Impinj Inc (PI) 2022 Q3 法說會逐字稿

Welcome to the Impinj Third Quarter 2022 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mr. Andy Cobb, Vice President, Strategic Finance. Please go ahead.

Thank you, [MJ]. Good afternoon, and thank you all for joining us to discuss Impinj's third quarter 2022 results. On today's call, Chris Diorio, Impinj's Co-Founder and CEO, will provide a brief overview of our market opportunity and performance. Cary Baker, Impinj's CFO, will follow with a detailed review of our third quarter 2022 financial results and fourth quarter 2022 outlook. We will then open up the call for questions. Jeff Dossett, Impinj's CRO, will join us for the Q&A. You can find management's prepared remarks plus trended financial data on the Investor Relations section of the company's website.

We will make statements in this call about financial performance and future expectations that are based on our outlook as of today. Any such statements are forward-looking under the Private Securities Litigation Reform Act of 1995. While we believe we have a reasonable basis for making these forward-looking statements, our actual results could differ materially because any such statements are subject to risks and uncertainties. We describe these risks and uncertainties in the annual and quarterly reports we file with the SEC. We do not undertake, and expressly disclaim, any obligation to update or alter our forward-looking statements except as required by law.

On today's call, all financial metrics, except for revenue or where we explicitly state otherwise, are non-GAAP. Balance sheet and cash flow metrics are GAAP. Please refer to our earnings release for a reconciliation of non-GAAP financial metrics to the most comparable GAAP metrics.

Before turning to our results and outlook, note that we will participate in the Baird 2022 Global Industrial Conference on November 10 in Chicago, and we will virtually attend the Susquehanna Semiconductor Showcase on December 13. We look forward to connecting with many of you at those events.

I will now turn the call over to Chris.

Thank you, Andy, and thank you all for joining the call.

Our third quarter results were strong. Revenue and adjusted EBITDA exceeded our guidance, with both setting new quarterly records. Against the backdrop of broader macro crosscurrents, these record results highlight our growth potential as product supply improves.

Last quarter, I said that, based on my conversations with Impinj's leading end users and go-to-market partners, I expect the demand to remain strong at least through second half 2022. Recent conversations with those end users and partners suggest that that strength extends well into 2023, driven by new deployments and expansion at existing deployments. Highlighting that strong demand, we entered the fourth quarter with record backlog.

Starting with endpoint IC supply, the pace and lead times of wafer upsides from our foundry partner continue to gradually improve. Despite that improvement, third quarter demand still exceeded supply by more than 50% for the sixth consecutive quarter, and we expect demand to exceed supply well into 2023. At Impinj's yearly Executive Forum, a partner event which we just held, our leading inlay partners highlighted they are adding significant inlay manufacturing capacity and reiterated they would layer on additional endpoint IC bookings if we had more wafers. We look forward to the day when our improving supply situation positions us to take those additional bookings.

Third quarter endpoint IC revenue exceeded our expectations, and for the fourth consecutive quarter set a new quarterly record. Our current supply visibility supports continued endpoint IC unit volume growth in both fourth quarter of 2022 and 2023. Looking further out, we continue to see multiyear growth tailwinds for our endpoint ICs.

Turning to system supply. Component shortfalls again constrained our reader shipments like they have for the past 4 quarters. For reader ICs, although third quarter supply mostly caught up to demand, we see strong orders heading into fourth quarter, particularly for our E-family products. In aggregate, we entered fourth quarter with significant systems backlog yet with product supply still constraining systems revenue growth into 2023. Like for endpoint ICs, we look forward to the day when we have enough system supply to satisfy market needs.

Third quarter systems revenue exceeded our expectations. Reader ICs were a bright spot, setting a new quarterly record. Reader and gateway revenue met our expectations, led again by shipments to the visionary European retailers expanded loss prevention deployment. Looking into 2023, we see solid systems demand led by rapid unit volume growth in our E-family reader ICs.

On the product front, I am thrilled by our September launch of the Impinj Authenticity solution engine. More than a decade in the making, Impinj Authenticity is an end-to-end platform offering for cryptographically authenticating everyday items as genuine. Comprising a new endpoint IC, the Impinj M775, which pairs an ISO standardized cryptographic engine with a unique key in each IC; new firmware in our reader ICs and readers that enables a challenge response dialogue with those endpoint ICs, a new cloud-based Impinj Authentication service that can verify an IC's Authenticity in milliseconds, and easy-to-use APIs that enable partner or end-user product databases that pair each item with its authenticated endpoint IC. Impinj Authenticity will inhibit counterfeits, improve product safety and secure the supply chain.

With Impinj Authenticity, we hope to make a substantial dent in global counterfeiting, which costs legitimate enterprises hundreds of billions of dollars annually. Only available from the Impinj platform, Impinj Authenticity is also our first product offering focused on expanding our recurring revenue opportunity from endpoint ICs to include cloud services. Impinj Authenticity represents another key element of Impinj's mission of connecting every item in our everyday world and, while doing so, protecting those items, the privacy of people who benefit from those connected items, and the world we live in; Impinj Authenticity for protecting items, protected mode for protecting privacy and, looking forward, using the Impinj platform to improve the sustainability of those connected items.

On the project front, we see continued strong retail momentum. The visionary European retailer, pleased with our RAIN-based loss prevention offering, continues deploying as planned. We expect that deployment to continue generating meaningful revenue for at least the next 2 quarters.

The Asia-based global retailers' continued expansion of their self-checkout deployment into new geographies generated meaningful reader revenue again in the third quarter. And in supply chain and logistics, we continue to expect a second large North American customer to drive large endpoint IC volumes in 2023 and beyond.

In closing, I'd like to thank every member of the Impinj team for your tremendous effort this quarter. We delivered record revenue and adjusted EBITDA, introduced a new first-of-its-kind platform offering to inhibit global counterfeiting, strengthened our bond with partners and end users and positioned us for growth, all while navigating ongoing supply challenges. With a strong team and a growing opportunity, I remain confident in our market position and energized by our strong demand.

I will now turn the call over to Cary for our financial review and fourth quarter outlook. Cary?

Thank you, Chris, and good afternoon, everyone. On today's call, I will review our third quarter financial results and fourth quarter financial outlook.

Third quarter revenue was $68.3 million, up 14% sequentially compared with $59.8 million in the second quarter of 2022 and up 51% year-over-year from $45.2 million in third quarter 2021. Third quarter endpoint IC revenue was $51.2 million, up 19% sequentially compared with $42.9 million in the second quarter of 2022 and up 60% year-over-year from $32 million in third quarter 2021. Accelerated demand timing for specialty and industrial ICs drove third quarter revenue above our expectations. And although that specialty and industrial mix will normalize in the fourth quarter, we still expect sequential endpoint IC revenue growth with our improving wafer supply.

Third quarter systems revenue was $17.1 million, up 1% sequentially compared with $16.9 million in the second quarter of 2022 and up 29% year-over-year from $13.2 million in the third quarter 2021. Third quarter systems revenue exceeded our expectations, driven by strong reader IC shipments. On a sequential basis, reader IC revenue increased, reader revenue was flat and gateway revenue declined. On a year-over-year basis, reader IC and gateway revenue increased while reader revenue declined. Despite strong demand, we expect similar fourth quarter systems revenue as we continue navigating reader component short (indiscernible).

Third quarter gross margin was 56.9% compared with 54.7% in second quarter 2022 and 53.3% in third quarter 2021. The sequential increase was driven by endpoint IC product margins, specifically the richer mix of specialty and industrial IC. The year-over-year increase was driven by higher endpoint IC product margins from both the specialty and industrial IC mix and a larger Impinj M700 mix, partially offset by decreased sales of old reserved inventory.

Total third quarter operating expense was $29 million compared with $28.8 million in the second quarter 2020 and $24.4 million in third quarter of 2021. Research and development expense was $14 million. Sales and marketing expense was $7.4 million. General and administrative expense was $7.7 million. We expect similar total operating expense in the fourth quarter.

Third quarter adjusted EBITDA was $9.8 million compared with $3.8 million in second quarter of 2022 and a loss of $400,000 in third quarter 2021. Third quarter adjusted EBITDA margin was 14.3%. Third quarter GAAP net loss was $2.2 million. Third quarter non-GAAP net income was $9.3 million, or $0.34 per share on a fully diluted basis.

Turning to the balance sheet. We ended third quarter with cash, cash equivalent and investments of $201.1 million compared with $183.7 million in the second quarter 2022 of $113.3 million in third quarter 2021. Inventory totaled $31.9 million, down slightly from the prior quarter.

Third quarter net cash provided by operating activities was $14.5 million. Property and equipment purchases totaled $2.3 million. Free cash flow was $12.2 million.

Before turning to our fourth quarter guidance, I want to highlight a few items unique to our results and outlook. First, third quarter gross margin exceeded expectations due primarily to the favorable shipment timing of specialty and industrial endpoint IC. Looking forward, we anticipate gross margins to stabilize in the 53% to 54% range as endpoint IC mix normalizes, at least until further 300-millimeter innovations create opportunities for gross margin accretion.

Second, we currently anticipate receiving a meaningful quantity of wafers late in the fourth quarter that are scheduled for early first quarter customer shipment. That balance sheet timing will mask the fact that our shippable supply remains extraordinarily weak.

Third, equipment delivery timing has resulted in lower-than-expected capital expenditures year-to-date. And despite some catch-up in fourth quarter, we now anticipate our 2022 CapEx will fall below 2021. Regardless, we have sufficient endpoint IC post-processing capacity that the equipment delays will not impact our ability to grow 2023 endpoint IC shipments. Finally, as wafer upsides from our foundry partner continue layering in, we foresee increasing endpoint IC shipments driving mid- to high single-digit sequential endpoint IC revenue growth in fourth quarter 2022 and again in first quarter 2023.

Turning to our outlook. We expect fourth quarter revenue between $71.5 million and $73.5 million compared with $52.6 million in fourth quarter 2021, a 38% year-over-year increase at the midpoint. We expect adjusted EBITDA between $9.8 million and $11.3 million. On the bottom line, we expect non-GAAP net income between $9 million and $10.5 million, reflecting non-GAAP fully diluted earnings per share between $0.32 and $0.37.

In closing, I want to thank the Impinj team for your outstanding execution this quarter, particularly in driving operating leverage, one of our key financial objectives. Back in 2020, we committed to returning to adjusted EBITDA break-even. We have now delivered 4 consecutive quarters of positive adjusted EBITDA, with third quarter 2022 setting a new record.

And looking ahead, I see opportunities for continued operating leverage improvement. Even as we continue investing in our business, we now turn our focus to our next goal, generating consistent free cash flow. I look forward to ongoing progress towards that goal.

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

Thank you. (Operator Instructions) The first question today comes from Mark Lipacis from Jefferies.

On the question of supply, going forward, aside from the strategy of just waiting for more wafers to become available, could you just frame out what are the realm of possibilities to get supply on a more consistent basis? And as a follow-up to that, maybe Cary, if you could just talk about the industry. There are some people who believe that the industry is going to go into an inventory correction and that we're going to have capacity loosen up a lot in the first half of next year. And then, often, that's followed by a restocking cycle, and then we get tight capacity again.

And I'm wondering how much working capital would you consider putting to building inventories? I guess you have around 90 days. Would you consider 180, or 3/4 of a year of inventories just to kind of make your customers feel better that you have the ability to supply them and hit that upside?

This is Chris. I'll start. In the timeframe that we're talking about here over the next couple of quarters, our supply opportunity is to work closely with our foundry partner to generate additional supply as it frees up and as they're able to deliver more wafers. They deliver more wafers both from their fabs exceeding their capacity plans as well as from any demand shortfalls from other customers and other industries.

We are positioned to take as those wafers become available. We've seen modest upsides already. We expect to (indiscernible) where we hope to continue seeing modest upsides. And depending on how the market goes, we will take what we can get from our foundry partner. We work closely with them, and that we believe we are prioritized for that upside. Even with our current supply visibility, that visibility supports endpoint IC unit volume growth in fourth quarter 2022 and in 2023.

In terms of our ability to take and how much we take kind of the inventory build, which is what you're getting at, if supply becomes more available, I'll turn it over to Cary.

So yes, if we were to have the opportunity to rebuild supply, we absolutely would. We're very lean, particularly on our finished goods. We're effectively producing units and shipping them out within the following weeks. So we would build supply.

I'm not worried about building the supply because our products have incredibly long lifecycles. Our Monza 4 was introduced more than 10 years ago. It's increasing volumes this year. Our Monza R6, [R6P], were introduced more than 5 years ago, and they're still growing volumes this year. So there is a long product lifecycle that gives us the flexibility to add inventory.

Now, I see the same reports that you are, and I'm hopeful that supply will break free for us. Currently, I'm not modeling inventory build this year. I don't see us getting enough incremental supply to first satisfy the demand that's in the market and then be in a position to build inventory.

Mark, this is Chris. I'll just add, during the depth of the pandemic, we built many billions of units of inventory; in fact, what was considered at that time an outsized inventory build. We burned through that inventory essentially in 2 quarters, and we've been short ever since. And I would say that we learned from that situation, especially as Cary said, given the long life of our products and, given the opportunity to build inventory this time around, we'd like to do so again. And so we are looking at all of our options for supply. But in the timeframe that you're talking about, like I said, the opportunity here is to work closely with our existing foundry partner.

The next question comes from Jim Ricchiuti of Needham & Company.

I'm wondering, as you look at the 2 areas of the business where you're clearly constrained, which part normalizes first in terms of the supply challenges based on the conversations that you're having?

So yes, we're constrained on both sides of our business, on the system side and on the endpoint IC side. Obviously, predicting the future here is very difficult. I'm going to hazard a guess that we will probably see the system supply free up earlier because we are so far behind in terms of our endpoint IC supply-demand imbalance that we've got a lot of catching up to do. And at the same time, we are seeing system components gradually start to free up.

So my expectation would be, looking forward, that we will see systems normalize before the endpoint ICs do, but that's an expectation based on today's facts. And of course, the situation on the ground could change at any time.

And then the follow-up question I have just relates to that, Chris. And this really comes down to I guess you're beginning to enter your normal end-of-year price negotiations. I wonder how would you think about your leverage, frankly, as you go into this process? It sounds like you're in a pretty good position for a second year in a row now, or third year.

So Jim, I'm going to say a few words there and then turn it over to Jeff and/or Cary.

We are currently looking at continued price increases from our foundry partner. We are looking, of course, at continued constrained supply and strong market demand. So that's the situation in front of us right now. Of course, at the same time, we want to deliver into the opportunity and grow those market opportunities as much as we can. Cary, why don't you say a little bit about our integrity of our margin model; and then, Jeff, anything you would like to add on kind of the dynamics in the fourth quarter?

Yes, certainly. So Jim, our foundry partner has signaled another round of price increases beginning in 2023. You should expect us to handle those the same way we did on the previous rounds of price increases. We will look to pass those costs on to our customers in a way that maintains the integrity of the margin model

This is Jeff. I think the only other thing I would add is that, in the context of this extended supply constraint, we have been working very closely and very hard on behalf of our partners and their efforts on behalf of their end customers to optimize the supply that is available into the market, and that has been the primary focus of our engagement with our partners as opposed to typical fourth quarter end-of-year pricing negotiations.

So our conversations continue to be supply-focused and focused on optimizing end customer outcomes to help service programs that have already deployed as well as to plan for the activation of new programs when the supply outlook improves. And as Cary said, we continue to work closely with our partners with respect to cost pass-throughs, if our costs increase, to pass those through effectively to our partners' end customers.

The next question comes from Mike Walkley of Canaccord Genuity.

I guess, Chris, my question is digging a little more to Impinj Authenticity. How should we think about that recurring revenue, the opportunity, how you might price it, trial time with customers and when it might start to impact the financial model?

So Impinj Authenticity is our first platform offering, really. It's an end-to-end platform offering comprising essentially every element of our platform, and it expands our recurring revenue opportunity from endpoint ICs to include cloud services.

The endpoint IC revenue opportunity is, of course, meaningful. The systems revenue opportunity is meaningful. And at the same time, we spent years building a cloud service from which we will monetize authenticating items.

Given that it's really a new offering, this idea of bringing cryptographic authentication to everyday items, it's too early to model significant 2023 revenue. We will keep you and our investors and everybody else updated as we make progress on this opportunity and as we make progress in different verticals.

But as of right now, we're really excited about the launch, excited about what we brought to market here and really energized by the opportunity in front of us. We've been working on it for a long time. Expect us to push it really hard in the market. And I personally have a lot invested in this one. I've talked about it for quarters, and I am absolutely thrilled that we were able to launch it.

Mike, this is Jeff. Just a couple of observations or insights from the market. I have the opportunity to engage with executives of sector-leading enterprises. And the topic of brand value has been a consistent focus and priority. And we talk a lot about how they create and lose value associated with their brand, and counterfeits are clearly a very significant value erosion situation.

So we're very excited to be able to come to those conversations with the Impinj Authenticity solution engine, which enables our partners to craft a whole new category, a whole new approach to improving the authenticity of everyday items. And we're already beginning to get expressions of interest to begin to build the pipeline. We're seeing interest not only in apparel and footwear, as we anticipated, but also in other sectors, including pharmaceutical, building materials and many, many more.

So this is a long-term opportunity. We hope to create a new growth vector for Impinj, and we look forward to updating you in subsequent quarterly earnings calls.

I guess from my follow-up question, just for Cary, it's really great to see the inflection point in the model over the last 2 quarters, and I guess, 3, based on your guidance. Is there any way to think about adjusted EBITDA and free cash flow margins, going forward? Is the back half of this year a fair way to be thinking about future years? Or is this above where you might be in future years given investments you plan to keep making in the business?

Yes. So I think the back half of the year is a good starting point in the near term. We expect additional leverage in our model, and we will continue to drive that.

There will be incremental investment in our business. We see the opportunity in front of us as massive, and we're going to invest in front of that opportunity. You should assume most of that investment is in the R&D line. So as you think about your long-term models, assume that we will grow R&D at roughly the same rate as revenue.

On the sales and marketing line, there is investment required, to be sure, but we have a strong network of partners that we leverage to take our products to market, both on the endpoint IC side and the system side. So while there will be continued investment in sales and marketing, it won't have to be at the same rate of revenue growth. And then clearly, there will be leverage in the G&A side.

As you look in the very near-term to Q1, recall that, last year, we made the decision to transition our management bonus from 100% stock to 50% stock and 50% cash, with the cash component impacting our non-GAAP OpEx. You should expect us to take the next step to 100% cash beginning in 2023. So that, along with the payroll tax resets that always occur at the beginning of the year, the heavier audit fees, I'm expecting a step-up in OpEx in Q1.

The next question comes from Troy Jensen with Lake Street Capital.

So how about, Cary, just to challenge you a little bit on kind of the gross margin guidance for Q4 of 53% to 54%, the last time you were there was a year ago, and you were doing $45 million in revenue, right? Now you're talking $72.5 million. And I get, and I know you're probably going to say specialty and industrial IC sales were strong or unseasonably strong, but it seems like that's a recurring problem for you guys. So if you can just talk us through how gross margins get to 53% to 54%?

Yes. So you're right, Troy. The biggest impact has been the specialty and industrial ICs. This quarter was a little bit different in that part of it was demand timing. We had orders that we had planned for or modeled in Q4 that our customers requested in Q3. So there's a little bit of a pull-forward effect.

That being said, the level that we are modeling in Q4 that is the basis for our 53% to 54% normalized gross margin, I look at a preliminary modeling for 2023, and I see that as a consistent quarterly level looking into 2023. So that gives me confidence that, at least at this moment, I think some of the nuance has been created, the very good nuance, to be clear, that's been created in the specialty and industrial is behind us at this point.

You will note in our guide what's embedded in there, assuming the similar OpEx, is that I'm modeling at the high end of that 53% to 54% range again. But I think that's the right spot for us right now. I think endpoint IC mix is normalizing. We're not done there. There's more opportunity for incretion as we continue innovating on our 300-millimeter product line.

And (indiscernible) my follow-up, can you just talk about wafer supply diversification? Are there anything you guys are doing to try to spread out the wafer production?

Yes, Troy. As I mentioned a little bit earlier, at least in the timeframe we're talking about over the next couple of quarters, our opportunity is to work closely with our existing foundry partner with the new products that we had spent so much time developing with them and launching with them and to focus on working with them to get wafer upside to basically drive our position, our supply into the market.

As Cary noted, there are opportunities for some gross margin accretion as we continue to advance our 300-millimeter product portfolio. Along those lines, there's opportunities to increase the number of die per wafer and potentially get some more IC supply that way. But in the timeframe we're talking about, the opportunities with our existing foundry partner.

The next question comes from Scott ones Scott Searle of Roth Capital.

Chris, maybe diving into 2023, you've given some color as it relates to some of the customers that you've talked about in the past, your European visionary customer, large logistics in North America, et cetera. I'm wondering if you could talk a little bit more about what else is in the pipeline as opposed to some of the existing customers. What use cases are getting pulled forward? And how should we think about the mix of the end verticals as we get into the end of '23?

So Scott, thanks for the question. I obviously can't talk about specific customer opportunities, specific ones looking at 2023 above and beyond what we've spoken about already. However, I will say that we are looking at retail, expanding beyond apparel to general merchandise, which I think you're well aware of. And that general merchandise opportunity is quite -- I mean, it's large. It's much larger than the retail apparel opportunity overall.

We do see growth, and you can kind of hear it in other calls from other executives from other companies associated with the supply chain and logistics opportunity, and we expect to see large endpoint IC volumes turning to 2023 and beyond, so that supply chain and logistics opportunity.

There is a food opportunity, which we generally include in supply chain and logistics for now because most of that food opportunity is associated with shipments rather than -- I say most, not exclusively -- but the most is associated with shipments. So we're including food opportunity in supply chain and logistics, which even makes the supply chain and logistics opportunity even larger.

And then Jeff spoke to, associated with Impinj Authenticity, the opportunity in pharmaceuticals and medical devices. If I layer all of those together, the opportunity in front of us is far, far larger than the opportunity that we and the industry have already achieved. And our industry as a whole is still sub-1% penetrated in a gigantic market. We are seeing that market open up in multiple verticals, and we're truly excited about the future staring into 2023 and beyond.

Scott, this is Cary. As you think about the pacing of the quarters, first with endpoint IC, I mentioned in my prepared remarks that we're expecting mid- to high single-digit growth on endpoint IC revenue in Q4 and again in Q1. We are expecting growth overall in endpoint ICs based on the current supply that we have. But at the end of the day, we are still going to be supply limited, not demand limited, throughout 2023 for endpoint ICs.

And then on the systems side, I signaled flat systems revenue going into Q4 because of reader component shortfalls, not because of demand. I believe those reader component shortfalls persist through the first half of 2023. And then, the other factor that you (indiscernible) consider in 2023 as it relates to systems is the large loss prevention deployment with the visionary European retailer. That project will continue generating meaningful revenue for at least the next 2 quarters as we complete this phase of the project.

This deployment is going very well, and there are opportunities, from both a store and a brand perspective, to win more business with this customer. And we're going to have to balance those opportunities to customers' timing desires as well as those component availability as we manage our systems business into the second half of 2023.

And lastly, if I could, just to follow up on Mike's earlier question on Impinj Authenticity; I know it's early days, but in terms of the model, how are you guys thinking about it? Is it a subscription-based model? Is it a per-unit model or a usage model? What are the early thoughts on that front?

So Scott, so we are actively engaging right now with partners in terms of the details in that model. Different verticals and different use cases will have different needs. I think you should really be thinking about us focusing on generating recurring revenue from that authentication opportunity and pushing forward with different models, subscription per use click and others depending on the needs of the particular segment and particular end user.

But the key to us is that we're going to be generating recurring revenue from the endpoint IC, from the service, both of them together and linking the entire thing through the Impinj platform as an entire complete platform offering that's exclusive to the Impinj platform. And that's where the excitement for us where it comes in.

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

Thank you, MJ. I'd like to thank you all for joining the call today, and I hope you and your loved ones are and remain safe and well. Thank you very much. Bye-bye.

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