Impinj Inc (PI) 2021 Q2 法說會逐字稿

Good day, and welcome to the Impinj Second Quarter 2021 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, Matt. Good afternoon, and thank you all for joining us to discuss Impinj's second quarter 2021 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 second quarter 2021 financial results and third quarter 2021 outlook. We will then open the call for questions. Jeff Dossett, Impinj's CRO will join us in the Q&A session. 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 future expectations and financial performance 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 statements we make 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 applicable 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 on a GAAP basis. Please refer to our earnings release for a reconciliation of our non-GAAP financial metrics to the most comparable GAAP metrics.

Before turning to our results and outlook, note that we will participate virtually in the 10th Annual Needham Industrial Technologies Conference on August 9, the Oppenheimer 24th Annual Technology, Internet & Communications Conference on August 10, the Canaccord Genuity 41st Annual Growth Conference on August 12, the Jefferies Semiconductor IT Hardware and Communications Infrastructure Summit on August 31, the 2021 Colliers Investor Conference on September 9 and the Piper Sandler Global Technology Conference on September 14.

We look forward to connecting with many of you at these events. I will now turn the call over to Chris.

Thank you, Andy, and thank you all for joining the call. Our second quarter results were strong with revenue and profitability exceeding our guidance. Already strong first quarter 2021 bookings became even stronger in second quarter 2021, setting a record for the third consecutive quarter. Growing RAIN adoption engender strong demand for all our product lines. Those record bookings and strong demand, along with record adjusted EBITDA, highlight the underlying strength in our business. Counterbalancing that strength, today's tight wafer supply, our not yet completed 300-millimeter wafer post-processing expansion and short-term reader component shortfalls constrain our ability to fully capitalize on that demand. To best support our partners and end users, we plan to ship much of our remaining inventory in second half 2021, focusing on maximizing total unit volumes. Growing endpoint IC demand drove record quarterly bookings. Of the factors we see driving that demand, the need to digitize and virtualize enterprise operations in retail, automotive, logistics, food, aviation and so many other vertical markets is at or near the top.

To help our inlay partners meet that demand, we shipped more of our 200-millimeter inventory than we had planned and every 300-millimeter wafer we could post process, pushing revenue above our expectations. Despite those shipments, our inlay partners are running hand-to-mouth, periodically lines down and consuming what little inventory they still have. And despite our efforts, demand still exceeded shipments by a full 50%.

Looking at the third and fourth quarters, endpoint IC demand exceeds our 200-millimeter and 300-millimeter wafer supply. For 200-millimeter, we have now shipped essentially all the wafers we prebuilt in 2020. For 300-millimeter, which is on the cusp of becoming our volume runner, third quarter deliveries will remain constrained by post-processing capacity. With us doubling that capacity in third quarter and tripling it by year-end, fourth quarter 300-millimeter shipments will be limited by wafer supply just like 200-millimeter is today. Absent increased wafer availability from our foundry partner, which some industry veterans predict but which neither we, nor they yet see, we will exit 2021 with very low inventory levels across our ecosystem.

We will also exit the year with significant post-processing capacity at both 200-millimeter and 300-millimeter able to quickly turn any supply upside at either wafer diameter. Second quarter systems revenue exceeded expectations, setting a quarterly record. Our reader IC supply improved faster than anticipated, delivering part of that revenue outperformance. We expect reader IC revenue to continue improving in third quarter despite lingering packaging challenges and consequent supply constraints. Reader revenue was also a bright spot, with us capitalizing on both strong demand and opportunities that shifted out of first quarter. Reader channel inventory declined again in the second quarter, driven by component shortfalls that constrained our reader builds. Those component shortfalls are an ongoing challenge with some suppliers decommitting mere days before a scheduled delivery. Our team has deftly navigated the challenges, delivering upside where they can. Nevertheless, we remain constrained on all systems products, reader ICs, readers and gateways, albeit not as significantly as for endpoint ICs. And like for endpoint ICs, we are focused on maximizing total unit volumes.

Looking forward, we expect strong third quarter demand, combined with operations execution to grow run rate systems revenue. Like for endpoint ICs, enterprise digital transformation was a key factor driving reader demand. We again generated meaningful revenue from the self-checkout deployment by a leading global retailer based in Asia for the third consecutive quarter. We delivered modest revenue from the second North American supply chain and logistics customer who continues deploying. And we delivered all remaining units of our RAIN-based loss prevention engine to the visionary European retailer, recognizing essentially the entire $6 million prepayment.

For the latter, I am energized by our early success at this terrific opportunity with expansion potential, not only at this retailer, but across the entire retail industry, and increasing endpoint IC opportunities from the 100% tagging required by consumer self-checkout. On the product side, we launched the new Impinj E710, E510 and E310 reader ICs in July, our first new reader ICs in 10 years and all 3 with groundbreaking features and performance. The reception has been overwhelming. Our website already showed 17 partner handhelds, fixed readers, modules, wearables and printers. Unlike our prior reader ICs, these new ICs use standard CMOS, dramatically reducing die size and power consumption. More than 5 years in the making and with guidance from partners, large and small, they come at a time when so many enterprises are turning to Impinj to identify, locate and authenticate items they manufacture, transport and sell.

I believe these reader ICs will bring RAIN to new classes of smart edge devices, especially battery-powered ushering in a world of ubiquitous reading. I see and feel our vision of a boundless IoT coming to life. On the organizational side, in July, we hired an intact RF design team, who we believe will greatly increase our IC design velocity. To our new team members, I wish you a warm welcome.

In closing, we delivered another record bookings quarter, introduced groundbreaking new products, strengthened our team and see strong long-term demand from enterprise digital transformation. We exceeded our profitability guidance and delivered record adjusted EBITDA. But we also face difficult second half supply constraints that require empathy for and close alignment with our partners, superb execution by us and for our endpoint ICs, upside from our foundry partner. We have straightened and widened our 200-millimeter and 300-millimeter post-processing pipes and are primed for that upside whenever it comes. And whatever the challenge is, I have the utmost confidence in the Impinj team's ability to successfully tackle them.

I will now turn the call over to Cary. Cary?

Thank you, Chris, and good afternoon, everyone. On today's call, I will review our second quarter financial results and third quarter financial outlook. Second quarter revenue was $47.3 million, up 4.5% sequentially compared with $45.2 million in first quarter 2021 and up 78.7% year-over-year compared with $26.5 million in second quarter 2020. Second quarter endpoint IC revenue was $30.8 million, down 19.2% sequentially compared with $38.1 million in first quarter 2021 and up 66% year-over-year compared with $18.5 million in second quarter 2020. Endpoint IC revenue exceeded expectations as we shipped more inventory than previously planned. Looking forward, we expect third quarter 2021 endpoint IC revenue to increase sequentially despite the higher-than-expected second quarter base.

Second quarter systems revenue was $16.5 million, up 130% sequentially compared with $7.2 million in first quarter 2021 and up 108.3% year-over-year compared with $7.9 million in second quarter 2020. Reader IC revenue increased sequentially but declined year-over-year, the latter due to ongoing packaging constraints. Reader and gateway revenue increased both sequentially and year-over-year. We expect third quarter 2021 systems revenue to decline sequentially as we face a difficult comparison to second quarter, which included the $6 million loss prevention engine shipments.

Second quarter gross margin was 54.5% compared with 50.3% in first quarter 2021 and 51.4% in second quarter 2020. The quarter-over-quarter increase was driven by product mix and underlying product margins, offset by less benefit from sales of fully reserved inventory. The year-over-year increase was driven by less excess and obsolescence charges and leverage against indirect costs. We expect third quarter gross margin to revert to more typical levels.

Looking forward, the M700 will be a positive gross margin tailwind as it increases as a percentage of our endpoint IC mix. Total second quarter operating expense was $22.4 million compared with $21.9 million in first quarter 2021 and $18.8 million in second quarter 2020. The sequential increase was due primarily to increased engineering expense. Research and development expense was $11 million. Sales and marketing expense was $5.7 million. General and administrative expense was $5.7 million.

Second quarter operating expense was below our expectations, in part due to timing. In third quarter, that timing will normalize. Also in third quarter, our newly hired RF design team will hit our cost structure, further increasing operating expense. Second quarter adjusted EBITDA was a record profit of $3.3 million compared with a profit of $900,000 in first quarter 2021 and a loss of $5.2 million in second quarter 2020. Second quarter GAAP net loss was $8.9 million. Second quarter non-GAAP net profit was $2.7 million or $0.11 per share using a weighted average diluted share count of 25.6 million shares.

Turning to the balance sheet. We ended the second quarter with cash, cash equivalents and short-term investments of $112 million compared with $119.3 million in first quarter 2021 and $120.9 million in second quarter 2020. The sequential cash decline was due primarily to deferred revenue from the loss prevention project and capital expenditure from our ongoing endpoint IC post-processing expansion, partially offset by reduced inventory. Inventory totaled $24.1 million, down $4 million sequentially. We anticipate a further inventory decline in second half. Second quarter net cash used in operating activities was $4.4 million. Property and equipment purchases totaled $3.5 million. Free cash flow was negative $7.8 million.

Before I turn to our third quarter guidance, I want to highlight a few unique items and give an update on a few of our strategic initiatives. First, to help our partners keep their production lines running, we shipped more endpoint ICs in the second quarter than we had originally planned. Absent near-term improvements in wafer supply, those second quarter shipments come at the expense of fourth quarter supply. Second, customers continue placing endpoint IC orders far ahead of our historical norms. And as a result, our backlog now extends well into 2022. With additional supply, we believe there is even more demand we could service.

Third, we continue investing in engineering and endpoint IC post-processing. The design team we just hired will partially hit our cost structure in third quarter and fully in fourth quarter. We expect CapEx spending to increase in third quarter associated with our post-processing capacity expansion.

Fourth, the recent resurgence of COVID-19 has temporarily impacted some of our endpoint IC post-processing facilities, reducing our third quarter capacity. We have factored that impact as we see it today into our third quarter guidance.

Turning to our third quarter outlook. We expect revenue between $43 million and $45 million, a 56% year-over-year increase at the midpoint of the range compared with $28.2 million in third quarter 2020. We expect adjusted EBITDA between a loss of $3 million and $1.5 million. On the bottom line, we expect a non-GAAP loss between $3.6 million and $2.1 million, reflecting a non-GAAP loss per share between $0.15 and $0.08 on a weighted average diluted share count between 24.3 million and 24.5 million shares.

In closing, I want to thank our Impinj team, our customers, our suppliers and you, our investors, for your ongoing support.

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

(Operator Instructions) Our first question will come from Harsh Kumar with Piper Sandler.

First of all, congratulations. Since there's a lot to chew on in your comments, Chris and Cary, but let me try to ask the first question this way. Things look like they're running great from the point of view of orders and demand and things happening for you. But it almost sounds like you're running the risk of a lot of supply constraints. How do you -- help us understand how does that play out from a growth angles, from revenue growth angle in the third and possibly the fourth quarter? And I bring that up, Cary, as you mentioned, you blew out some inventory to customers of

(technical difficulty)

the fourth quarter. So I'm trying to just get my arms around that.

Yes, Harsh. So first, let me start with the third quarter. So yes, actually, let me start with the second quarter. So yes, you heard correctly, we exceeded our endpoint IC shipments higher than we planned in the second quarter. Our supply situation for the year really hasn't changed, so that increase in Q2 shipments comes at the expense of Q4 supply. Now when I look at Q3, we expect Q3 revenue to increase -- our Q3 endpoint IC revenue to increase sequentially. Perhaps not quite at seasonal level, and that's due to the post-processing impacts we have related to COVID-19 in some of our Southeast Asia locations. We've had a couple of shutdowns that we are navigating right now. And we factored that impact into our Q3 guidance. From a systems perspective, again, looking at Q3 it will be down sequentially. But the reason it's coming down is because of the $6 million loss prevention engine shipments we had in Q2 that, that phase is now completed. If we take that out and look at our run rate systems business, it's going to grow in Q3, and we'll see a nice lift with that adjustments in there. From -- I'll just keep going down, from an OpEx perspective, as you saw, we signaled Q3 is going to be higher because of the timing and because of the RF design team we hired and the CapEx will also be higher. If I were to look into Q4, it's too early to predict Q4. From today's vantage point, the wafer supply and systems constraints that we are navigating in Q3 only get tighter in Q4. The endpoint IC situation is really no different than we've described over the last few quarters. So the key to success in Q4 continues to be our ability to ramp the M700. We spent the last several quarters adding and ramping post-processing capacity and preparations for Q4 and beyond for that matter. The COVID impacts are a little bit of a wildcard that we'll have to closely monitor. But we've been dealing with those types of situations for over a year right now. So I trust that we'll be able to navigate it. And if we are able to receive any wafer upside, if we can get it kind of by mid-quarter, Q4, at least we'll be able to post-process and turn it in year. On the systems side, again, looking at Q4, the shortages or the component shortages that we're dealing with now are more of a recent development than the wafer supply. Our team has done a really good job, navigating a path for us in Q3. And now they're turning their attention to Q4. So I'm confident in the team and their ability to help us find a passage Q4, but it's going to take a few weeks to a month or so for us to determine that path forward.

Sorry. I wanted to say just a tiny bit more. Just I know Cary gave a lot of really good detail there. Well, first, I wanted to say thank you for your kind words. But then I just want to layer one other additional piece of information on the endpoint IC wafer supply. To date, we have received from our foundry partner a committed wafer allocation plus some modest upside. We're pulling out all the stops to maximize both wafer upside as well as total IC volumes. And if any team can do it, I think the Impinj team can.

Understood. My next question is on a similar topic. It sounds like you've got the demand that's not the issue. Cary and Chris, I think you guys have mentioned that you've got your 12-inch sort of wafer spike, [if you want]. Cary, you mentioned that again in the previous [answer]. Curious as to when that hits and if you've got some kind of like granularity around that? And when -- and how is your ability to be able to process it? You brought up post-processing a couple of times with the COVID variables, just help us get on around that as well.

Harsh, this is Chris. You cut out just a little bit for the first part of your question. Could you just say the first part again so that we make sure we can answer it properly?

Yes. Yes. Actually, I want to take off these headsets and put them away. But the question really was, when does the 12-inch capacity hit for you guys with the -- this 12-inch capacity hit for you guys? And what is your ability in terms of timing to be able to post-process it given the COVID?

Okay. So the crossover point from shipping primarily 200-millimeter wafers to a shipping primarily or endpoint ICs driving 200 millimeters versus endpoint ICs driving 300-millimeter wafers is this quarter. So we're rapidly ramping our 300-millimeter volumes as well as post-processing capacity. We have, as you know, and we've talked about for a couple of quarters, invested in that back-end post-processing capacity. It will double in the third quarter compared to the second, and it will triple in the fourth quarter compared to the second. So we will exit the year with very significant post-processing capacity and sufficient to cover the wafers that we expect to see and then some. So we've got margin on the post-processing side. As I said in the prepared remarks, we're primed to quickly post-process any wafer upside that comes our way.

Our next question will come from Mike Walkley with Canaccord Genuity.

It's Daniel on for Mike. Could you provide us with an update on how the airline opportunity is trending? And if there's anything new that you're seeing on that front?

So Daniel, thanks for joining us. The airline opportunity is still going forward as best as we understand. The IATA -- the IATA-driven initiatives to track all airline baggage has not pulled back. That said, of course, aviation is going through a very difficult time right now. And the pace of that adoption has slowed compared to our original expectations. We do see the need for better visibility in airlines, in aviation and airline supply chains. We do see the opportunity still there going forward. Just the pace has slowed. And given how the aviation industry has been hit by COVID-19, I don't think we can make any prediction in terms of the pace at which further adoption will happen. Jeff, anything you want to add?

Daniel, I'll just add that some airlines have taken the opportunity during a reduction in passenger loads to plan for operational improvements driven by RAIN deployments. So we are encouraged by the continued focus of airlines to improve operations with RAIN deployments, and we anticipate that they will initiate and continue deployments as their business continues to improve.

Our next question will come from Jim Ricchiuti with Needham & Company.

Just had a question on your systems business. To ramp up the new reader IC, I'm wondering if we adjust for the large contract that $6 million loss prevention engine shipment in Q2. Would you still anticipate that your system business would be down sequentially in Q3?

No. No, no, Jim. I was trying to signal that with -- we will have the tough compare sequentially in Q3 due to the $6 million loss prevention. But if you normalize for that, our run rate systems business, so think of that as being everything else is going to grow sequentially from Q2 into Q3. And really, we're seeing broad-based demand, a nice recovery across multiple verticals driving that.

Okay. Thanks for clarifying that, Cary. Just in terms of the level of demand that you're seeing on the tag side, is there any color you could provide as to whether you're seeing this from new customers? Or is it potentially more so from your existing customers that are ending projects?

Jim, this is Chris. I'm going to start just by saying yes, and then I'll hand over to Jeff.

Thanks very much, Chris. And thanks for your question, Jim. It's an important question. I think we're seeing strength that is broad-based. That is those organizations, enterprises that have deployed RAIN are continuing to invest and expand those RAIN deployments and we're seeing the layering on of additional RAIN deployments for those who are at the beginning of their RAIN journey. So there's broad-based demand across both. Did we lose you, Jim?

Jim, do you have a follow-up?

Yes, I do. Just with respect to just looking out as these inventory levels come down, I mean, you talked about your team being able to source more product from your foundry partner. But the question, I guess, is as we look out 20 -- early '22, what gives you the confidence that you're going to be able to at least be in a position where you're in a better -- you got a better shot at meeting customer demand? Because it looks like we're seeing these constraints extend well into '22.

Yes, Jim. So this is Chris. It's still a bit early for us to project 2022 wafer availability and visibility. We definitely need more wafers than we received in 2021 at the very least, just because of the overall business and the overall RAIN opportunity is growing compounded with the fact that we -- there's more demand than we can service in 2021. We have multiple irons in the fire. We're working it every way we can. There's no guarantees that we're going to be able to get significant upside, but we're going to do our darndest to pull it out. And like I said previously, if there's any team that can do it, the Impinj team can.

Yes. And Jim, maybe I'd add one thing to this. It's still early for us to be discussing 2022 wafer allocation with our foundry partner. That doesn't typically take place until later in the year.

Our next question will come from Derek Soderberg with Colliers Security.

Just curious on the transition to the M700 production. My understanding is that you guys use sort of a unique manufacturing process, some new equipment. Are you guys still qualifying or certifying those machines? I guess I'm curious, what are the major milestones you guys need to hit before bringing everything up to your production estimates?

Okay. Thanks, Derek. This is Chris. So the answer to your question is we anticipated a transition to significant 300-millimeter endpoint ICs back actually a couple of years ago. We started building that post-processing capacity in earnest starting last year. We have capacity up and running now. We are running significant volumes already. We ran significant volumes in the first half. As we said in prior calls, we're adding post-processing capacity. We'll double it in the second quarter, triple it in the third quarter. And of course, this will bring up -- every time you bring up additional equipments for those, the additional equipment is just additions to what we're already doing. So we have good confidence that we will exit the year with very significant 300-millimeter post-processing capacity and we'll not be constrained by post-processing by the end of the fourth -- or at the end of the fourth quarter.

Okay. Got it. So that sort of answers my next question. I'm kind of building out the earlier question just before me. So it sounds like if the current supply environment persists, the bottleneck would not be your post-processing in Q4, Q1 of next year, it would still be the wafer supply?

Let's just say -- the answer to your question is yes, but in the latter part of Q4 and heading into first quarter next year. We're still adding in fourth quarter because we're basically doing that tripling in the fourth quarter. But by the end of the fourth quarter, we will be strictly limited by wafer supply.

Our next question will come from Scott Searle with ROTH Capital.

Just to clean up on a couple of your earlier questions. It sounds like systems grow sequentially, net of loss prevention sales, so you're at $10-plus million. I was wondering, as you look into the third quarter and you look into that pipeline, if you could provide a little bit more details or maybe quantify what's going on in the pipeline in terms of the number of engagements, pilots, et cetera, or something to provide a little bit more color on how we see that growing going forward.

Scott, this is Jeff. I'll speak first to the question. And the pipeline is and remains very strong. Our partners are reporting an increased level of sales activity the reactivation of deployments that were impacted during the depths of the pandemic as well as new proof-of-concept projects that give us a lot of reason to believe that the growth is going to remain strong. It's quite broad-based across geographies, across industry sectors. And so overall, the pipeline is very strong.

Great. And maybe just a follow-up on the 300-millimeter post-processing capacity. Chris, and Cary, you've mentioned this a couple of times, but could you just calibrate where we are today in terms of that as a percentage of the mix? You're going to double it and triple it by the time we get to the fourth quarter, and that doesn't become the constraining factor here. But where are we starting at today? How big is that as a percentage of the mix when we start thinking about where the M700 is today?

Yes. So Scott, the crossover in terms of endpoint IC, not wafers, in terms of endpoint ICs, is this quarter. So right around this time, we will be shipping more endpoint ICs than we'll -- that's derived from 300-millimeter wafers than those that's derived from 200 millimeter.

Great. And lastly, if I could, the demand sounds like it's off the charts. I think you mentioned demand exceeding supply by about 50% plus. I wonder if you could provide a little bit more color on that. Are you seeing double ordering? Perhaps at this point, it really doesn't matter. But as we start to get to the end of this year into 2022, when do you expect that to possibly be -- come back into an equilibrium of balance as we're looking to 2022? You've already mentioned that you're not necessarily engaged right now for your wafer allocation yet. But when do you start to engage in that process? What else can you be doing to get out ahead of this to maintain or make sure that you're not being impacted at least as we start to get into the middle of 2022?

Yes. So this is Chris. I'll start with the question, and then I'll give Cary and Jeff an opportunity to layer in. So of course, double ordering is always a risk in a 2-step distribution model like we have, where we don't have direct visibility to the end customer. But our team is pretty seasoned. Our purchase orders are noncancelable, and our visibility into our partners' inventory levels shows they are very lean and frequently lines down. They are, as I said in my prepared remarks, running hand to mouth. So we don't see inventory builds in the channel. We don't see evidence of significant double ordering. We're tracking that fairly carefully. The demand, we believe out in the market is real, and it's driven by the enterprise significantly by enterprise digital transformation. And it's driven by just the overall unit volume CAGR in the RAIN industry, which has averaged between 25% and 30% over the past decade. So there's nothing to indicate that, that unit volume CAGR is poised to decline. If anything, it's going to -- it looks poised to accelerate as a consequence of companies coming out the other side of COVID. We are bullish about the demand -- what?

And Chris, just the

(technical difficulty)

number is endpoint IC number, not a total endpoint and systems, it's an endpoint IC number.

Yes, the endpoint IC number is what I was referring to, but we see growth on the systems side as well as industries transition or, let's say, I won't say, transition, extend from handheld-driven retail inventory to fixed reading. So there are unit volume CAGRs just in both endpoint ICs and in our systems opportunities. We still see demand, of course, for handhelds in retail, retail inventory visibility, but we're seeing a lot of demand for fixed reading, supply chain and logistics, dock doors, asset tracking, conveyors, just a whole bunch of opportunities. And Jeff and Cary, anything you would add?

No. I think maybe the one other point that I would add about this, the double order and checking against that is the team also does a really good job of matching end customer demand with the orders that we get. So that's a final step in the process to ensure. As Chris noted, it's impossible to say that there is no double ordering going on in a 2-step distribution model that like -- such as we are, but we're pretty confident in the demand here.

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, operator, and thank you all for joining the call today. 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.