Q2 2021 Impinj Inc Earnings Call
Good day and welcome to the Impinged second quarter 2021 earnings conference call on.
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At 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.
Yeah.
Thank you Matt Good afternoon, and thank you all for joining us to discuss impinges second quarter 2021 results on.
On today's call Kristi Oreo.
Please <unk> co founder and CEO will provide a brief overview of our market opportunity and performance Cary Baker <unk> 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.
And Jeff Dossett, and just see Aro 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 $19.95.
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.
Jack 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 for 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 and Communications conference on August 10th the.
For the Canaccord Genuity 40 <unk> annual.
Both conference on August 12.
The Jefferies semiconductor 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 Randy 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.
We'll gain even stronger in second quarter 2021, setting a record for the third consecutive quarter.
Growing rain adoption engendered 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.
<unk> be counterbalancing that strength.
<unk> tight wafer supply.
Our not yet completed 300 millimeter wafer post processing expansion and short term reader component shortfalls constrained 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 for.
Focusing on maximizing total unit volumes.
Growing endpoint IC demand drove record quarterly bookings.
<unk>, we see driving that demand.
The need to digitize and Virtualized enterprise.
Enterprise operations, and 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.
Pershing revenue above our expectations.
Despite those shipments our inlay partners are running hand to mouth.
Reata Glee 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 pre built in 2020.
For 300 millimeter, which is on the cusp of becoming our volume runner.
<unk> 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 which neither we nor day yet.
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 either wafer diameter.
Second quarter systems revenue exceeded expectations setting a quarterly record.
Our reader IC supply improved faster than anticipated delivering part of.
Wafer 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.
Net revenue channel inventory declined again in second quarter, driven by components shortfalls that constrained our reader builds.
Those components shortfalls on ongoing challenge with some suppliers decommission near days before a scheduled delivery.
Our team has definitely navigated the challenges.
Delivering upside where they can net.
For the less.
We remain constrained on all systems products reader Ics readers and gateways.
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 operational 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 deployment.
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 letter 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.
Wired by consumer self checkout.
On the product side, we launched the new <unk> 710, <unk> 10, and <unk> hundred 10 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 Ictu's 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 impinge to identify locate and authenticate items, they manufacture transport and sell.
I believe these reader Ics will bring ranked new classes of smart edge devices.
Especially battery powered usher.
Ushering in a world of ubiquitous reading.
I see and feel our vision.
A boundless Iot.
Coming to life.
On the organizational side in July we hired an intact RF design team.
<unk>, who we believe will greatly increase our IC design velocity.
2 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 entered.
Enterprise digital transformation.
We exceeded our profitability guidance and delivered record adjusted EBITDA.
But we also faced difficult second half supply constraints that require of empathy for and close alignment with our partners.
Superb execution by us and for our endpoint Ics.
<unk> upside from our foundry partner.
We have straightened and widened our 200 millimeter and 300 millimeter post processing pipes, and our prime for that upside whenever it comes.
And whatever the challenges.
I have the utmost confidence in the impinge team's ability to successfully.
Fully tackle them.
I will now turn the call over to Carrie Carrie.
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 for 5% sequentially compared.
Paired 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.
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 some.
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 2000.
<unk> reader IC revenue increased sequentially, but declined year over year, the latter due to ongoing packaging constraints reader.
<unk> and gateway revenue increased both sequentially and year over year, we expect third quarter 'twenty, 1.2021 systems revenue to decline sequentially as we face a difficult comparison to.
The second quarter, which included the $6 million loss prevention engine shipments.
Second quarter gross margin was 54, 5% compared with 53% 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.
Looking forward. The M 700 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.
For 2020, the sequential increase was due primarily to increased engineering expense Reese.
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 X.
Expectations in part due to timing in third quarter that timing will normalize.
So 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.
900000 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 <unk> 11 per share using a weighted average diluted share count of 20.
A $5.6 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 of 2021 and $129 million in second quarter 2020.
The sequential.
Twenty-five 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.
<unk> inventory declined in second half.
Second quarter net cash used in operating activities was for $4 million property and equipment purchases totaled $3.5 million free.
Free cash flow was negative $7.8 million.
Before I turn to our third quarter guidance I want to highlight a few <unk>.
Leak 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.
Further 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's even more demand we can service.
Third we continue investing in engineering and endpoint IC posted.
<unk> processing the.
The design team, we just hired will partially hit our cost structure and third quarter and fully in the 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.
Post practice 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% and $45 million a 50.
In percent 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.
6 protecting a non-GAAP loss per share between <unk>.
And <unk> on a weighted average diluted share count between $24.3 million and $24.5 million shares.
In closing I want to thank our <unk> team our customers our suppliers and you our investors for your ongoing.
Boeing support.
I will now turn the call to the operator to open for question and answer session.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at anytime you question that's.
It's been interesting you would like to withdraw your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.
Okay.
Our first question will come from harsh Kumar with Piper Sandler. Please go.
Go ahead.
Yeah, Hey, guys first of all congratulation on the same shops, there's a lot to chew on on your comments, Chris Carey, but I mean, let me try to I suppose this day things look like they're running great from the point of view on orders and demand and things happening for us.
But it almost sounds like you are running the risk of a lot of supply.
Change.
How do you help us understand how does that play out some growth angles for revenue revenue growth tango in debt turn and possibly the fourth quarter I bring that up Capex you mentioned you blew out some inventory.
2 questions.
Right.
Fourth quarter on some kind of demand on that.
Yeah. So first let me, let me start with our with the third quarter. So so yes, I think I'll actually let me start with the second quarter. So yes, you heard correctly, we exceeded our endpoint IC shipments.
Higher than we planned in in the second quarter, our supply situation for your really Hasnt changed so that increase in Q2 shipments comes at the expense off of Q for supply now when I look at Q3, we expect Q3 revenue to increase at Q3 end point IC revenue to increase sequentially.
Sequentially, perhaps not quite at seasonal level and that's due to the the post processing the impacts we have related to COVID-19, and some of our southeast Asia locations. We've had a couple of shutdowns that we're navigating right now and we factor that impact into into R. R.
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 debt that phase has now completed if we take that out and look at our our run rates systems business.
It's going to grow in Q3, and we will see a nice lift without adjustment in there from a 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 then Capex will also be higher.
You know if I were to look into Q4. It is it's too early to predict Q4 from from today's vantage point, the wafer supply and systems constraints that we're navigating in Q3 only get tighter in queue for 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 M..700, we spent the last several quarters, adding and ramping post processing capacity and preparations for Q4 and beyond for that matter.
On the Covid impacts are a little bit of a wildcard that will have to closely.
We monitor but we've been dealing with with those types of situations for over a year right now so on.
That will be able to navigate it and if we are able to receive any way for upside. If we can get it kind of by mid quarter Q for at least we will be able to post process and turn it in year.
On.
Systems side again looking at Q for the shortest the shortages of the component shortages that we're dealing with now are more of a recent development than the wafer supply on.
Our team has done a really good job navigating a path for us in Q3.
We'll be ramping our 300 millimeter.
The volumes as well as post processing capacity, we have as you know and we've talked about for a couple of quarters and net.
<unk> in that backend 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.
<unk>.
Sufficient to cover the wafers that we expect to see and then some so we've got margin on the post processing side as we as I said in the prepared remarks.
Prime too quickly post process any way for upside that comes our.
Thanks, guys I'll get back in queue. Thank you.
Okay. Thank you harsh harsh.
Our next question will come from Mike Walkley with Canaccord Genuity. Please go ahead.
Hey, guys. Good afternoon, it's Daniel on for Mark. Thanks for taking my question could you provide us with an update.
Right.
Your line of opportunities trended.
Is there anything moving youre seeing on that for them.
So the Daniel Thanks for joining us on.
The airline opportunity its still going forward as best we understand the IATA.
The IATA driven initiatives to track all airline baggage.
The it on behalf of non.
Pulled back that said of course aviation is going through a very difficult time right now and.
And the pace of the adoption has slowed compared to our original expectations.
We do see the need for better visibility in airlines and aviation.
Back in the line of supply chain.
We do see the opportunity still there going forward, just the pace of slowed and <unk>.
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.
Daniel I'll, just add debt some airlines have.
<unk> taken the opportunity during a reduction in passengers.
Loans to plan for.
Operational improvements driven by of rain deployments. So we are encouraged.
The continued focus of airlines to improve operations with rain rain deployments.
And.
We anticipate that they will.
Initiate and continue the deployment.
As the business continues to improve.
Okay, great. Thanks for the color.
Thank you Daniel.
Our next question will come from Jim Ricchiuti with Needham <unk> Company. Please go ahead.
Hi, Good afternoon, just had a question on your systems business.
Yes.
The ramp up.
I think of the reader IC I'm wondering if we adjust.
For the.
The large contract that $6 million.
The loss prevention engine shipments.
Would you still anticipate.
Net your system business would be down sequentially.
In Q3.
No no no.
Just trying to signal debt.
We will have the tough compare sequentially in Q3 due to the for 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.
The growth sequentially from Q2 into Q3.
Great. Thanks for getting really we're seeing broad based demand of nice recovery across multiple verticals driving that.
Okay. Thanks for clarifying that Eric just.
In terms of the level of demand that you're seeing on the tank.
Got it.
Is.
It's going to be any color you could provide as to whether youre seeing this from.
New customers.
Or is it.
Essentially more so from your existing customers that are ending projects.
Hey, Jim This is Chris I'm going to start just by saying yes.
The covered.
Over to Jeff.
Thanks, Chris.
Chris Thanks for your question Jim.
Part of the question I think we're seeing strength is broad based that is.
For those organizations enterprises that have deployed rain are continuing to invest and expand those range deployment.
And.
We're seeing the layering on of additional rain deployments for those who are at the beginning of their range journey. So there's broad based demand across both.
This is Jim.
Jim do you have the follow up.
Thank you with respect to just <unk>.
Looking out as these inventory levels come down.
Talked about your team being able to source more.
Product from your foundry partner, but the question.
Passes as we look out 'twenty early 'twenty 2 what gives you the confidence that you're going to be able to.
To be able to at least be in a position where you're in a better you got a bit of shot at meeting customer demand because it looks like we're seeing these constraints the extent.
Well into 'twenty 2.
Yes, Jim So this is Chris.
It's still a bit early for us for sure.
On project 2022, wafer availability and visibility.
I need more wafers than we received in 2021 of the great. Thanks, just because of the overall business and the other.
The rain opportunities.
Can I get compounded with the fact that we.
There is more demand than we can service in 2021, we have multiple irons in the fire. We're working it every way we can.
There is no guarantees that we are going to be able to get significant upside, but we're kind of do our darndest to pull it out and like I said previously if theres anything that.
The growth and do it with the pension income.
And Jim maybe I'd add 1 thing to the theory of it.
Still early for us to be discussing 2022 way for allocation of with our founding partner that doesn't typically take place until later in the year.
Okay.
Thanks, a lot.
Thank you Tim.
Our next question will come from Derek Soderberg with Colliers Security. Please go ahead.
Hey, guys. Thanks for taking my questions just curious on the transition to the 700 production now my understanding is that you guys use sort of a unique manufacturing process from some new new equipment.
Net are you guys still qualifying of 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, Derrick this is Chris so.
The answer to your question is we anticipated a transition.
The significant 300 millimeter and point of Ice's back.
Actually a couple of years ago, we started building that post processing capacity in earnest starting last year.
The capacity up and running now.
Our running significant volumes already we ran a significant volumes in the first half as we as we.
In prior calls, we're adding post processing capacity of double it in the second quarter of triplet in the third quarter of.
Of course, there's the bring up and every time, we bring of additional equipment for those of 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 of post processing capacity and will not be constrained by post processing by the end of the fourth at the end of the of the.
Of the fourth quarter.
Okay got it so that's sort of.
Answers My next question kind of building out for the earlier question.
Just before me so.
It sounds like the.
The current supply environment persists, the bottleneck would would not be your post processing.
In Q4 Q1 of next year, it would still be the the wafer supply.
Let's just say the answer to your question is yes, but in the.
The latter part.
For and heading into first quarter next year, we're still we're still adding in fourth quarter as the 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 the wafer supply.
Got it thanks guys.
Okay. Thank you thanks, Eric.
Again if.
Your question. Please press Star then 1 our next question will come from Scott Searle with Roth Capital. Please go ahead.
Hey, good afternoon. Thanks for taking my questions, Hey, just to clean up on a couple of the earlier questions. It sounds like systems grows sequentially net of the loss prevention sales. So you're at 10 plus million I was wondering as you're.
In the third quarter and you look into that pipeline. If you could provide a little bit more details or maybe quantify whats going on of 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.
Hey, Scott This is Jeff all of that speak first to that question and the pipeline is.
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 the proof of concept.
The projects that give us a lot of.
A 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 the.
Upon.
The 300 millimeter post processing capacity, Chris and Terry you had 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 are going to double and triple it by the time, we get to the fourth quarter net doesn't become the constraining factor, but where are we starting at today how how.
How big is that as a percentage of the mix when we start thinking about where the 700 is today.
Yes.
So Scott the crossover in terms of the endpoint I think not waivers in terms of NYSE this quarter.
Okay.
Uh huh.
Right around this time, we will be shifting more incline of Ics.
At derived from 300.
Everybody for Sandoz the derived from Chile.
Great and lastly, if I could the demand sounds like it's off the charts I think you mentioned the 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 2020.
'twenty 2.
When do you expect debt to possibly become back into an equilibrium of balance as we're looking into 2020 of you've already mentioned that youre not necessarily engage right now for your wafer allocation yet when do you start to engage in that process. What else can you be doing to get out ahead of this to maintain the or make sure that youre 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 ill.
Okay carry on for Jeff opportunity the layer and so of course double ordering is always at risk in the 2 step distribution model like we have.
We don't have direct visibility for the end customer.
Our team is pretty seasoned our purchase orders are noncancelable.
And our visibility into our partners' inventory levels shows, they're very lean and frequently lines down.
There is a set of my prepared remarks running and come out.
We don't see inventory builds for the channel we don't see.
Evidence of significant double ordering where 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 the.
It's driven by just the overall unit volume CAGR in the range industry wishes.
As average between 25% 30% of it for the past decade, so there's nothing to indicate that that debt.
Debt unit volume CAGR is poised to decline of if anything it's kind of it looks poised to accelerate as a consequence of of companies coming out of the other side of Covid.
Chris.
In terms of demand of Joanna.
The number of point I'd number.
Not not of total endpoint and systems Thats, an endpoint IC number.
Yes, the endpoint IC number is what I was referring to but we see growth on the system side as well as industry transition or let's say, let's say transition extend.
From handheld driven retail inventories to fixed reading so their unit volume CAGR in both endpoint Ics and <unk>.
In our system.
Systems opportunities.
Don't see demand of course for handhelds and retail channel inventory visibility, but we're seeing a lot of demand for fixed reading the supply chain of logistics.
Doctors asset tracking conveyors, just a whole bunch of opportunities.
And Jeff and care of anything you would add.
No I think maybe the 1 of.
I would add about the the.
The double order and checking against that.
The team also does a really good job matching and 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.
The point on it in a 2 step distribution model.
Such as we are but we're pretty confident in the demand here.
Great. Thanks, so much.
Thank you Scott.
This concludes our question and answer session I would like to turn the conference back over to Kristy Oreo co founder and CEO for any closing remarks.
Thank you operator, and thank you all for joining the call today I Hope you Andrew of up 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.