Q3 2021 Impinj Inc Earnings Call
And the Raymond James 2021 Technology Investor Conference on December seven.
Look forward to connecting with many of you at those events 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 with revenue and profitability exceeding our guidance.
Demand was also strong driven by enterprise needs for Omnichannel fulfillment supply chain visibility environmental sustainability and process Digitization.
The same time COVID-19 related manufacturing and shipping disruptions compounded our ongoing product shortfalls excel.
Accentuating, our difficulty meeting that demand and constrained our third quarter revenue.
Third quarter also brought wafer component assembly packaging and shipping cost increases that are now too large for us to absorb.
We began passing those increases to our customers and fourth quarter.
Despite those increases we still entered the quarter with demand greatly exceeding our supply.
All told our fourth quarter outlook is strong buoyed by those cost pass throughs in that demand.
Albeit with insufficient product supply that continues to disappoint our customers.
And put IC revenue grew sequentially driven by accelerating in <unk> and 700 sales.
Despite regional factory shutdowns due to COVID-19.
Doubled our 300 millimeter post processing capacity in the quarter and clinic further 50% increase in fourth quarter.
By year end, we will be wafer supply limited rather than post processing limited.
It will quickly turn any 200 or 300 millimeter upside wafers, we received from our foundry partner.
Regardless of the cause our wafer shortfall means our inlay partners continue running hand them out.
Obviously lines down and with critically low inventory.
Like for last quarter third quarter endpoint, IC demand exceeded shipments by more than 50%.
In September our endpoint IC fabric partner gave us first half 2022 wafer supply commitments that should allow us to equal or exceed fourth quarter of 2021 shipment levels through mid 2022.
Like us they recognized the mission critical importance of rain to the global supply chain.
And they have prioritized us far more wafers.
And Opportunely in October our wafer costs increased.
Even as we began passing those cost increases to our inlay partners demand remained so strong.
That they would layer additional bookings onto our order backlog, if we could procure more wafers.
Third quarter systems revenue exceeded expectations with strong leaders and reader IC shipments, partially offsetting the decline in loss prevention engine shipments.
Rita revenue set a quarterly record even as channel inventory declined further with components shortfalls again constraining our reader production.
Although we expect modest improvement in rigor build quantities in the fourth quarter we.
We also expect some of those readers to come too late to ship in quarter.
We had significant rigor backlog entering the fourth quarter and we expect to have backlog again entering first quarter with our supply normalizing in first quarter at the earliest.
Third quarter reader IC revenue continued recovering from our first half 2021 supply shortfall.
We expect supply to finally catch up to demand in first quarter 2022.
Excitingly, we booked significant orders for our new reader Ics as we grow the partner base building products with those Ics with.
More than 75 design wins to date, we expect those reader Ics to be a key driver of rain adoption.
Like for endpoint Ics third quarter brought significant cost increases for our systems products.
Also like for endpoint Ics, we began passing those increases to our systems partners.
Demand remains strong even with those increases.
On the project front for the fourth consecutive quarter, the Asia based global retailer drove meaningful reader revenue from their self checkout deployment.
Europe based global retailer began transitioning from deployment to the operational phase of their loss prevention rollout.
And the second North American supply chain and logistics customer further advance their deployments.
Each project progressed nicely and we continue to see strong opportunities ahead.
I'd like to now say, a few words about environmental sustainability, which I always expect it to be a driver of rain adoption, which we are now seeing.
Rain helps enterprises, digitize and virtualize their operations.
I think real time data that can improve operational efficiencies and reduce waste.
As one example, our partner link cell systems operated Norway posts rang infrastructure using the <unk> platform.
Improving real time package visibility and helping Norway post identified process improvements that will reduce fuel consumption.
C O two emissions and meet their sustainability goals.
Before I close I'd.
I'd like to say a few words of thanks to the pinch team.
With incredible effort and grace under pressure they over the past 18 months.
Launched and ramped new products across every intense product line.
Migrated to a new ERP system and transitioned to a largely work from home environment.
All during an unprecedented global pandemic with unparalleled supply chain disruptions.
The call their effort herculean doesn't do justice to what they have accomplished.
So the each and every <unk> team member I would like to give my heartfelt.
Thank you.
In closing, we exceeded our third quarter revenue and profitability guidance accelerated our 700 production navigated unprecedented challenges and see strong long term demand from enterprise digital transformation.
By year end, we will have sufficiently straightening and widened our endpoint IC post processing types that we will be well primed for upside wafers whenever they may come.
Until then we continue working side by side with our ecosystem partners to navigate today's supply chain challenges. So both we and they emerge stronger on the other side of COVID-19.
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 third quarter financial results and fourth quarter financial outlook.
Third quarter revenue was $45 2 million down four 4% sequentially compared with $47 3 million in second quarter, 2021, and up 63% year over year compared with $28 2 million in third quarter 2020.
Third quarter endpoint IC revenue was $32 million up three 8% sequentially compared with $38 million in second quarter, 2021, and up 48, 1% year over year compared with $21 6 million in third quarter 2020.
Absent COVID-19 related factory shutdowns that exceeded expectations embedded in our third quarter guidance endpoint IC revenue could have been higher.
Looking forward, we expect fourth quarter 2021 endpoint IC revenue to increase sequentially driven by both the initial impact from our cost pass through and incremental upside wafers.
Third quarter systems revenue was $13 2 million down 19, 7% sequentially compared with $16 5 million in second quarter, 2021, and up 102% year over year compared with $6 6 million in third quarter 2020.
Both reader and reader IC revenue increased sequentially and year over year, while gateway revenue declined sequentially and year over year, our gateway revenue faced a difficult comparison to second quarter, which included $6 million for the loss prevention engine shipments.
We expect fourth quarter 2021 systems revenue to decline sequentially, a supply related decline in reader revenue more than offset the continuing strength in our reader IC.
Third quarter gross margin was 53, 3% compared with 54, 5% in second quarter, 2021, and 51% in third quarter 2020 the.
The quarter over quarter decline was driven by indirect costs and product mix, partially offset by sales of fully reserved inventory.
The year over year increase was driven by sales of fully reserved inventory product mix in underlying product margins.
Third quarter gross margin benefit from selling reserved inventory was 200 basis points. Another bright spot. The <unk> 700 provide a gross margin tailwind in third quarter and looking forward. We expect that trend to continue as M. 700 volume grows as a percentage of our endpoint IC mix.
Total third quarter operating expense was $24 4 million compared with $22 4 million in second quarter 2021, and two sequential increase was due primarily to increased engineering expense, including a partial quarter of cost for our new RF design team in general and administrative expense.
Research and development expenses.
$11 8 million sales and marketing expense was 6 million general and administrative expense was $6 6 million.
We expect fourth quarter operating expense to increase sequentially.
Third quarter adjusted EBITDA was a loss of 400000 compared with a gain of $3 3 million in second quarter of 2021, and a loss of $6 2 million in third quarter 2020.
Third quarter GAAP net loss was $12 9 million third quarter non-GAAP net loss was 900000 or <unk> <unk> per share using a weighted.
Turning to the balance sheet, we ended the third quarter with cash cash equivalents and short term investments of $113 3 million compared with $112 million in second quarter 'twenty one.
And $105 1 million in third quarter 2020.
The sequential cash increase was due primarily to reduced inventory and proceeds from stock option exercises, partially offset by capital expenditure from our endpoint IC post processing expansion.
Inventory totaled $18 4 million down $5 6 million sequentially.
Based on our current visibility to wafer and component supply, we do not anticipate building inventory in fourth quarter 2021.
Third quarter net cash provided by operating activities was $5 4 million property and equipment purchases totaled $6 3 million free cash flow was negative 900000.
Before I turn to our fourth quarter guidance I want to highlight items unique to third quarter and give an update on a few of our <unk>.
Our strategic initiatives.
First product costs across all product lines increased markedly over the past year.
In October we began passing those increased costs to our customers. We have factored those increases as we see them today into our fourth quarter guidance.
Second we anticipate a favorable mix of specialty and industrial endpoint Ics in fourth quarter driving margin rich revenue.
We expect that favorable mix, coupled with increasing 700 volumes other prospects in our fourth quarter gross margins.
Third we expect Capex.
Looking forward, we expect 2022 capex spending to be similar to 2021 as we continue investing in our business.
Turning to our fourth quarter outlook, we expect revenue between $46 48 million, a 29% year over year increase at the midpoint of the range compared with $36 4 million.
We expect adjusted EBITDA between a loss of 500000 and a gain of $1 million.
On the bottom line, we expect non-GAAP.
Net income between a loss of $1 1 million at a gain of 400000, reflecting non-GAAP earnings per share.
On a weighted average diluted.
Share count between $24 3 million or $26 5 million shares.
In closing I want to thank rmp's team customers suppliers and investors for your ongoing.
Support I.
I will now turn the call to the operator to open the call.
Okay.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing.
Please first of all Nathan at.
At this time, we will pause momentarily to assemble and Lawson.
Okay.
Our first question today comes from harsh Kumar with Piper.
Sandler. Please go ahead.
Yeah, Hey, guys first of all let me just congratulate you guys on some tremendous execution. There's a lot of has been but I think you guys are doing.
And all the right things in terms of supply and execution so huge leg.
Next question.
Thank you.
Lunch.
The chip is the endpoint IC revenues jumped up I know supply was pretty big and chunky buys you werent expecting someday for initial interest coming later on in the quarter around November timeframe is that the set of wafers that you were able to already secure or is that still.
I guess supposedly on the come.
Hi, harsh this is kerry thanks for the question and it's a good one so as we've talked previously endpoint IC volumes typically decline in fourth quarter and.
And even with our accelerating demand percent decline would hold in Q4.
The incremental weight.
If orders we've received in Q3.
We are now able to satisfy more of that demand certainly not all of it but more of that demand.
And then we had thought last quarter, and it's allowing us to deliver endpoint IC unit volume in Q4 that beats that typical seasonality.
The price increases and then layer on top of that better than seasonal volume.
Those two factors will drive the sequential increase in endpoint IC revenue.
Understood. Thank you for that clarification, and then you guys talked about.
Hoping you could.
Sitting in a situation where demand is foreign exceeding supply. So this is something very one I was curious if you can elaborate on what kind of maybe some COVID-19 mentioned what size of things for conventions have you guys secured and as you're finishing I'll get back in line. After this.
Thank you. So this is Craig.
Our visibility now to the first half 2020 'twenty. Two obviously there is possibility to further wafer upsides that visibility to the first half of next year allows us to say that we will be able to.
Two equal.
Equal our.
Fourth quarter shipments in the first half of the year.
Thank you I appreciate it guys.
Thank you harsh.
Our next question comes from Derek Soderberg with <unk> Securities. Please go ahead.
Hey, guys. Thanks for taking my questions.
Start with the commentary on demand being 50% higher all sort of consistent with last quarter.
Just given 50%.
Demand.
Well for the industry to supply or would you expect that even with the wafer on allocation.
That demand is going to continue on beyond that 50%.
So that gives us Chris thanks for the question.
We guide one quarter at a time, we're getting some advanced visibility at this point in time, just given the weaker supply shortfalls.
Hi.
So we don't guide as far out as would be able to answer your question, but demand does remain strong.
Sure.
And as I said for this quarter, sorry for the last quarter that exceeded plan by more than 50% of our endpoint.
There's no additional fed additional supply.
Because of the strength of demand we see demand.
And continuing to be strong.
We will give further guidance in terms of our further visibility on our next earnings call.
Got it got it and then as my follow up I understand that <unk> wants to drive industry tag volumes forward and pricing is a big.
A piece of that.
To me it seems like the cost structure on the 700 is such that you could take a pretty substantial haircut to the ESP and still generate a stronger gross margin on the 700 versus prior generations.
Sort of wondering how you're balancing.
That desire to maximize tag volumes.
Market share with really a great opportunity for you guys to jobs and then if you could share sort of what you guys are targeting for the 700 gross margin then.
Would be great. Thanks.
Hi, Derek this is Kerry thanks for the question.
<unk>.
From a from a pricing perspective, or maybe let me first start with the cost we've seen a wider a wide array of cost increases across all of our product lines.
To the extent it doesn't make sense in maintaining our margin model, we pass those costs onto our customers.
We are very price sensitive, we believe and the elasticity of pricing in the rain market.
Maintaining the margin.
Look two to take on those costs.
Cost increases.
Great. Thanks, guys.
Our next question comes from Chris <unk>.
With Needham <unk> co. Please go ahead.
Hi, Thanks for taking the call. This is Chris Craig in for Jim Ricchiuti.
Sure.
Congrats on the on the <unk> on the great quarter.
Chris had mentioned.
Some strong opportunities ahead on the on the project side.
Could you talk about the pipeline for large projects in the systems area.
Whether youre seeing more underlying demand from larger customers.
Or from customers, who have been in earlier stages of project deployments.
Thanks for your question, Chris This is Jeff.
I think overall I would say the pipeline remained strong.
In each of the large projects that we've discussed on prior.
Our earnings call. So those projects are continuing to progress well.
But overall.
Geographies.
<unk> strength in supply chain and logistics and ongoing strength in retail.
Got it thanks.
And.
Okay.
Have you have you observed whether retailers are are slowing or revising deployment schedules for rain RFID in light of.
In light of the IC shortages.
I am not aware of any.
Slowdowns as it relates to deployments in retail in fact, we're seeing.
Strength and continuing the continuing strength in retail that flying our self checkout.
So retail remains a strong growth opportunity front page I'll just add that there is there is very strong interest for a range of drive enterprise Digitization and retail supply chain logistics and many other verticals. It is.
Obviously with that short supply.
Propensity of projects to our smaller newer projects to move forward it could be could be delayed a bit.
But I will actually take the other side of that coin is that demand as we see it right now is very strong right now in the market from those end customers to drive that enterprise Digitization.
Great very helpful. Thank you very much.
Thank you Chris.
Okay.
Our next question comes from harsh Kumar with Piper Sandler. Please go ahead.
Yeah, Hey, guys. Thanks again for accommodating me.
I had.
Final question I think it's the same thing so I'll just ask.
To answer your questions together and I believe the answer is similar in.
Terms of scope. So since you mentioned several times demand is much greater than supply being increased demand, so infants and should be that if there wasn't an issue.
Seasonality in <unk>, we Shouldnt expect.
That because you are seeing increased demand and there is.
Yeah.
You've got demand and Youre not youre now getting supply so.
Should that basically led me to think that.
Should not worry about seasonality whatsoever that you should be.
It'd be up to the right is that the correct way for me to think and then I've got a small follow up.
<unk>. Thanks for your question I'll answer the first part of an instrument demand, finishing up this plan that will have up to carrier.
When we mentioned that.
Sorry assets Bank had campus supply many of the other way around supply catching up to demand when we were talking about supply catching up.
To demand it was not relative to endpoint Ics It was in the reader Ics and catching up on the fixed readers.
Our endpoint Ics supply continues to exceed any sorry, if demand continues to exceed supply.
<unk> significantly and Thats, why we said in the third quarter demand exceeded supply by more than 50%. So.
So we have not said anything about catching up on the endpoint Ics and in fact, the wafer shortfalls continue.
And fortunate for Trulia actually we got commitments from our factory partners, such that we will be able to deliver endpoint Ics at least at fourth quarter levels through the first half of 2022, the demand is much higher than that.
Sure ill take the second part of your question on seasonality.
So harsh thanks.
Thanks for the question so its still a little too early to predict how seasonality is going to play out next year and from today's vantage point, we are and we will we anticipate continuing to be constrained on both wafer supply and systems components.
As I think about endpoint IC as Chris mentioned Q4 supply remains well below demand and I think that continues into 2020.
Due to the incremental wafer supply that we've received over the last several weeks gives us the confidence that we can supply volumes that meet or exceed Q4 levels through at least middle of 2022 and the significant investment. We've made this year in our 300 millimeter post.
Processing capacity, plus our existing 200 millimeter capacity positions us well to quickly turn any wafer upside as we receive in that period.
And I'll, just I'll add to Chris' point on the systems side, we just see the situation improving modestly as we enter the new year.
Chris Dodd reader Isuppli is coming online late in Q4, and will benefit Q1, and reader IC supply to catch up in it.
Readers should catch up with supply in Q1, a harsh this is Chris I'm going to just jump in I wrote it down here at this point I'm pointing you to a particular sentence in the in the script that we just delivered which is relative to endpoint Ics and we said even as we began passing those cost increases to our inlay partners.
Demand remained so strong.
Bookings onto our order backlog, if we could procure more wafers.
Sure Okay, great very helpful guys and that showed a slight blend very nicely into my second question, which was.
What is the cause of the reader IC shortages and just the general supply constrains in one of the possible solutions to that that you could work on as a company.
Okay. Yes. So this is Chris again for the reader Ics Shapewear significantly packaging limited in terms of our ability.
And so we.
Yeah.
We expect to be able to catch up.
For a display to catch up to demand in first quarter, because we have caught up on some of that package.
So for those particular products issue is not so much wafer supply as it was packaging and factory ability to package our okay.
Okay. Thank you harsh.
Our next question comes from Troy Jensen with Lake Street Capital. Please go ahead.
Hey, gentlemen, congrats on the nice results.
Thank you Troy and insured.
So maybe Chris for you you touched briefly on loss prevention, and Europe and as we can.
Please check out in Korea.
So that's on which ones moving fast area, which one is going to be.
The bigger.
Application for you guys in 2020.
Yes.
Thanks for the question.
But I'm going to say is that the driver for both deployments is self checkout.
There is the self checkout deployments in Asia.
And that alone.
Because if you've got regions with that tenant.
Since you gave a little bit higher than we wanted to do self checkout.
We actually can't have self checkout without a functional loss prevention system.
If you think two existing loss prevention technologies for example, the hard tag with Tim Nicholls requirement.
That doesn't work for self checkout, because you can't give the detach or to them for the customer to remove that Jorge.
Because they can just remove any car cabinet so in order to.
Nathan.
Our deactivate tag at points.
And then have the exit gate not recognized that same tack on the annual meeting.
The store or recognize the items being sold so in both instances self checkout that is driving the opportunity.
In Asia, there is not as much need for loss prevention, although it's still there and so we expect even if some of those agent opportunities for loss prevention to come into play in the future.
Alright that makes sense and maybe I just want to carry.
Gross margin to bounce around a lot and there's been some onetime items in there.
But can you just thoughts on gross margin expansion going forward or a business model target you can point us to or and it's too early to talk about 2022 targets, but any thoughts on how margins longer term.
Yes.
Good question.
Yes, gross margins haven't been nuanced throughout the year.
Q4, it will continue to be to be nuance, we will have the strong mix of.
Industrial and specialty Skus, which are higher margin.
And we will have an increasing mix of <unk> 700, both of those factors even without the benefit of BNS sales that we had in Q3 I anticipate gross margin gross margin increasing in in Q4.
As I'm looking to 2022 I do not think we will maintain that same level.
Industrial specialities SKU mix, so, we'll lose that benefit, but will maintain and likely increase the benefit coming from an increasing 700 mix.
All right.
Again, if you'd like to ask a question with Star then one Star then one to ask a question.
Our next question comes from Scott Searle with Roth Capital. Please go ahead.
Hey, good afternoon. Thanks for taking my questions nice job in a difficult environment, guys and I apologize for the background noise.
A couple of quick questions again.
Looking to the fourth quarter and 700 I'm wondering if you could give us an idea of what that endpoint mix looks like now that youre starting to become less constrained on that front.
And also just follow up on <unk> question as it relates to gross margins. It looks like you got a favorable mix going into the fourth quarter, Terry I wanted to clarify that that sequentially up gross margin.
That is off of the reported number of 53% as opposed to an adjusted number reflecting the onetime reserves I'm wondering also if youre thinking about any onetime reserves reversing in the fourth quarter and then as we go into <unk>.
So the first quarter, but typically you get the pricing negotiation impact it takes a step down does that not happen. This year, because you've just kind of gone through.
Passing price increases through to your customers. Thanks.
Thanks, Scott. Thanks for the question, Kevin I think the first part which is about 100 and I'll hand off to you okay.
Thanks, Pat for <unk> for the question and.
For the endpoint Ics, we are constrained on 200 millimeter wafers for constraint on 300 millimeter wafer can spend on it and <unk> 700 going forward to the constraints are still there.
We the crossover between 200 millimeter or 300 millimeter products or the crossover to where the <unk> and 700 is the primary product that we're supplying for our endpoint Ics is happening this quarter and it will be our volume run at going forward. Okay.
So Scott on gross margin the commentary I made for Q4 and reinforcing that yes. It is nuanced was relative to Q3's 53, 3% unadjusted for piano sales. So as I look to Q4, I think Q4 increases sequentially, we lose the.
Benefit of BMO, we gain the benefit of specialty and industrial SKU mix and we gained the benefit of increasing <unk> 700 mix and those two factors more than offset the loss from <unk>.
<unk> from sales and will being fully reserved inventory excuse me I was thinking of excess and obsolescence inventory fully reserved inventory more than offset that benefit in Q4, driving gross margins up.
And then.
Terry.
As we look into the first quarter.
The usual historic.
Price decreases price concessions as that happened this year.
Hey, Scott This is Jeff Thanks for your question.
Invest supply environment.
I think I would refer to it as atypical.
Supply demand environment.
We are working very closely with our partners Daily weekly monthly quarterly to optimize.
The.
Our supply to their view of demand and as Chris mentioned in his opening remarks, we have.
Then in our conversation with regard with regard to cost.
Pass throughs, and so I think this.
This is an atypical scenario so I wouldn't.
Anticipate.
The same seasonal seasonality that we've experienced in previous years with respect to that.
ASP.
Thank you Scott.
Ladies and gentlemen, this will conclude our question and answer session I would like to turn the conference back over to Chris <unk> co founder and CEO for any closing remarks.
Thank you grant.
I'd like to thank you all for joining the call today.
Hope you Andrew loved ones are and remain safe and well. Thank you again bye bye.
The conference has now concluded.