Q2 2022 Impinj Inc Earnings Call
Welcome to the impinge second quarter 2022 earnings conference call and webcast.
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I would now like to turn the conference over to Mr. Andy Cobb, Vice President Strategic Finance. Please go ahead.
Thank you Jack good afternoon, and thank you all for joining us to discuss second quarter 2022 results on.
On today's call Kristi, Oreo, who can just co founder and CEO will provide a brief overview of our market opportunity and performance.
Baker.
CFO will follow with a detailed review of our second quarter 2022 financial results and third quarter 2022.
We will then open the call for questions. Jeff Dossett, you can just see our L will join us in the Q&A session.
You can find management's prepared remarks.
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 based on our outlook as of today.
Any such statements are forward looking under the private Securities Litigation Reform Act of 1994, while.
While we believe we have a reasonable basis for making these over looking statements. Our actual results could differ materially because any statements we make today.
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 non-GAAP financial metrics to the most.
Comparable GAAP metrics.
Before turning to our results and outlook and we will participate in the 11th annual Needham Industrial Tech robotics in clean Tech one on one conference on August <unk>.
Oppenheimer, 25th annual Technology, Internet and Communications conference on August nine.
42nd annual Canaccord Genuity growth conference in Boston on August 11, the Jefferies semi hardware in Comm infrastructure summit in Chicago on August 30, and 31.
Hypersound our growth Frontiers conference in Nashville on September 13th and the Goldman Sachs 2022 commuter Copia Technology conference in San Francisco on September 14th.
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 second quarter results were strong driven.
Driven by robust secular demand for all our products and polynices reader Ics readers and gateways.
Revenue set a new quarterly record and strong profitability highlighted the leverage in our operating model as our revenue scales.
Based on my conversations with Impinges, leading end users in go to market partners.
<unk> demand to remain strong at least through second half 2022.
Driven by both new deployments and expansion at existing deployments.
Turning first to supply.
The pace of wafer upsides from our foundry partner has recently increased.
Suggesting that global demand for wafers, an hour process nodes may finally be cooling.
Although I'm guardedly optimistic that that trend will continue.
Second quarter endpoint, IC demand still exceeded supply by more than 50% for the fifth consecutive quarter.
And looking ahead I expect that imbalance to persist in the third quarter. Despite the wafer upsides.
On the systems side second quarter demand exceeded our ability to supply as it has for the past three quarters.
We exited second quarter with significant systems backlog.
Reader component shortfalls in particular will constrain our reader supply and revenue growth in both the third and fourth quarters.
Consequently, I expect product supply rather than demand so broadly constrain second half 2022 revenue growth.
Just like it did in the first.
That said, we are poised for strong growth at <unk>.
Apply improves.
Second quarter endpoint IC revenue exceeded our expectations setting a new quarterly record.
Demand remains strong driven by retailers adopting rain inventory visibility and omnichannel fulfillment.
Slide 10, and logistics providers for item traceability, including parcel tracking and operating efficiencies.
Based on that strong demand I continue to believe our inlay partners layer on additional bookings as our growing shipment volumes to begin addressing our order backlog.
Looking further out.
We continue to see retail expansion focused on apparel home goods and general merchandise.
And supply chain expansion.
On parcel shipment traceability.
As multiyear growth tailwind for our endpoint Ics.
To help meet that demand over the past 18 months, we have invested in growing diversifying and streamlining our endpoint IC post processing.
June marked a milestone in that investment with our operations team releasing a 300 millimeter post processing.
It reduces cycle times by 25%.
We are primed and ready to.
So quickly turn any future upside wafers into shippable product.
Second quarter systems revenue also exceeded our expectations reader Ics were a bright spot recovering from last quarters post processing challenges and setting a new quarterly revenue record.
Looking forward I expect strong third quarter ease family reader IC volumes and.
And growing supply of E family Ice's helped drive record annual reader IC revenue.
Reader revenue also exceeded our expectations.
Our operations team securing more second quarter supply and we had anticipated.
Our gateway revenue performed in line with expectations led by shipments to the visionary European retailers expanded loss prevention deployment.
In June we launched our new impinge E 910 reader IC.
Bringing the highest performance of any reader IC on the market.
Our <unk> family, which now includes the <unk> hundred 10, <unk> hundred 10, 710, Andy nine can bring.
Brings rain to new classes of smart edge devices.
With design wins and partner handhelds fixed readers modules wearables and printers.
With its sibling E family Ice's. The 910 users of common reference design and software stack.
Among our partners to quickly bring new <unk> based products to market.
I believe this combination of high performance and rapid time to market will further accelerate our vision of a boundless internet of things.
On the project front.
I see continued momentum in both retail and supply chain and logistics.
Starting with retail second quarter marked the return of meaningful reader revenue from the Asia based global retailer.
They expanded their self checkout deployment into new geographies.
And in my discussions with the visionary European retailer. They are pleased with the performance of our rain based loss prevention offering and continue deploying as expected.
I anticipate this deployment to continue generating meaningful revenue.
Over the next several quarters.
On the supply chain front second large north American supply chain and logistics customer.
Advancing their reader deployment genera.
<unk> healthy second quarter reader revenue.
I expect this customer to drive a large endpoint IC opportunity in 2023 and beyond.
In closing I'd like to thank every member of the <unk> team for your tremendous effort this quarter.
We delivered record revenue and growing profitability.
Introduced market, leading new products.
Dan start platform.
Third our operations.
<unk> to us for growth.
All while navigating persistent 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 Kerry for our financial review and third quarter outlook Gary.
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 $59 8 million up 13% sequentially compared with $53 1 million in first quarter, 2022, and up 27% year over year from $47 3 million in second quarter of 2021.
Second quarter endpoint IC revenue was $42 9 million up 10% sequentially compared with $38 8 million in first quarter, 2022, and up 39% year over year from $38 million in second quarter 2021.
Close engagement with our foundry partner started paying dividends accelerating the pace of upside wafers, which allowed us to ship more endpoint Ics and drive revenue above expectations.
Looking forward, we expect a sequential increase in third quarter and third quarter endpoint IC revenue as we further leverage the upside wafer availability.
Second quarter systems revenue was $16 9 million up 18% sequentially compared with $14 3 million in first quarter, 2022, and up 3% year over year from $16 5 million in second quarter 2021.
Systems revenue exceeded our expectations driven by strong reader and reader IC revenue.
On a sequential basis gateway and reader IC revenue increased while reader revenue decline on a year over year basis reader IC and reader revenue increased while gateway revenue decline.
Despite strong demand, we expect a slight sequential decline in third quarter systems revenue as we continue navigating components shortfalls.
Second quarter gross margin was 54, 7% compared with 57% in first quarter 2022, and 54, 5% in second quarter 2021. The sequential decrease was driven by higher cost wafers flowing through Cogs, partially offset by product mix the year over year increase was driven by endpoint IC.
Margins, partially offset by product mix and indirect cost.
Total second quarter operating expense was $28 8 million compared with $26 8 million in first quarter, 2022, and $22 4 million in second quarter 2021.
Research and development expense was $13 6 million sales and marketing expense was $6 9 million general and administrative expense was $8 3 million, we expect similar operating expense in third quarter.
Second quarter, adjusted EBITDA was $3 8 million compared with $3 5 million in first quarter, 2022, and $3 3 million in second quarter 2021 second.
Second quarter adjusted EBITDA margin was six 4%.
And even as we grow adjusted EBITDA, we continue investing in our business.
Second quarter GAAP net loss was $11 5.2nd quarter non-GAAP net income was $3 million or <unk> 11 per share.
Turning to the balance sheet, we ended the second quarter with cash cash equivalents and investments of $183 7 million compared with $193 4 million in first quarter 2022, and $112 million in second quarter 2021.
The sequential cash decline was due primarily to us repurchasing the remaining $9 9 million aggregate principal of our 2026 convertible notes for $17 6 million plus accrued interest.
Inventory totaled $32 million up slightly from the prior quarter.
Second quarter net cash provided by operating activities was $7 2 billion property and equipment purchases totaled 700000 free cash flow was $6 5 million.
Before I turn to our third quarter guidance I want to highlight a few items unique to second quarter and also give an update on a few of our strategic initiatives.
First we took advantage of market weakness to repurchase the remaining principal of our 2026 convertible notes at more favorable prices than our November 2021 refinancing the.
The all cash repurchase saves us $1 1 million in non-GAAP interest expense and removes 300000 shares a potential dilution.
Second reader components shortfalls remain an ongoing challenge and we will limit our third quarter reader production from our current vantage point, we expect third quarter reader revenue to decline sequentially and reader supply to remain constrained through year end.
Third equipment purchase timing drove a sequential decline in second quarter capital expenditures, we expect that timing to reverse and third quarter and continue to expect 2022 Capex study to be similar to 2021.
Finally, with the recent increases in wafer supply from our foundry partner, we expect endpoint IC revenue to grow sequentially in both the third and fourth quarters, regardless, given our strong endpoint IC demand, we expect supply rather than demand to pace revenue growth into 2023.
Turning to our outlook, we expect third quarter revenue between 63, 5% and $65 5 million, a 43% year over year increase at the midpoint compared with $45 2 million in third quarter 2021.
We expect adjusted EBITDA between five 1% and $6 6 million on the bottom line, we expect non-GAAP net income between four and $5 5 million, reflecting non-GAAP earnings per share between 15 and 20.
In closing I want to highlight that at its midpoint our outlook reflects record revenue adjusted EBITDA and non-GAAP net income per share demonstrating the operating leverage in our business I also want to thank our impinge team our customers our suppliers and you our investors for your contributions and your ongoing support.
I will now turn the call to the operator to open the question and answer session.
Thank you.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Jim Ricchiuti with Needham <unk> Company. Please go ahead.
Hi, good.
Good afternoon, I wanted to focus first on the list.
In this business.
And so.
You might begin to see some easing in some of the components.
Shortages that.
You indicated I guess youre going to persist through the second half I mean should that begin to get better and how does that look potentially.
Entering 2023, do you feel like there's going to be better availability, where youll be able to meet the demand that you're seeing.
So Jim Thanks for the question I'll take the first part of it and then I'll hand off to carry so we had previously indicated in our first quarter call that we expected to see.
And ability to supply to the latter half of the year. We had some decommissioned a few key components that we have line of sight to last quarter and that led to our revised statement. This time around and carry hand off to you in terms of the go forward estimates.
So Jim Thanks for the question this is Carrie.
These components shortfalls have has been a reality of our life for several quarters at this point.
And.
It's an ebb and flow we take a step forward, we take a step back and we're constantly trying to outmaneuver them.
The operations and engineering team have done an outstanding job navigating what seems to be a new list of components shortfalls every quarter as I look to the future right now I think those shortfalls are going to impact us in Q3, which is why despite having strong demand.
Signaled that rigor and gateway revenue would be down slightly sequentially.
We will still be constrained in Q4, but there's a lot of time between now and Q4 and I have confidence in the team to where I think we'll be at least flat flat to hopefully slightly up in in Q4 on the reader and gateway business.
Got it and my follow up question just relates to.
What youre seeing from your foundry partner I guess, some encouraging signs that that potentially things might be easing a bit and you're seeing a little.
Better allocation, how did that trend as you went through the quarter and how is that trending thus far in Q3.
Jim This is Chris how its trending as we are seeing incremental wafer upsides.
The pace seems.
Gradually increasing and we're also seeing some incremental poland's of scheduled deliveries.
<unk>.
And as I said in my prepared remarks, we're guardedly optimistic that that trend will continue however, our process nodes.
<unk> says we're in still remain really tight and we are still significantly supply constrained and will be well into the third quarter and looking into the second half of the year. So although there is there is a little bit daylight, we would like to see a lot more daylight going forward.
And maybe I can add to that as well Jim I think over the last several quarters, you've heard us give almost a two quarter outlook on supply and we've been saying, we're going to be equal or exceed so kind of keeping flattish to slightly up supply in the two hour quarters upcoming in the following quarter. This is the <unk>.
First time that we've had enough supply visibility to say confidently that we're going to increase our endpoint IC shipments in Q3, and then increased them again in Q4.
That's great news, but it's still to Chris's point, well short of the demand that's out there and what and what Terry noted shipments those are.
You spoke to revenue in the in the prepared remarks shipment shipment volumes are also increasing.
Got it thanks very much.
Thank you Jim.
The next question comes from harsh Kumar with Piper Sandler. Please go ahead.
Yeah, Hey, guys first of all strong congratulations on what Youre doing managing to grow in this tough environment, particularly in challenging economics and congratulations on that.
On the topic of thank you hi.
No youre walking totally on the question of supply again.
My understanding is the mobile and the PC guys are experiencing some weakness in their backing off your helping out to foundries by stepping in and taking the place.
I'm curious what happens when those guys come back they are bigger than you like but.
But you are helping out and youre, taking a first spot now and a lot of situations, where this incremental capacity when they come back let's say in March or June quarter of next year do you get put back in line or do you continue to take that first spotted any incremental capacity and then I do have a follow up.
Okay. So harsh I will do my best on that question here. So.
As I said in answering <unk> question.
Supply in our process nodes still remains tight.
So I'm going to be a little cautious in the words, helping out our foundry just because of the supply.
Is tight.
Now our foundry partner has indicated to us that we are a priority high priority for wafer upsides and and.
And we have had that prioritization for an extended period of time I.
I believe that the demand in our market the potential for the future.
Ill.
Cause us to maintain a high level of prioritization, both for existing wafers at upside rivers. So yes. Other industries are today larger.
Come a time in the future when rain RFID is going to be larger.
So we're working closely with our foundry partner to maintain our prioritization and to continue to get wafer upsides I can't speak to what's going to happen in the latter part of next year, but we're going to do everything we can across all fronts to ensure that we get continued supply upsides and maintain that supply going forward.
Appreciate the clarity krish.
Follow up was on your logistics customers last quarter was the first time I think you talked about the big logistics customer, which draws customer number two having potentially revenues in our shipping endpoint Ics and in next year 2023, then you reiterated again on this earnings call I was curious about.
Your puts and takes on.
You know what.
And cause that program to happen on Washington caused that program to maybe push to be pushed back just just I'd be curious on color and pros and cons of the situation there.
So I'm going to start by saying, we're very excited about that program and working with the customer.
And the needs of that customer are associated with.
Parcel traceability and visibility into the items moving through essentially their supply chain as you might call it supply chain.
Their shipments.
The opportunity for for them is to reduce missed shipments reduce errors and handling reduce our may basically improved labor efficiencies reduce manual scans and overall improve the automation in their system.
So.
The opportunity for us is to demonstrate with the end customer.
Those gains.
And to the extent that we demonstrate those gains quickly theyre going to adapt quickly and to the extent that there are some challenges along the way whether it has to do with readability or integration or other things there can be some delays. So it's like any other program.
Program is going to be paced by our successes.
Excuse me.
To date they are pleased with the level of deployment. We are pleased with the results. We continue working closely with that customer.
And we're going to do our very best to make that program successful.
Okay. So Chris can I just ask on that wouldn't all this sort of testing and qualification. We don't at this point in time, we already.
Has all that all of that processing sort of like the testing and the quantification type work at this point.
Yes, so harsh so the answer is yes, and no yes early testing deployments by letting things but at scale.
The world changes, a little bit and as you deploy at scale cover challenge is that neither side had anticipated you have to work through just overall scaling in the operational infrastructure.
<unk>.
It is an ongoing joint effort to make that program successful. So like I said I do feel great about where we are so great about the results they've achieved to date and yet we've got to stay on the ball, we really do and help them to navigate challenges that come along and we will continue to do so that program is an incredibly high priority for us we're going to.
Put in the effort that we can from our side to help make it successful.
Excellent congratulations guys.
Okay. Thank you harsh.
Our next question is from Troy Jensen of Lake Street Capital. Please go ahead.
Hey, gentlemen, I'd like to also offer my congratulations on the great quarter.
Thank you Troy Thank you Troy.
Hey, Karen.
You said opex flat on a sequential basis I mean, if I just go back in my history of following you guys. Chris It feels like Youre always this market is huge and we're going to invest any upside to accelerate business nowadays.
It sounds like Leverages more kind of in the in the sights right now so just curious to know if you guys can talk about.
Operating margin targets or kind of growth.
How long would you kind of try to keep the opex on a flatter type basis or slower growth.
Yes.
Troy. Thanks for the question. This flat Opex is not an indication of lack of investment or slowing the investment it's more an artifact of the big step up we took in Q2, some of which was timing related that timing not repeating and incremental investment taken its place to.
Keep us in a at a flat spot. So the investment continues where we're more excited than ever we've got a lot of things that we want to work on and we're making sure that our team has the fuel to do that now taking a step back and looking more broadly.
Following the 2020 Covid downturn, we were focused on getting to adjusted EBITDA breakeven or expectations have evolved and our goal now is to generate adjusted EBITDA profitability, we delivered second quarter adjusted EBITDA profitability, and we're guiding our third quarter to expanded expanding.
Adjusted EBITDA profitability, even in a supply constrained environment.
And even as we continue investing in our business, we remain focused on delivering that adjusted EBITDA profitability. Our next step in the cycle will be moving towards.
<unk> free cash flow.
Okay, perfect any targets you might give us kind of we got to wait and see.
Not right now Julian.
Okay, and then my follow up here.
Okay. So yeah.
I think I know the answer to this question, but I just want to get it out there. So you know assuming you guys are going to have great to go into growth for the next two quarters and your Ic's.
AG sales would you expect to still have a book to bill greater than one and exit the year with a record backlog level of above where it is currently.
So I'm going to start on that one our bookings our pace today.
The supply.
So as I made as I said in my prepared remarks is as we begin addressing that supply backlog I expect our partners to layer on additional bookings.
And so we feel very good about our position in the market in terms of demand.
We feel very good about our position in the market in terms of bookings, we have an incremental bookings we expect to get.
But I think you should be looking at it as a.
Supply and limited bookings opportunity Ghansham.
Alright, anything you'd like to add.
This is Jeff I was just going to add that we are well booked into 2023 and yet at the same time, given the strength of the demand environment, We do anticipate our inlay partners well, we'll layer in additional bookings.
Supply continues to improve.
And then Troy I would just add remember that historically this is a business that turns 50% in a quarter, so being well booked into 2023 is pretty substantial.
Alright understood. Okay. So this is awesome keep up the good work.
Thank you George.
Our next question is from Scott Searle of Roth Capital. Please go ahead.
Hey, good afternoon. Thanks for taking my questions nice to see supply loosening up a little bit as we move into the back half of this year.
Chris maybe just to jump in on the wafer visibility front. It sounds like things are continuing to improve you're getting some upside.
But you are still under shipping demand by 50%.
As you're talking to your foundry partner and looking into 2023, I'm wondering what kind of indications you are getting for incremental wafers.
In allocation on that front and do you expect that in 2023 that we start to get back into supply demand balance or really too soon to call.
Yes, so Scott I'm going to answer the latter part of the question first I think it's too soon to call to the question I had earlier from harsh you know about <unk>.
And picking up back in the latter half of 2023 for other products. It's just given the kind of macro crosscurrents were seeing given the foundries building capacity at some notes.
With all these pieces swirling around it.
It's really it's too it's too early to.
Yes, it's too early to call, what's going to happen in 'twenty three.
In terms of where we're focused right now we're focused on the latter half of 'twenty. Two so we're working with our partner our foundry partner getting upsides and pull ins for the remainder of this year to drive as much of the opportunity as we can through this year and then we'll be transitioning our focus over to 2023, so I prefer not to speak much about <unk>.
123, right now because it's still a ways away and we'll be working with our foundry partner to both build our base and potential for upsides.
In terms of wafer volumes I'm looking into 2023, Okay fair enough and if I could following up on the gross margin front you guys are doing a good job on that front, you've got mix right in terms of systems.
An endpoint Ics this quarter, but looking a little bit further out some of the foundries are talking about increasing their prices as we're going into 2023 I Wonder if you could talk a little bit again I know, it's on the on the horizon, but how youre thinking about pricing as you go.
Into the second half of this year in 2023 is there an ability to raise some prices keep steady do you come back to giving annual price negotiations as we go into the first quarter of next year, given the supply constraints.
We get a pass on that front this year and how do you manage any sort of the incremental foundry costs that are going up.
Hey, Scott Great question. This is Jeff.
We continue to monitor and evaluate.
All cost inputs into our model and we work closely with our partners to pass through those costs to their end customers.
Our primary objective is to protect the integrity of the gross margin model.
So we feel good about our pricing position today and the expectations that we're setting for our partners and in turn for their end customers.
As we proceed.
Into 2023.
And Scott I would add that.
Last quarter, we guided gross margin in the 53% to 54% range.
Think that is the right spot for us right now.
Based on our current view in the supply and the resulting sales mix, we're trending towards the higher end of that range as we look into Q3 and if you deconstruct.
Our outlook and assume a flattish opex youll see that were we're signaling about a 54% gross margin for Q3.
Looking further out we anticipate future 300 millimeter endpoint IC innovation to drive additional opportunities for gross margin accretion.
Great. Thanks, so much nice quarter guys.
Thank you.
Again, if you have a question. Please press Star then one.
Yeah.
Seeing no further questions. 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 Jay.
I'd like to thank you all for joining the call today and.
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.