Q2 2023 Impinj Inc Earnings Call
Welcome to the second quarter 2023 earnings conference call and webcast all participants will be in listen only mode did you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask a question.
To ask a question you May Press Star then one on your Touchtone phone do.
To withdraw your question. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to Mr. Andy <unk>, Vice President of strategic Finance. Please go ahead.
Thank you Jay good afternoon, and thank you all for joining us to discuss <unk>.
Second quarter 2023 result.
On today's call Kristi, Oreo impinges cofounder and CEO will provide a brief overview of our market opportunity and performance.
Cary Baker Impinges CFO will follow with a detailed review of our second quarter 2023 financial results and third quarter outlook.
We will then open the call for questions.
Jeff Dossett impingement CRO will join us for the Q&A.
You can find management's prepared remark plus trended financial data on the company's Investor Relations website.
We will make statements in this call about the financial performance and future expectations that are based on our outlook as of today and any such statements are forward looking under the private Securities Litigation Reform Act of 1995, while we believe we have a reasonable basis for making these forward.
Looking statements our actual results could differ materially because any such statements are subject to risks and uncertainties. We describe these risks and uncertainties in the annual and quarterly reports, we file with the SEC, we do not undertake and expressly disclaim.
Any obligation to update or alter our forward looking statements, except as required by law.
On today's call all financial metrics, except for revenue or where we explicitly state otherwise are non-GAAP balance sheet and cash flow metrics are GAAP. Please refer to our earnings release for a reconciliation of non-GAAP financial metrics to the most comparable GAAP metrics before turning to our results and outlook.
Note that we will participate in the 12th annual Needham virtual industrial robotics and clean Tech one on one conference on August 4th.
Oppenheimer, 26th annual Technology, Internet and Communications conference on August eight.
The Canaccord Genuity 40, <unk> annual growth conference on August 10 in Boston, The Jefferies semiconductor hardware and communications Technology Summit on August 29, and 30 in Chicago, The Goldman Sachs commuter Cobra and Technology Conference on September six.
In San Francisco, the Piper Sandler growth Frontiers Conference on September 12 in Nashville, and late Street Seven conference on September 14th in New York, 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.
Second quarter revenue set a new record with record systems revenue more than offsetting weaker than anticipated endpoint IC revenue.
The primary driver of the system's revenue strength was the loss prevention deployment at the visionary European retailer.
The primary driver of the endpoint IC weakness was larger than anticipated retail apparel and inventory destocking.
We expect the impact of that inventory destocking to persist at least through the third quarter.
Focusing first on endpoint Ics.
Second quarter revenue declined sequentially.
It's slightly below our expectations.
The magnitude of the retailer inventory Destocking became apparent late in the quarter.
Not just to us, but also to our inlay partners.
We don't have requested upside ic's as recently as April .
That destocking more than offset sequential IC growth at our second large north American supply chain and logistics enterprise customer and seating several hundred million in pension and 77, five ics into multiple authentication applications.
Looking to the third quarter, our endpoint IC share at our enterprise customers remains strong.
At the same time, we and our inlay partners now anticipate softer than expected third quarter retail demand recovery.
Those partners built IC safety stock anticipating a stronger recovery and as our wafer supply has grown.
They are burning down roughly a month's worth of Ice's, primarily in the third quarter, but with a tail into the fourth.
Also the curve of new program launches.
Shifting to the right by the 2022 product shortfalls created an adoption air pocket that the industry is still working through.
Our enterprise wins are insufficient to overcome these headwinds and as a result, our third quarter endpoint IC revenue will decline sequentially.
Importantly, despite these headwinds we did not know about single end user who has pulled back from rain RFID.
Said another way our long term opportunity remains strong and we expect growing adoption to drive demand. After these corrections are behind us.
We also expect greater than 25% 20, twenty-three endpoint IC unit volume growth.
Turning to systems second quarter reader and gateway revenue exceeded our expectations driven by better than anticipated component availability.
The additional supply allowed us to deliver more gateways into the visionary European retailers self checkout and loss prevention deployment than we had expected as well as fulfill our prior period reader backlog.
It also allows our team to shift their focus to new opportunities for our solutions offerings.
For the third quarter, we expect a sequential decline in reader and gateway revenue.
The delivery timing to the visionary European retailer and our return to typical reader and gateway backlog entering the quarter.
Later after nearly two years of component supply constraints.
Yes.
Our second quarter reader IC revenue remained healthy with robust demand for printer Encoders in North America, offsetting weak macro demand in China.
Looking at the third quarter, we see the printer encoder demand, mostly fulfilled what China remains soft.
Our Chinese reader partners built Indy reader IC inventory ahead.
Head of our planned end of life.
And are today focused on selling any based product inventory rather than ramping impinge E family based designs.
That indeed focus will drive a sequential decline in third quarter reader IC revenue.
Like for our readers and gateways, our reader IC suppliers normalized and we entered the third quarter with typical reader IC backlog.
Yeah.
Turning to new products last week, we launched the impinge <unk> hundred series rain RFID endpoint Ics.
The first Ics in the series the impinge <unk> 30, and <unk> 50 are the most advanced in the market with performance and features designed to help enterprises read the write tag at the right place at the right time.
In addition to 25% more die per wafer than the opinion M 700.
M 800 has 30% lower power consumption, allowing businesses to use a single small tag across a broad range of items.
With enhanced tag reliability manufacturer ability and dropping compatibility with M 700 antennas.
We expect the M 800 to drive additional ran adoption.
It is also a key component of our long term growth and margin targets.
Turning to intellectual property.
We are the innovation leader in our industry with more than 300 issued and allowed patents.
I am pleased to say, we successfully defended our leadership position by prevailing in two separate trials.
In June .
Federal jury in Washington found that impinge endpoint, Ics do not infringe and NXP patent.
In July a federal jury in California found that NXP and book at these do infringe when pinch patents one willfully.
The California jury awarded impinge, approximately $18 $9 billion in damages and loss profits.
We have asked the court for injunctive relief.
We now turn our attention to the upcoming Texas trials against NXP.
Yeah.
In closing from today's vantage point, we see several headwinds driving lower third quarter revenue.
At the same time, our long term opportunity remains strong and.
And we see some green shoots in retail apparel.
We as a company have been through industry cycles before.
And have come through those cycles stronger.
With confidence in our growing opportunity and our leading position in it.
No doubt we will do so again.
Before I turn the call over to Kerry for our financial review and third quarter outlook.
I'd like to again, thank every member of the <unk> team for your constant effort driving our bold vision.
We were honored by my incredible good fortune to work with you.
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 $86 million up slightly sequentially compared with $85 9 million in first quarter, 2023, and up 44% year over year from $59 8 million in second quarter 2022.
Second quarter endpoint IC revenue was $64 9 billion down 3% sequentially compared with $67 million in first quarter, 2023, and up 51% year over year from $42 $9 million in second quarter 2020 to look.
Looking to the third quarter, we expect a sequential decline in end point IC revenue driven by Italy partner safety stock reductions and weak retail apparel demand more than offsetting growth from our platform wins.
Second quarter systems revenue was $21 1 billion up 12% sequentially compared with $18 8 million in first quarter, 2023, and up 24% year over year from $16 9 million in second quarter 2022.
Second quarter systems revenue exceeded our expectations driven by better than anticipated component availability, allowing us to service reader and gateway demand.
On a sequential basis reader revenue increased while reader IC and gateway revenue decreased on a year over year basis Gateway revenue increased while reader IC and <unk> revenue decreased.
Systems included Boy Antic revenue, starting second quarter.
Looking ahead, we expect a sequential decline in third quarter systems revenue with declines in all product lines.
Second quarter gross margin was 53, 3% compared with 52, 4% in first quarter 2023, and 54, 7% in second quarter 2020 to the sequential increase was driven by endpoint IC product mix the year over year decrease was driven by lower endpoint IC product margins, specifically a smaller.
Specialty and industrial IC mix and lower systems product margins driven by increased costs.
Looking to the third quarter, we expect our gross margin to decline.
Second quarter operating expense was $35 9 million compared with $36 4 million in first quarter, 2023, and $28 8 million in second quarter 2022.
Research and development expense was $16 8 million sales and marketing expense was $7 7 million general and administrative expense was $11 3 million litigation expense was $4 3 million. Despite litigation expense being similar to second quarter, we expect a sequential decline in third quarter operating expense as we.
Eitan our belt on spending.
Second quarter, adjusted EBITDA was $10 million compared with $8 6 million in first quarter, 2023, and $3 8 million in second quarter 2022 second quarter.
Adjusted EBITDA margin was 11, 6%.
Yeah.
Second quarter GAAP net loss was $8 1 million second quarter non-GAAP net income was $9 3 million or <unk> 33 per share on a fully diluted basis.
Turning to the balance sheet, we ended the second quarter with cash cash equivalents and investments of $114 9 million compared with $164 7 million in first quarter of 2023, and $183 7 million in second quarter 2022.
Inventory totaled $112 3 million up $26 5 million from the prior quarter with wafer delivery timing and the initial M 800 ramp contributing to the increase net cash paid for <unk> totaled $23 4 million.
Second quarter net cash used by operating activities was $22 5 million property and equipment purchases totaled $5 7 million free cash flow was negative $28 2 million, including $25 3 million for inventory growth.
Before turning to our third quarter guidance I want to highlight a few items unique to our results and outlook.
First we anticipate third quarter gross margin to decline by approximately 300 basis points due primarily to lower revenue on fixed cost and less reader Ics.
As our revenue recovers, we are confident that our gross margin will recover with it and we remain confident in the long term margin targets I outlined at our Investor day.
Second we have updated our non-GAAP net income to include estimated taxes based on statutory tax rates given our Nols, we expect our cash tax payments to remain well below this estimated rate at least for the next few years.
Please see our trend and file for a retrospective view of our non-GAAP net income following this revised tax treatment.
Third we have reduced our wafer purchases adjusted our wafer delivery timing and are focused on better aligning our inventory to our outlook.
We expect those efforts to impact fourth quarter inventory, we currently expect third quarter inventory to be similar to second quarter.
Finally based on our revised view of market demand, we believe our inlay partners have roughly a month's worth of excess Ic's safety stock.
Our third quarter guidance assumes progress right sizing that safety stock with a tail into the fourth quarter.
Turning to our outlook, we expect third quarter revenue between 63, and $66 million compared with $68 3 million in third quarter 2022, a 6% year over year decline at the midpoint.
We expect an adjusted EBITDA loss between three three and $1 8 million on the bottom line, we expect non-GAAP net loss between three two and $1 7 million, reflecting non-GAAP fully diluted loss per share between <unk> 12 cents and six cents.
In closing I want to thank the impinge 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 I'm Jake.
Thank you very much we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Anytime your question has been addressed and you would like to withdraw your question. Please press Star then two.
As a courtesy to others, we ask that you limit yourself to one question and one follow up if you have additional questions. Please re queue and we will take as many questions as time allows.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from harsh Kumar with Piper Sandler. Please go ahead.
Yeah, Hey, guys. Thanks for letting me ask a question I had to Krish <unk>.
One for you.
So I think if I'm reading this correctly I think we're thinking there's about a month's worth of inventory safety stock and Dan Loeb partners.
But then you know.
Is what July 20, shakes, so theres a whole months.
So les.
Can understand this this sort of tailed into the third quarter, but I guess I'm trying to understand your comment about this might dovetail into the fourth quarter as well the inventory correction I was I was wondering if you could provide some color around why it might spill into the fourth quarter and <unk> logistics uptick that you might be anticipating would that rollout not.
Come as a positive and sort of offset offset this decline.
Okay. Thanks harsh this is karri I'll I'll take that question.
You know looking into our third quarter. Our guide assumes that endpoint IC revenue was going to be down in the mid twenty's sequentially, they're going to be a few factors driving that sequential decline. So I want to unpack each of those right now.
In in the second quarter.
We shipped several hundred million higher Asps and 775 authentication Ics as we seeded multiple applications ahead of their commercial launch the timing and success of those launches will determine when more product is pulled and then second to your point, we're attempting to burn down as much of the excess safety stock as possible.
Based on our current view of demand, we anticipate burning down roughly two to three weeks in Q3. Unfortunately, both of those factors are masking growth from the large project ramps and logistics in general merchandise.
Okay, I guess I'll add that our partners have need for specific products.
No not all ours, our CS are identical so we're still fulfilling orders and so that that burned down at that I'd see inventory is it doesn't happen over over two months its going to tail end of the fourth quarter I'm. Just curious if we're gonna take as much of it out in the third quarter as we can but there will be a tale ended the fourth.
I got you. Thank you for that color and then one of your large customers I guess, you reported yesterday and they talked about a pretty substantial growth.
Kind of going back into your answer to the first question that I asked.
Is there.
Is the logistics ramp already inventoried in some manner at some of your customers is that part of the safety stock that you're referring to or as a safety stock comments all related to shut off the debacle in detail that is basically happening in the industry due to macroeconomic factors.
Yeah, Thanks, Chris So I'll try and take that and Jeff might step in so we continue to deliver ice's into that enterprise deployment, obviously through our partners.
Yeah.
Large partner of ours reported yesterday. They are also sitting on ICD safety stock. So even though there is for them some demand growth in the market and I know that green shoots in my prepared remarks.
Well, our expectation is that our partners fulfilled those green shoots and weather as well as existing demand.
By reducing their inventory so that the comments. They made are consistent with what we are seeing and saying which is that there's some excess inventory in the channel significantly built up as a consequence of our inlay partners.
Worried about IC supply up until very recently and about IC tightness going forward. They built safety stock now that we've got inventory theyre going to be focused on bringing it down a bit.
So that retail recovery for us at least is pushed beyond the third quarter.
Okay got you.
Guys.
I would just.
I would just add that.
We don't always line up with Avery Dennison prints and that's for a variety of reasons.
Including us sell into the broader market, but probably more importantly, as we ship in front of their demand and our shipments can proceed our partners demand by up to 90 days and that can be even further elongated when new programs are coming online. So you have to factor that timing in and I would point you back to a comment.
That Chris made in his prepared remarks, we're anticipating greater than 25% endpoint IC unit growth in 2023 on a year over year basis.
Got you thanks, guys I'll get back in queue. Thank you.
Okay. Thank you harsh.
Yeah.
The next question comes from Jim Ricchiuti with Needham <unk> Company. Please go ahead.
Hi, Good afternoon, Kary I wanted to follow up on just that point about your expectation for 25% endpoint unit volume growth and 23, what has it been through the first six months and just based on the way your either your expectations for Q3, what do you say <unk>.
Late two because it would seem to suggest I think some recovery outside of the B.
The soft retail market in Q4, maybe you could help with that.
Yeah, Hey, Jim Thanks for the question. So you will see in our 10-Q that our volume is up roughly 70% on a year to date basis.
Through the first two quarters of the year.
When you map that in to our 25% year over year number.
Youll see that yes, there is a step down in the back half of.
Of the year.
We announced at our Investor day in the Middle of June that we had increased our our life to date shipments by about 10 billion units. So you can assume that through the through the first half of the year, we did a little bit more than 10 billion units call. It 11 billion units in the first half of the year.
Okay.
The follow up I have is just I'm trying to understand how you get to your adjusted EBITDA guidance for Q3 of these.
Low levels of revenue and lower gross margins and maybe you could talk.
A little bit of that.
How we should think about the opex in Q3.
As it relates to the bigger areas and then the.
The question is you know as you come out of this.
Are you is your intent to maintain these opex levels at lower than previous levels that perhaps we were thinking.
Yeah, Great question, Jim So so as I noted, we are tightening and tightening our belt on spending and Opex is coming down in the third quarter. I also signaled that the litigation expense would be roughly flat in Q3. So Q2. It was $4 3 million so assume that same level.
Of litigation spend.
Absent that litigation spend my guide would have been in the black for for the third quarter.
But yes, we are tightening our belt on spending given this.
Lower revenue line.
Okay. Thank you.
Thanks, Jim.
As a reminder to ask a question you May Press Star then one.
Our next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.
Yeah.
Great. Thank you, maybe just shifting a little bit to the to the systems business, you know with the strategic European retailer or is it a pause or are they pretty much done you know rolling out.
The systems and maybe you can remind us what a more normalized system quarterly cadence is for your business.
I'm going to say, Mike Thanks for joining us they are not done and I'm going to hand, it over to Jeff to just tell you a little bit about the pacing yeah. Thanks for your question Mike.
In the second quarter.
And our European visionary retailer we're completing.
The second phase of their overall deployment, while beginning the third phase into additional brands. So in second quarter, we had that layering effect.
Of shipping into the end of the first phase and the beginning ramp of the third phase, whereas in the third quarter, we will be shipping into their ramping third phase.
Resulting in a.
Stepped down from <unk> to <unk>, but again this customer is.
Quite satisfied with the deployment to date and increasing its investment across its overall brand and store footprint and Chris I'll add that the size of the third quarter.
Deployment into the third phase is larger than we did in second so the pacing is increasing for that third phase, but we're losing the benefit of continuing to fulfill the second phase which is essentially completed.
Okay. Thanks, that's helpful.
Maybe just a little bit into.
And the endpoint side I think you talked about some of the new opportunities would lead to a <unk>.
Q4 seasonally up from Q3 absent kind of these inventory adjustments is that still the case on the new opportunities. So we think about Q4 up a little bit from that and then up a little bit because it's maybe one to two weeks clearing versus two to three weeks clearing of inventories had a good framework to think about Q4 endpoints.
So Mike we are.
We're not guiding Q4 at this time, we're really saying that it's too early for us to predict Q4, given the dynamics that we're going through is still still covering coming after the COVID-19 insufficient supply recovery.
Inventory destocking at our partners burning down inventory when you put it all together, we're gonna be watching and see where what.
The enterprise opportunities are in fourth quarter and growth there the overall macro retail.
And our partners' ability to basically bright side their inventory and put all those pieces together, we'll have a better view of fourth quarter as we get further along but as of right now we're not guiding to anything associated with fourth quarter.
Understood. Okay. Thank you.
Okay. Thank you.
The next question comes from Mark <unk> with Jefferies. Please go ahead.
Hi, Thanks for taking my questions.
A question on the the ramp of the two new larger programs could you give us a sense like how do those ramp like how long before you get to what you would consider to be fully ramped at those customers and before you kind of grow more organically with your customer.
Growth in them.
I'm wondering is this like does this happen like in one quarter two quarters had pictures take a year or so to ramp and then and then could you give a sense of how big they could ultimately could either these be like 10% customers or or does it not impact your are your topline ultimately to that degree.
Any color you can tomorrow.
Great. Thanks.
Thanks for joining the call I appreciate it so for these large customers the ramps take typically years and they really do when we're when we're talking to the size of some of these enterprises for them to fully rollout even just the phases of their deployments that they've got plant takes a long time and that's a positive thing don't think about it negatively you've got giant customers who are.
Rolling out across their enterprises are transforming digitally transforming their enterprise and and that takes time.
We see systems opportunities persist over multiple quarters, we see endpoint IC volumes ramping up both of the ones, we talked about have IC volumes already ramping.
They are ramping at third quarter, they will ramp again in the fourth quarter, we see that ramping sustained and even when we've done a phase.
We're not that because you know as Jeff just noted we're in the third phase of our rollout at our visionary European retailer and Thats still simply on loss prevention and self checkout there.
There are other opportunities with that retailer with other retailers or their use cases.
And we see the same thing with all of our large scale enterprise deployments as they start deploying rain RFID.
See the benefits of transforming their enterprises, they come up with additional opportunities and use cases, and our job as an pinch is to ensure those customers are wildly successful in their deployments and that is our focus because if they are wildly successful.
And then it will be wildly successful with them and we're going to make sure theyre successful.
Yeah.
Got you very helpful. Thank you.
Okay. Thanks Mark.
The next question comes from Scott Searle with Roth N K N. Please go ahead.
Hey, good afternoon. Thanks for taking my questions maybe to follow up on some of the earlier comments I'm trying to understand what a normalized level of endpoint IC demand looks like today. It looks like it's probably in that $60 million range or so and then you've got other systems.
Systems deployments that are ongoing the European retailer U S logistics provider et cetera. So.
I guess I had two questions. What's what is the real normalized level that I see demand where were starting today and then as we get into the beginning of next year and some of these other projects start to ramp up what is non retail apparel look like in terms of your mix I think every denizen was pretty upbeat yesterday about the <unk>.
Non retail apparel mix growing at a 50% plus clip I'm wondering if you could provide us with some idea of what you think your mix looks like in the growth rate it looks like there.
Yeah. So.
So first.
First question Scot This is Kurt thank you.
I'd highlight the transition from Q2 to Q3 on the endpoint IC growth has a couple of factors that.
Our are impacting what is the real demand in that.
First as I mentioned before we shipped several hundred of those high high E. S. P.
775 authentication Ics in Q2 that was feeding an opportunity before the commercial launches. So we won't see that level of volume immediately following in Q3, while we wait to see the rebound in the volume until those products are actually pulled through five by the commercial launches.
So that comes down we also see.
So we also see on the.
The IC safety stock.
Pulling that down it's about about a month right now we're trying to pull it down by two to three weeks. So that's masking real demand in the quarter whats offsetting that are partially is the ramps of the big projects and think of that as logistics think of that as general merchandise still logistics is much bigger than the Ram.
Logistics is much bigger than general merchandise right now.
Last year, the industry ship 34 billion units in total.
We won't know what the industry shifts this year until until early part of Q1, but as impinge sits right now we're modeling greater than 25% endpoint IC unit growth on a year over year basis.
And carry then just a follow up.
Exiting this year, given the ramp of customers into general merchandise and logistics.
It does that start to get to 50% of the mix at this point in time once we get to back to normalized levels and then one other just on the pricing front typically you have pricing negotiations going into the from the fourth quarter into the first quarter that hasn't happened last couple of years because of wafer.
Wafer availability issues does that return as we go into 'twenty four.
So Scott I'm going to take the first part of your question and then hand over to Jason Kary to talk about the pricing negotiations.
Yes.
Retail apparel is still by our estimate only about 25% penetrated so there's still huge growth opportunities in that market retail general merchandise has enormous growth opportunities and that supply chain and logistics layers on top we still see retail as being the primary driver of endpoint IC volumes, we also see the opportunity.
We see long term secular growth in our industry. It's a long term opportunity we have confidence in that long term opportunity adoption has increased and will increase over time. So we're going to manage through this downturn, we're going to come out stronger the other side, we're gonna be delivering it to those opportunities we're going to leverage our strengths.
And we're confident in the future, but as we just noted on the call given the dynamics that are a consequence of the inventory shortfalls.
We take that back that are a consequence of the product shortfalls, we entered 2022.
<unk> entered an over inventory situation at our partners as they're burning down their safety stock now seeing that we have enough wafers. There's some gyrations that we have to work through we're going to work through as much of them as we can in the third quarter there'll be a tail end of the fourth and we'll report out as soon as we know more information about the for US on our next call and and <unk>.
And provide more visibility going forward, but the long term opportunity in front of us remains strong.
So the second part of your question.
A pricing wonder negotiations happen.
Youre, absolutely correct Scott historically.
Price negotiations have occurred late in the fourth quarter and result in low to mid single digit ASP declines in the first quarter that hasnt been the case in the last couple of years as our cost has increased in order to maintain the integrity of our margin model, we pass those costs onto our customers.
I don't want to project, what's going to happen right now, but our goal I would reiterate is maintaining the integrity of the margin model. So it's tough to to do that unless we see a cost decline.
<unk> pitch.
Yes.
Okay. Thank you.
Okay. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Christie <unk> co founder and CEO for any closing remarks.
Thank you I'm Jay I'd like to thank you all for joining the call today.
I hope you and your loved ones are and remain safe and well.
Thank you.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
[music].
Yes.
Okay.
Okay.
Yeah.
Yeah.
Okay.
Yeah.