Impinj, Inc. (PI) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Impinj Third Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Maria Riley, Investor Relations. Please go ahead.

Thank you operator. Thank you all for joining us to discuss Impinj’s third quarter 2016 financial results. On today’s call, Chris Diorio, Impinj's Founder and Chief Executive Officer will provide a brief overview of our performance in our market. Evan Fein, Impinj's Chief Financial Officer, will follow with a detailed review of financial results and outlook for the remainder of the year. We will then open the call for questions. Impinj’s President and COO, Eric Brodersen, is also on the call and we’ll join Chris and Evan in the Q&A session. Before we start, note that we may make certain statements during this call that are not historical facts including those regarding our plans, objectives and expected performance. To the extent we make such statements, they are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements we make are reasonable, our actual results could differ materially because any statements based on current expectation are subject to risk and uncertainty. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements whether as a result of new information, future events or otherwise except as required by applicable law. Also during today’s call, all statements of operation results with exception of revenue or where we explicitly state otherwise our non-GAAP financial measure. Balance sheet metrics and cash flow metrics are on a GAAP basis. Before moving on to the financial results, I’d like to remind you that management will attend RBC Technology, Internet, Media and Telecommunications Conference on November 9 in New York. We hope to see you there. I will now turn the call to Dr. Chris Diorio, Impinj’s Founder and Chief Executive Officer. Chris?

Thank you, Maria, and thank you all for joining the call. I'm delighted to be here with you today. We delivered a strong third quarter exceeding our revenue and earnings guidance. Revenue grew 50% year-over-year to reach a record $31 million, driven primarily by accelerating demand for our endpoint ICs, followed by growing demand for our connectivity products. We view endpoint IC volumes as an indicator of RAIN market adoption and are excited by the accelerating demand we are seeing. On our august earnings call, we increased our estimate for 2016 endpoint IC volumes to 5 billion units at the midpoint. Today, we are again increasing our estimate for 2016 endpoint IC volumes and now expect those volumes to be between 5.6 billion and 5.8 billion units representing 63% year-over-year growth at the midpoint. I'd like to spend a minute reviewing Impinj’s vision and mission then discuss that accelerating RAIN market adoption and our strategy to capitalize on it. Impinj’s vision is digital life for everyday items. Our mission is to wirelessly connect those everyday items to applications. We are extending the reach of the Internet by a factor of 100 from today's powered electronic devices to items and delivering to the digital world, each item's unique identity, location and authenticity, which we call Item Intelligence. Our platform enables connectivity to those billions of everyday items and delivers that Item Intelligence to business and consumer applications. We see our vision of digital life for everyday items validated by accelerating RAIN adoption across many industries. For example, in automotive, Daimler is using RAIN to optimize their supply chain, record airbag assembly as well as for kanban. Audi is using RAIN to track transport racks for vehicle doors, hatches and hoods, verifying delivery to the production line. When I was at a RAIN Alliance meeting in Japan, a few weeks ago, one of our partners, 7iD give a wonderful talk about how Ford is using RAIN to automate vehicle delivery. At the same conference, another partner, Evanhoe & Associates spoke about using RAIN for enterprise IT asset management. You can find this talk, the 7iD talk and others highlighting the benefits of RAIN and its growing adoption on the RAIN Alliances website. As yet another example in the retail market, Macy's recently announced that by the start of 2017, they now plan to have more than 60% of all items in most of their stores RAIN connected and by the end of 2017 to have 100% of all items in all stores RAIN connected. Well these examples highlight the broad based adoption. We are driving our vision of digital life for everyday items by continuing to deliver joint solutions with our go-to market partners. We introduced three new joint solutions in the third quarter. In retail, our joint solution with TexTrace enables garment anti-counterfeit and product authentication. In healthcare, our joint solution with Intelliguard automates managing and replenishing pharmacy, medicine kits and trace. In transport and logistics, our joint solution with HID Global, tracks returnable transport items. In total, we have announced 15 joint solutions in the last twelve months. We also continue enhancing and marketing those joint solutions we previously announced. For example, on our second quarter call, we highlighted a healthcare solution with Accruent for a mobile medical device management giving hospitals visibility into medical equipment utilization. Since then we and Accruent have engaged in joint go-to market activities around hospital workflow, generating sales opportunities in multiple hospital systems. These joint solutions are part of our strategy to capitalize on existing market opportunities and create new ones. Another part of our strategy is to enhance our platforms reach and breadth and on that front we introduced a key new connectivity layer product in the third quarter. Our new xSpan gateway is tailored to deliver the real time identity of endpoints passing through doorways, portals and entry ways and moving down hallways or corridor. xSpan also have the aesthetics to blend into high-end retail stores and hospitals yet is rugged enough for warehouse logistics and shipping environments. xSpan complements our existing xArray Gateway, which is tailored to deliver the real time identity and location of endpoints on a store or a factory floor. Finally I'm happy to note Impinj won two awards this past quarter. We won the IoT Evolution Asset Tracking Award, which honors excellence in utilizing IoT technologies to automate Asset Tracking to increase efficiencies, reduce theft or optimize utilization. And we won the Seattle Business Magazine 2016 Tech Impact Awards for Emerging Technology, a notable regional award. In summary, we delivered a strong quarter we are incredibly excited to see how our platform and how our solutions efforts extend connectivity to so many billions of everyday items truly enabling the Internet of Things. Our investments and strong executions are enabling us to capitalize on a massive market opportunity. I would like to thank our team, partners and shareholders for their support and contribution in making Impinj what it is today. I will now turn the call over to Evan to give you a detailed look at our financial results and outlook for the fourth quarter of 2016. Evan?

Thanks Chris. Before I review our third quarter 2016 financial results I want to remind you that with the exception of revenue, or unless explicitly stated otherwise, today’s statement of operations information is on a non-GAAP basis. All balance sheet and cash flow metrics are on a GAAP basis. A reconciliation between our non-GAAP and GAAP measures as well as how we define our non-GAAP measures is included in our earnings release available on our website. As Chris mentioned we delivered a strong third quarter. We achieved revenue of $31 million representing 50% growth over the third quarter of 2015 and 19.3% growth over the prior quarter. Our growth this quarter was driven primarily by increasing demand for endpoint ICs followed by growing demand for our connectivity products. Our gross margin for the third quarter was 53.6% compared with 53.4% in the prior quarter and 52.5% in the third quarter of 2015. Depending on product mix gross margin can fluctuate from quarter to quarter. In this case an increase of 20 basis points compared to the prior quarters. Total operating expense in the quarter was $14.4 million or 46.4% of revenue. Compared with $12.6 million or 48.3% of revenue in the prior quarter. R&D expense was $6.1 million or 19.5% of revenue. Sales and marketing expense was $5.1 million or 16.6% of revenue. G&A expense was $3.2 million or 10.3% of revenue. We ended the quarter with 230 employees compared with 224 at the end of last quarter. GAAP net income for the quarter was $808,000 dollars. On a non-GAAP basis, we achieved net income of $1.9 million dollars or diluted earnings of $0.10 per share using a weighted average diluted share count of 18.6 million shares. Adjusted EBITDA in the quarter was $2.2 million or 7.2% of revenue. As we have said previously, we plan to increase our investment level. And in the near term maintain EBITDA margins in the low-single digits to enhance our leadership positions and capitalize on the massive market opportunity. Turning to the balance sheet, we ended the quarter with cash and cash equivalents and short-term investments of $62 million. Accounts receivable increased approximately $1.9 million on a sequential basis to $17.5 million. Inventory increased sequentially by $1.3 million to $20.5 million. Working capital increased to $85.3 million from $19.9 million in the previous quarter. This increase includes approximately $69 million in net proceeds from our IPO offset by $18 million of debt repayment. For the three and nine months ended September 30, 2016 we used approximately $3.2 million and $9.5 million respectively in cash to fund our operations. Turning now to our outlook we expect revenue for the fourth quarter to be in the range of $31.5 million to $33 million, reflecting 43% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA to be in the range of $750,000 to $2.25 million. On the bottom line we expect non-GAAP net income to be in the range of $750,000 to $2.25 million and non-GAAP EPS to be between $0.04 and $0.11 per share based on a weighted average diluted share count of approximately $20.2 million shares. As Chris previously mentioned given the increasing demand for our endpoint ICs, we are increasing our 2015 estimate of endpoint IC sale. We now expect endpoint IC volumes for the full-year to be between 5.6 to 5.8 billion units, an increase from our prior estimate of 4.9 to 5.1 billion unit. With that, I will turn the call over to the operator to open the question-and-answer session.

We will now begin the question-and-answer session. [Operator Instructions] Our first quarter comes from Brad Erickson of Pacific Crest. Please go ahead.

Hi guys thank for taking the questions. Just to start I guess on Macy's you called that in the prepared remarks, given that they’re going to hundred percent penetration I guess RAIN over the next few years. It seems like they're a pretty good candidate for software to effectively optimize their utility for these RFID investments. Can you kind of talk about Macy's or other similar customers that are more deeply penetrated now as a prospect for item sense and sort of what the progress update is there? Thanks.

Thanks Brad. So I’ll take the lead into that question and then I’ll hand over to Eric to talk a little bit more about it. So we believe the Macy's announcement speaks to overall industry growth and opportunities. And within the retail market, but just within the broader market in general really kind of validates our – the vision that we've expressed previously of when a retailer or an other end customer starts adopting. They tend to expand, and grow and increase the items that they connect. And the scope of the usages that they see for that growth. And so in terms of item sense, we see opportunities for a variety of customers going forward as they expand their use cases to leverage the data that we provide with our end point layer, our connectivity layer and our operating system software layer which is item sense. Eric you are looking add to that.

Now I think the main points I’d highlight is that as you think about the retail space Macy's and customers are among our most longstanding deployments, deployment customers for RAIN generally. And that industry today is in the midst of really an evolution towards utilizing always-on connectivity and fixed infracture for always-on connectivity to their items. And so that for us is the primary transition point for retail customers to deployments that utilize software, specifically along with our gateway products. So I that's really the transition point that will make retailers prime targets for that transition to software and fixed infracture.

Got it. And then maybe just by vertical, any more color you can provide on what drove the raise in the endpoint IC unit volume growth or guidance, I should say rather?

Really we see broad based demand across multiple verticals. In the remarks we mentioned automotive, we mentioned IT asset tagging, we mentioned retail and obviously other sectors are increasing, as well. So there is no one particular vertical to point to. The grow and adoption is broad based existing customers and new customers as they deploy RAIN RFID to solve their business endpoints.

Got it. And then one last one if I could, just in terms of inventory levels, how are you guys feeling? The volumes have obviously come up significantly. Just maybe talk about your confidence level in terms of some of these new customers who placed orders and not – and sort of guarding against taking on too much product, too fast, et cetera. Thanks.

I’ll let Evan take this.

Hi Brad. We use several methods to conduct inventory levels. The primary one we use is by working closely with our largest inlay customers. And we're in a position now where our customers are desiring their endpoint ICs in a very rapid fashion. So we feel comfortable that inventory levels are low.

And I guess I’ll add to that. That visibility we’ve got combined with the short lead-time orders we're seeing for many of those customers, give us really confident – real confidence in the strong demand.

Got it. Thanks very much.

Thank you.

Our next question comes from Troy Jensen of Piper Jaffray. Please go ahead.

Hi thank you. And this is Austin Bohlig on behalf of Tory. And first congratulations gentleman on a very nice quarter.

Thank you.

Yes first of all I’m just stuck with for maybe Chris or Eric. I'm sticking with Macy's. Just wondering now what you guys are seeing with as their customers doing full adoption? Do you feel many people are leaning that way and going beyond apparel?

So I don't think we can speak to any particular customers in terms of the nature of their deployments other than what they've disclosed publicly. But as you know Marks & Spencers has talked previously a lot about their expansion, a couple of other retailers have talked about expansion, for example, Decathlon. And I would just get to the point that I said previously which is that, when a retailer or other end user deploys RAIN, tend to see the bets, expanded that the connecting they’re doing more and more items, expand the number of categories and then gain more and more value from connecting those items as they build out applications within their store. Eric anything to add?

I think that’s perfect.

Okay thank you.

All right. And then just one follow-up for Evan around gross margin, just wondering if the uptick this quarter had to do more with mix or volume? Or may be a little bit of both?

Sure, yes. A little of both, gross margin has increased for two reasons, one is that customers adopt newer parts, newer products of our platform, maybe Monza R6 is an example. The gross margin profile of the company tends to increase. And second, when the software to connectivity layers of the revenue grow relative to the rest of the platform that also is a driver of margin. And both of those were contributors this quarter.

Okay. Well that’s good. Good luck gentlemen in the fourth quarter.

Thank you very much.

Thank you.

[Operator Instructions] Our next question comes from Jim Ricchiuti of Needham and Company. Please go ahead.

Hi, thank you, good afternoon. Wondering if you could just talk a little bit about the competitive environment, are you seeing any changes out there in either of the main parts of the business. I know software is a lot more fragmented but just in general.

So yes, Jim. Thanks for joining us. In terms of competitive environment, we're seeing similar competitive environment to what we've seen in the past some competition at all layers of our platform but we retain our – we believe we retain our strong market position and are continuing to drive and be very competitive in those segments. You've seen some other things going on in the industry for example Qualcomm acquisition or our proposed acquisition of NXP and other things that are going on. From our perspective we're maintaining our focus on our business our industry being competitive maintaining our market share and growing our overall business.

And Chris, you may have touched on this in the presentation but I apologize if you did but I wonder did you – can you talk a little bit about headcount and where you see it going where it ended the quarter and the areas that you're looking to invest expand in?

Evan have those comments, so I’ll let him take it.

No, problem.

Jim. This is Evan. Headcount for the quarter ended at 230 employees on our website today we have an additional 20 open requisition. We will continue to hire beyond those 20 and to 2017 and to fund some of the strategies that we've talked about previously on our calls, those include R&D strategies like enhancing the platform and ubiquitous reading and sales and marketing strategies like expanding verticals and developing joint solutions.

Okay, and it's – you're still in clearly a very rapid growth phase. And I'm wondering though are you seeing any signs of increased seasonality around the business.

Jim. This is Evan. We're not seeing any increased signs of seasonality. As you know, we are in the very early stages. It's tough to know on an ongoing basis exactly what that is but today we don't see much seasonality.

Okay. Thank you.

Thank you.

The next question comes from Mike Walkey of Cannacord Genuity. Please go ahead.

Great. Thank you and congratulations on the strong business trends. If you could – just kind of building on the last question about competition. It seems like not too long though you just crossed 1 billion endpoint shift to now based on your updated guidance. You are going to be closing in on 2 billion not too far from now. So given that big ramp is it just broad RAIN adoption or do you think within that you're expanding on your 60% plus market share for endpoints?

So Mike. Thanks for joining us. I can't really speak to share right now, we feel that our market position remains strong. And we're being very competitive out there on the market. What I can say is that we really see broad based adoption whether it be the Macy's announcement of the things they said about automotive. We see adoption across a range of verticals, we see a large end customers jumping in and being excited about the opportunities that RAIN affords them to improve their business operations. And so the growth you should see – the growth that we are showing really is significantly consequence of growing market demand. There may be some share shift in there but right now it's not carried away all I say is we are maintaining a strong market position.

Okay, thanks. And then just building on your opening comments. Given the endpoints are inflicting and growing so strong. How do you think about kind of the pull through of your connectivity business over time. I know you talked about it as a laggard. But do you think that it's the type of growth rates over time given your increased sales opportunities? Thank you.

Absolutely. We see growth in the connectivity layer following growth in the endpoint layer, we see continued significant opportunities in the connectivity layer. As we noted we just introduced our xSpan product which we believe is ideal for transitions, doorways, dock doors and even for hospital rooms for example to scan hospital rooms across – one bed on one side, one bed on the other side. And those kind of opportunities that we see out there in the market are causing us to introduce more and more products. So we see accelerating demand for our connectivity layer and we'll continue to invest and push that layer. As you think about it endpoint our things are going out there to going on products and there needs to be more and more connectivity products, to read those to get data from those endpoint ICs and then the value proposition of our items and software on top to extract the item intelligence and deliver it to applications becomes more and more important.

Thanks. And with Qualcomm buying NXP and Qualcomm is so big in the smartphone area. Maybe you can discuss how you see RFID maybe entering billion five smartphone market over time if you think that's an opportunity?

We think that there is a significant opportunity for ubiquitous connectivity for readers as part of your everyday world and to be connecting to text that are part of your everyday world and whether the entry points for those next generation readers is going to be in light fixtures or in doorways or in consumer mobile devices it's hard to predict right now. The end goal is to have reading capability, have connecting capability to connect RAIN items in all of them. So I can't say anything specifically about smartphones here now but I just know that the future – think about what the future holds and the future really holds connectivity devices, ubiquitous connectivity to those items that are tagged in our everyday world.

Okay, thanks. Another question from me just on the market sizing. I think at some of these RAIN alliance meetings, Amazon has started to participate. So anything you can say maybe about them as a new RAIN remember and the opportunities that local company to you longer-term?

Yes, I can speak a little bit to that because Amazon was at the RAIN meeting in Japan and I participated in a panel discussion with them at the meeting. I will note that not only did Amazon joined, but Lenovo or Motorola joined, CNA which is a large European retailer joined, we have a large lot of major end customers joining in RAIN alliance. And those companies are 10 at least – going forward tend to be fairly active. And so they've spoken up the meetings, they kind of talked about the positions, and the things they need. And has really helped us grow the RAIN alliance and marketing alliance driven to deliver solutions for those types of end customers, whether it happens to be Amazon, CNA or anybody else.

Okay. Thank you for taking my questions and best wishes for continued success.

Thank you, Mike.

Our next question comes from Mitch Steves of RBC. Please go ahead.

Hey, guys. Thanks for taking my question and a great quarter. So I guess I’ll first start off with a really big picture question here. You guys have essentially beaten your expectations are pretty materially twice now, so the comparison next year going to be a lot harder. So I’m just wondering first are you still going to be able to grow kind of that 25% – 20%, 25% in 2017. And then secondly just for modeling purposes, can you maybe help us how’s the seasonality throughout the year just generally or if you think it'll be roughly the same type of growth throughout 2017?

So this is Chris, I’m going to start off and then I’m going to hand off to Evan, and I'm just going to start by saying that we are very excited about the market opportunity ahead of us. We really do see broad-based adoption, excited about our prospects, and I'll hand it off to Evan to talk about the details.

Sure. Hi, Mitch, so as you know demand for our products and our platform remains very strong, we give guidance quarterly. And so we are for example gave guidance today in the fourth quarter. In February we will give guidance on the first quarter, but we will give an annual endpoint unit shipped range for all of 2017. So that will lend – shed some light on how we're thinking about 2017. On the long-term model basis we continue to believe in the 25% revenue growth rate that we have cited previously on our S1. On the seasonality question as I stated earlier we do not believe there are material seasonality trends in our business today since there are so many new verticals, new use cases, and new customers adopting all the time.

Got it, thank you. And then secondly kind of turning to profitability here so, I know you guys first tried to go public and talked about kind of breakeven, maybe million dollars in profit for the full year, but you're essentially running at that run rate now. Is there a certain level that you guys want to keep the operating margin that or you think it continue to expand. I think 7.2% was a lot higher than and I think a lot of people are modeling.

Yes, it is our goal to continue to invest our incremental gross margin dollars in this massive opportunity that we see growing today and to enhance our leadership position. Those investments would occur in R&D in sales and marketing and on the GNA side now that we are a public company. We think that will keep EBITDA as a percentage of sales in the near-term in the low single-digit.

Got it, make sense. And then one last one just kind of a bigger picture kind of broad question. So Delta now also using RFID technology $50 million investment there. Can you maybe just talk through how Impinj revenue when a large customer, maybe doesn’t have to be Delta or somebody else, decides to purchase a bunch of both chips and connectivity readers. So could you just walk through the sales cycle works for you guys in that case?

Yes. I’m going to let Eric take that one.

So I think it's probably best to think in terms of Delta and not roll out as from a customer and Impinj technology usage standpoint. We are part of that deployment. I can't articulate specifics about that customer for our sakes. We’re really not at liberty to do so. What I emphasis is that on our platform deployments, when we engage with customers and our selling into that solution sales motion, we're engaged with an ecosystem of application partners and deployment partners. We will continue to sell and fulfill in an indirect fashion via those fulfillment partners. And we will recognize revenue and monetize each layer of the platform. So if the customer is deploying our fixed infrastructure, so our connectivity layer, our software layer, and then as well the app then in turn hold through our endpoint ICs. So it’s really about our deployment model that can span everything from application, integration via software layer to connectivity layers to endpoints, but also don't forget our reader IC business as well. We can participate in deployments as part of partner reader solutions as well.

Is that the answer to your question, Mitch?

Yes, that's great. Thank you very much. I'll jump out of the queue now.

Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to Chris Diorio for any closing remarks.

I'd like to thank everybody for joining the call today and have a wonderful weekend. Thank you.