Impinj, Inc. (PI) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon and welcome to Impinj's Fourth Quarter and Year 2018 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 Chelsea Lish, Investor Relations for Impinj. Please go ahead.

Thank you, operator. Thank you all for joining us to discuss Impinj's fourth quarter and year end 2018 results. On today's call, Chris Diorio, Impinj's Co-Founder and CEO, will provide a brief overview of our market opportunity and performance. Eric Brodersen, Impinj's President, COO and Principal Financial Officer, will follow with a detailed review of our fourth quarter and year end 2018 financial results and first quarter 2019 outlook. We will then open the call for questions. Impinj's CFO consultant, Linda Breard; and Impinj's Executive Vice President of Sales and Marketing, Jeff Dossett, are also on the call, and will join Chris and Eric in the Q&A session. Management's prepared remarks along with quarterly financial data for the last eight quarters are available on the company's website. Before we start, note that we will 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 considered forward-looking within the meaning of the Private Securities Litigation Reform Act from 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 expectations are subject to risks and uncertainties. Please see the risk-factors section in the annual and quarterly reports we file with the SEC for additional information about these risks. 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 financial numbers we discuss, except for revenue, or where we explicitly state otherwise, are non-GAAP financial measures. Balance-sheet and cash-flow metrics are on a GAAP basis. Before moving to the financial results, I'd like to announce the company will attend the Morgan Stanley Technology, Media & Telecom Conference in San Francisco on February 26 and the Annual ROTH Conference in Dana Point on March 19. We hope to see many of you there. I will now turn the call to Chris Diorio, Impinj's Co-Founder and Chief Executive Officer. Chris?

Thank you, Chelsea. Thank you all for joining the call. We delivered a strong close to 2018 with record fourth quarter revenue. We beat the high-end of our guidance on revenue, adjusted EBITDA and non-GAAP earnings per share. We also increased our cash, cash equivalents and short-term investments on a sequential basis by $1.4 million. On a year-over-year basis, backlog grew, inventory declined, and we grew and recast our leadership team. I'm pleased with how we ended the year and feel we have strong momentum heading into 2019. Fourth quarter 2018 endpoint IC revenue was in line with our expectations, returning to growth on a year-over-year basis. On a sequential basis, an 8% decline in endpoint IC revenue reflects normal and expected seasonality. We maintained steady supply and lead times while reducing our internal inventory, marking yet another quarter of solid execution. We also shipped our 30-billionth endpoint IC in the quarter. Reflecting on that 30 billion number for a moment, while it is already large relative to other Internet technologies, recall our vision is to connect and give digital life to trillions of items per year. We are at the very beginning of our journey, leading a market whose opportunity is huge and whose secular trend has been and was again in 2018 strong growth. Fourth quarter systems revenue exceeded our expectations, delivering another quarterly record highlighted by strong reader IC and gateway sales. Our reader IC opportunities are broad based, and reader IC revenue showed year-over-year strength, but declined sequentially due to supply fulfilling backlog in the third quarter. Our gateway opportunities are significantly, although not exclusively, in the supply chain, driven by solutions we enable for shipment verification. We are energized by our systems success in the fourth quarter and remain keenly focused on execution. Turning to the market, retail adoption continues to grow, with new retailers and brands announcing deployments, and existing retailers and brands now piloting or deploying solutions beyond inventory visibility, such as frictionless self-checkout and RAIN-based loss prevention. We even have visionary retailers publicly asking for technology advancements, like Decathlon did at the most recent RAIN Alliance meeting in Xiamen, China, where they presented a wish-list that included embedded tagging solutions and RAIN readers in consumer devices. Beyond retail, the Board of Governors of IATA, the International Air Transport Association, at their annual meeting in December announced they have completed their first step toward a global plan to add RAIN inlays to all baggage tags. And we see significant supply-chain opportunities tracking pallets and cases, as they move into or out of a dock door or facility. Impinj's technology and solutions cost-effectively address this use case, providing business-critical data that verify shipments and enable automatic contract fulfillment. In 2019, we will build on our traction in these verticals and others, as we and our partners deliver solutions built on our platform. Last month we exhibited at the National Retail Federation show in New York City, the fourth time in as many years. Our progress, every year we attend, continues to amaze me. In 2016, our first year, most retailers were unaware of us, our platform or how we connected items. Some returned to our booth multiple times to see our demos over and over. The conversations back then centered on technology, how our platform worked and how improving inventory visibility could reduce costs and increase sales. By contrast, conversations this year focused on enhancing customer experiences by expanding proven inventory-visibility programs to frictionless self-checkout and RAIN-based loss prevention. Our booth showcased these solutions as well as smart fitting rooms, enhanced supply-chain visibility, loss analytics and robotic inventory-taking. We also showed a brand-protection demonstration that first registered items to an Impinj cloud service and subsequently verified the items' authenticity, our first step in enabling item-based cloud services with our platform. We see ever-growing opportunities in retail and are focused on playing an ever-increasing role in retail innovation, building solutions that leverage our unique position as the only company with a platform spanning endpoint ICs to services. In another exciting development, I am pleased to welcome Hussein Mecklai as Impinj's Executive Vice President of Engineering. Hussein has more than 20 years' experience leading engineering organizations, including most recently as Vice President and General Manager of the Product Architecture Group at Intel, and prior to Intel, as Engineering Vice President of the Wireless division at Infineon. He has extensive experience in systems, silicon, radio and software engineering as well as in scaling businesses and turning those businesses into profit centers. He previously received a national award for promoting diversity from the Society of Women Engineers for his commitment to recruiting, retaining and progressing women in technical roles. We warmly welcome Hussein to our team and look forward to leveraging his talent and experience in transforming organizations, growing people, building teams, delivering our platform and helping us achieve rapid, sustainable growth. In summary, Impinj delivered another quarter in which we outperformed our financial targets and delivered on our vision. We saw continued RAIN industry growth, with strong endpoint IC demand and significant platform opportunities in the supply chain. We enter 2019 confident, excited and passionate about our opportunity to connect, locate and authenticate trillions of everyday items. I would like to thank each and every Impinj employee for their dedication, commitment to our principles and focus on truly enabling the Internet of Things. I will now turn the call over to Eric for our detailed financial review and first quarter outlook. Eric?

Thanks, Chris. As a reminder, except for revenue or unless explicitly stated otherwise, today's statement of operations 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. Recall we took a $3.2 million accounting reserve in fourth quarter 2017, related to a onetime product exchange, for which we recognized $3.2 million revenue in first quarter of 2018. Please see the exhibit appended to the written version of this earnings script, available on our Investor Relations website, for revenue comparisons related to this exchange for fourth quarter and full year 2017 and 2018. Fourth quarter 2018 GAAP revenue was $34.6 million, compared with $34.4 million in third quarter 2018 and $26.9 million in fourth quarter 2017, reflecting 1% sequential and 29% year-over-year growth. Gateway sales were the primary driver of the fourth quarter over-performance versus our guidance. Endpoint IC revenue declined sequentially and grew 25% year-over-year. Systems revenue grew 20% sequentially and 37% year-over-year. Fourth quarter revenue mix was 63% endpoint ICs and 37% systems. We are pleased with our second straight quarter of record revenue, year-over-year endpoint IC growth and systems strength. 2018 GAAP revenue was $122.6 million, compared with $125.3 million in 2017. Revenue mix was 69% endpoint ICs and 31% systems, compared with 73% and 27% respectively in 2017. Endpoint IC revenue declined 7% year-over-year, primarily due to an ASP decrease on similar unit volumes, the latter negatively impacted by the channel inventory correction we discussed on prior calls. 2018 systems revenue grew 12% year-over-year, due to strength in our reader ICs and gateways. Despite the year-over-year revenue decline, we are pleased with our results considering the challenging start to the year. And we exit 2018 with strength in both our endpoint IC and systems businesses. Fourth quarter gross margin was 49%, compared with 50% in the prior quarter and 50.5% in fourth quarter 2017. The sequential decline was due primarily to a mix change within our systems business and higher customer attainment of volume incentives than in the prior quarter, partially offset by lower excess and obsolete charges. We view customer attainment of volume incentives as an indicator of the strength of our business. The year-over-year decline was due primarily to higher manufacturing overhead expenses, which include excess and obsolescence charges. Total fourth quarter operating expense was $18.7 million, compared with $18.1 million in the prior quarter and $19.3 million in fourth quarter 2017. Research and development expense was $7.5 million. Sales and marketing expense was $6.8 million. G&A expense was $4.4 million. Adjusted EBITDA was a loss of $1.7 million, compared with a loss of $900,000 in the prior quarter and a loss of $5.8 million in fourth quarter 2017. The $4.1 million year-over-year improvement in adjusted EBITDA reflects, in my view, our determined focus on business execution and cost containment. GAAP net loss for the fourth quarter was $6 million and for the year was $35.2 million. Non-GAAP net loss for the fourth quarter was $2 million, or $0.09 per share, using a weighted-average diluted share count of 21.5 million shares. Non-GAAP net loss for the full year was $14.5 million or $0.68 per share, using a weighted average diluted share count of 21.3 million shares. Turning to the balance sheet, we ended the fourth quarter with cash, cash equivalents and short-term investments of $56.1 million, compared with $54.7 million in the prior quarter and $58.1 million in fourth quarter 2017. Our accounts receivable balance was $18.5 million, down from the prior quarter and from fourth quarter 2017. Our total end-of-2018 federal NOL was $159.5 million. Inventory totaled $44.7 million, down $4.5 million over the prior quarter and $2.4 million from the prior year. We expect total inventory to continue to decline through 2019. Before I transition to first quarter guidance, I would like to remind you of the seasonality trends we typically see in our business. In the fourth quarter, lower endpoint IC volumes are partially offset by stronger systems sales. In the first quarter, annual endpoint IC pricing negotiations typically impact both revenue and gross margin while systems sales are seasonally lower. Also in the first quarter, expenses tend to increase over the prior quarter. Although these are typical trends, any number of factors can mask that seasonality in any given year, including project-based systems revenue where size, timing, and mix all play an important role in our quarterly results. Turning to our outlook, we expect first quarter 2019 revenue in the range of $30 million to $32 million, an especially strong 24% year-over-year improvement at the midpoint of the range considering the $3.2 million reserve-related revenue we recognized in first quarter 2018. The sequential decline is in line with our seasonality expectations. We expect adjusted EBITDA to be a net loss in the range of $5.9 to $4.4 million. On the bottom line, we expect a non-GAAP loss of between $6.2 and $4.7 million, and non-GAAP loss per share between $0.29 and $0.22 per share based on a weighted average diluted share count of 21.5 to 21.6 million shares. Throughout 2018, we were intensely focused on execution and regaining momentum in this gigantic market opportunity. As we exit 2018, with two consecutive quarters of record revenue just behind us, we feel strong momentum. I want to thank our team, customers, our suppliers and our investors for your ongoing support as we drive our long-term vision of digital life for everyday items. 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. [Operator Instructions] The first question comes from Troy Jensen with Piper. Please go ahead.

Hey, gentlemen. First off, congrats on the solid end of the year.

Thank you.

Thank you.

Hey, so maybe first for Eric, just a question on the gross margins. You discussed some of the mix stuff pretty well in the prepared remarks. But did ASP erosion play at all into the sequential decline?

From a gross margin standpoint in ASP erosion, in our sequential decline in Q4, that's not part of our gross margin impact in that period. Linda, do you want to add to that?

I'll try to add to that. It really is primarily related to mix within our systems business and then the other items that sequentially was impactful was our volume incentives, which is a good thing with volumes going up with our customers. So those are the primary drivers versus ASP.

Okay, perfect, Linda. And then, how about for either one of you or anyone in the room, just thoughts on tag IC growth in 2019, maybe what was it in 2018 and what do you think the growth rate of tags will be here in 2019?

Troy, so we don't have the numbers yet out from industry analysts yet or from the RAIN Alliance, so I don't think we're prepared to speculate. The RAIN Alliance, as you know, collects data from all the key suppliers in terms of the endpoint IC volumes. And hopefully, those data will be published soon. We will note that historically the trends have been growing at somewhere in the range of 25% year-over-year growth, going back the past 8 or 9 years, but we're not making any predictions for 2019.

Okay, that's fair. And then, how about just to that subject line here, what do you think the ASP erosion is on tags, so we can kind of back into it, we could expect see a tag IC revenue growth?

Troy, as you're familiar this is the time period where we complete our annualized pricing negotiation, pricing and supply negotiations with our partners. Those concluded in line with our expectations, but from - really for competitive reasons, we're going to remain silent on the outcomes of those negotiations.

Okay, understood. Last question for me then, you guys mentioned cashier-less applications. Just curious if there are any U.S. deployments or are these mostly overseas?

So, Troy, this is Chris. Looking around the room, I don't know of any U.S. deployments currently. That doesn't mean there aren't any. But I am not personally aware of any. There are obviously deployments overseas. And as I have spoken out - to my prior calls, I've actually used some of them. But I will say that we see as I mentioned from National Retail Federation show, a lot of retailer interest in what they're calling frictionless self-checkout. And when you have that self-checkout the retailers also want to do RAIN based loss prevention, so that they can tie the two together and ensure that there is not increased step when they go to frictionless self-checkout.

Okay. Okay, understood. Okay, I wish you the best here in 2019.

Thank you, Troy.

Thank you.

Thanks, Troy.

Our next question will be from Craig Hettenbach with Morgan Stanley. Please go ahead.

Yes, thanks. Can you elaborate just on some of the systems' momentum that you're seeing, any incremental color by geography and also kind of key verticals to watch for in 2019?

So this is Chris, Craig, and I think both Eric and I will probably have a couple of answers to that question. So in terms of systems - in terms of strong momentum, just overall, we had two record revenue quarters and our discussions with our customers, partners, and industry groups and others highlight significant IoT market opportunity, so we feel good about the future. In terms of systems opportunities, we see good opportunities in shipment verification and I'll let Eric say a couple of additional words there.

Yeah, the overall systems business, yeah, we got strength both in the reader IC business and the gateways on a year-over-year basis. The gateway momentum was particularly focused primarily, but not exclusively on supply chain and logistics, really with our continued focus on shipment verification, where we're really helping those in the supply chain improve operational efficiency and reduce missed shipments.

Got it. And then, just as a follow-up, Chris, if I think through last year, when you made some arguably modest adjustments to OpEx, but nonetheless kind of aligning for what was a more difficult environment back then, how do you feel today in terms of kind of cost structure relative to the growth opportunities you have over the intermediate term?

I think I'll let Linda take that question. Linda, go ahead.

Sure, Chris. So we made a number of adjustments coming into 2018, including exiting some facilities and a headcount overall reduction of approximately 9% of our headcount. I think we feel good about where we're sitting today. We're very thoughtful about where we invest and where we look for opportunities to either reduce investment or move it to other things that add more value to the organization overall. So as we head into 2019, we're very thoughtful about our investments and we'll continue to be diligent as we go forward and looking forward to the year.

Got it. Thank you.

Thanks, Craig.

The next question comes from Charlie Anderson of Dougherty & Company. Please go ahead.

Yeah, thanks for taking my questions. I appreciate the color on the Q4 gross margin. But I was kind of curious also on Q1. I know you are not guiding to a specific gross margin. But it looks like it will be down. So, I guess, I'm just curious, mix aside, just kind of on a like-for-like basis what's going on there on gross margin. Then on OpEx too, because I'm curious, is there anything that's sort of seasonal about it? I think you did mention there are some seasonal expenses in Q1, if you could just speak to those and the degree of those historically. And I've got a follow-up.

Okay. Good, Charlie. This is Linda. I'll take that one. So from a sequential perspective as we head into Q1, we talked about the fact that we in the fall of 2018, we do our price negotiations with our largest customers on our endpoint IC, which is approximately 70% of our business. So those negotiations typically is what we've seen in the past, impact both the revenue and gross margin. We see compression on the gross margin perspective. From an OpEx perspective, you typically see a step-up, not always. There can be things that overshadow this. But you typically see a step-up in the first quarter of the year that's related to payroll tax resets, typically healthcare benefits and sort of increases that you see in the market every year and you'd have some other small things that might drive up the first quarter compare.

Okay, great. And then, Chris, a question for you maybe just on new product cadence, kind of how is the pipeline looking there? And then, I know you talked in the past about wanting to sort of…

Charlie, did you - oh, sorry, go ahead.

Yeah, I think you talked in the past too about wanting to do things that help speed adoption. Maybe if you can just update us on where some of those efforts are. Thanks.

So we focus significantly on engaging both with our direct customers and partners in the market as well as with end customers, with our partners at our side to help those end customers solve problems, deploy solutions and really grow their market opportunities. And I think it's illustrative that as a consequence of some of those efforts that we - and, of course, others have put into growing and accelerating the market, you see significant end-customer participation in the various standard bodies in the RAIN Alliance and things along those lines. But like I mentioned there is one specific example in the earnings script, we have one retailer even coming forward to the industry and saying, here is the things that we need in order for us to adopt more of the solutions that you as an industry are offering. And so you should expect us to be putting significant efforts going forward into driving an accelerating growth in adoption in the industry.

And, Charlie, this is Linda. One more thing on non-GAAP OpEx and sequential increase in the Q1, as we have a fair number of trade shows that we attend in the first quarter, so it's a heavier investment in the first quarter than later in the year too from a seasonality perspective.

Great. If I just echo one more too, I'm just kind of curious with the negative EBITDA in Q1. How you guys are thinking about cash use for the year? Thanks.

So cash use and we are definitely very focused as a company. Like I said earlier on, our investments and cash balances, as Chris and Eric both talked about, we were up sequentially in the fourth quarter on a cash and cash investment perspective. We will be focused on continuing to manage cash the way we have been in past year. And since we're not guiding any further out than Q1, it's harder to just take Q1 and extrapolate.

Okay, great. Thanks so much.

Okay. Thanks, Charlie.

[Operator Instructions] The next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.

Right, thank you. Just building on maybe that last question, with the industry working through inventory level, how do you feel about your inventory level? Is it something where you want it to be or is it something you can work down as a source of cash throughout the next year? Thank you.

So, Mike, this is Linda again. So we definitely will look at reducing inventory further in 2019. We're not guiding to what number. But it would be - it would generate cash in 2019, similar to our decline in 2018.

Okay, thanks. And then, just bigger picture on the industry. Can you just let us know kind of how you feel about the inventory level for the industry? Are we through the lowering? I guess, you're getting some incented volumes as a good sign that we're through the inventory clearing. But could you maybe just comment on that? And then, also on the backdrop of that, is there any change in the competitive environment in the industry, post this year of inventory clearing?

So, Mike, yeah, as of today, we believe the inventory correction is resolved as we said previously. And we do expect, yeah, this period and going forward a return to more typical endpoint IC volume unit growth and trends overall. So from a channel inventory position, we believe that's been completed and corrected. You made a - you had a secondary question about the competitive environment. I'd hearken back a little bit to my comments with respect to the volume and pricing negotiations on the endpoint business, where really that process completed in line with our expectations. But we won't comment any further really from a - due to competitive reasons, we want to be cautious about how we talk about the overall pricing environment.

Okay. Maybe just more qualitatively on endpoints or systems, any change in the competitors out there? Any new entrants or anything that's changed maybe the last year during this transitional period for the channel inventory?

Yeah. So, Mike, this is Chris. In terms of those metrics, we haven't seen significant recent changes in the competitive environment.

Okay, great. Last question to me, just on the airline industry, how can we think about maybe the size of that opportunity should RAIN be adopted across all baggage tags? What's the penetration today and how large can that opportunity be longer term for the industry?

So, a couple of points there, Mike. So, first, we anticipate a multi-year rollout, which is what IATA has basically said they're going to doing. It's going to be a multi-year rollout, not only in terms of the tagging but the infrastructure build out. Their own numbers and you should look at their numbers, what they've quoted, but it's something in the range of a little bit north of 4 billion bags a year. And that's just bags alone. That doesn't count any other freight or anything else. They're just talking about bags right now. But then there also is a significant infrastructure build-out across airports and facilities worldwide. So multi-year rollout, we see opportunities for both endpoint ICs and systems. And as I said on a prior call, at least I feel really great about the fact that the airline or aviation industry is moving forward because aviation is one of those industries that's very thoughtful and deliberate in terms of the technologies they adopt. And in fact, that they're moving forward with RAIN to drive a critical piece of their operations. It really signals the strength of what we and our industry have delivered.

Great. Well, congrats on the strong close to the year and best wishes for 2019.

Thank you.

Thanks, Mike.

Thank you.

The next question will be from Mitch Steves with RBC Capital Markets. Please go ahead.

Hey, guys. Thanks for taking my question. I just wanted to kind of focus a bit on the gross margin side here. Looks like the systems business is getting to be a larger portion of the revenue. But then, the margins came down a bit sequentially. Can you help me understand why that was? And secondly, if we're seeing any sort of component pricing issues here, if it's - or I guess, why the mix wouldn't drive the margins up?

Right. Yeah, this is Linda, Mitch. The mix within the systems business really drives the margin there. So we have a lot of different products that we sell within the systems business and that can definitely, and did this quarter from a sequential perspective, definitely impacts the margin. We talked earlier about higher customer payments on our volume incentive which is a positive thing with higher volumes with customers. And those are the two factors that primarily from a sequential perspective impacted Q3 to Q4.

Okay. Just as a quick follow-up there, just in terms of the mix, like I guess what products were selling better than others from a high-level basis?

The primary change if you refer back to Q3 when we were fulfilling significant amounts of backlog on the reader ICs, I think you can understand how the mix shifted in Q4 a little bit as reader ICs played a - were a smaller component of the overall systems mix.

Got it. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Diorio for any closing remarks.

I just like to close by thanking everybody for joining the call today. And to again thank the Impinj team for their execution this past quarter. Thank you very much.

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.