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spk00: to the impinge second quarter 2022 earnings conference call and webcast. All participants will be in listen only mode. Should 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 questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Andy Cobb, Vice President, Strategic Finance. Please go ahead.
spk04: Thank you, MJ. Good afternoon, and thank you all for joining us to discuss impingent second quarter 2022 results. On today's call, Chris DiIorio, Impinja's co-founder and CEO, will provide a brief overview of our market opportunity and performance. Kerry Baker, Impinja's CFO, will follow with a detailed review of our second quarter 2022 financial results and third quarter 2022 outlook. We will then open the call for questions. Jeff Dawson, Impinja's CRO, will join us in the Q&A session. You can find management's prepared remarks plus 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 1995. While we believe we have a reasonable basis for making these forward-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, or non-GAAP. Balance sheet and cash flow metrics are on a GAAP basis. Please refer to our earnings release for 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 11th Annual Needham Industrial Tech, Robotics, and Clean Tech one-on-one conference on August 5th. Oppenheimer's 25th Annual Technology, Internet, and Communications Conference on August 9th, the 42nd Annual Canaccord Genuity Growth Conference in Boston on August 11th, the Jeffery Semi-IT Hardware and Comm Infrastructure Summit in Chicago on August 30th and 31st, the Piper Sandler Growth Frontiers Conference in Nashville on September 13th, and the Goldman Sachs 2022 Communicopia and 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.
spk06: Thank you, Andy, and thank you all for joining the call. Our second quarter results were strong, driven by robust secular demand for all our products and PwnICs, ReaderICs, 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 Impinja's leading end users and go-to-market partners, I expect demand to remain strong at least through second half 2022, driven by both new deployments and expansion at existing deployments. Turning first to supply, pace of wafer upsides from our foundry partner has recently increased, suggesting that global demand for wafers in our process nodes may finally be cooling. Although I am guardedly optimistic 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 system side, second quarter demand exceeded our ability to supply, as it has for the past three quarters, and 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, to broadly constrain second half 2022 revenue growth just like it did in the first half. That said, we are poised for strong growth as supply improves. Second quarter end-point IC revenue exceeded our expectations, setting a new quarterly record. Demand remains strong, driven by retailers adopting RAIN for inventory visibility and omnichannel fulfillment, and supply chain and logistics providers for item traceability, including parcel tracking and operating efficiency. Based on that strong demand, I continue to believe our inlay partners will layer on additional bookings as our growing shipment volumes begin addressing our order backlog. Looking further out, I continue to see retail expansion focused on apparel, home goods, and general merchandise, and supply chain expansion focused on parcel shipment traceability as multi-year growth tailwinds 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 flow that reduces cycle times by 25%. We are primed and ready to quickly turn any future upside wafers into shippable products. Second quarter systems revenue also exceeded our expectations. Reader ICs were a bright spot, recovering from last quarter's post-processing challenges and setting a new quarterly revenue record. Looking forward, I expect strong third quarter eFamily Reader IC volumes and growing supply of eFamily ICs to help drive record annual Reader IC revenue. Reader revenue also exceeded our expectations with our operations team securing more second quarter supply than we had anticipated. Our gateway revenue performed in line with expectations, led by shipments to the visionary European retailer's expanded loss prevention deployment. In June, we launched our new Impinj E910 Reader IC, offering the highest performance of any Reader IC on the market. Our E family, which now includes the E310, E510, E710 and E910 brings reign to new classes of smart edge devices with design wins in partner handhelds, fixed readers, modules, wearables, and printers. With its sibling e-family ICs, the E910 uses a common reference design and software stack, allowing our partners to quickly bring new E910-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 a 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 as 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, the second large North American supply chain and logistics customer continued advancing their reader deployment, generating 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 Impinj team for your tremendous effort this quarter. You delivered record revenue and growing profitability, introduced market-leading new products, advanced our platform, assured our operations, and positioned 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. Kerry?
spk04: 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 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 $30.8 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 endpoint IC revenue as we further leverage that 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 declined. On a year-over-year basis, reader IC and reader revenue increased while gateway revenue declined. Despite strong demand, we expect a slight sequential decline in third quarter systems revenue as we continue navigating component 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 product margins partially offset by product mix and indirect costs. 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 quarter adjusted EBITDA margin was 6.4%. And even as we grow adjusted EBITDA, we continue investing in our business. Second quarter gap net loss was 11.5 million. Second quarter non-GAAP net income was $3 million, or $0.11 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 million. Property and equipment purchases totaled $700,000. 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 all-cash repurchase saves us $1.1 million in non-GAAP interest expense and removes 300,000 shares of potential dilution. Second, reader component shortfalls remain an ongoing challenge and 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 the year end. Third, equipment purchase timing drove a sequential decline in second quarter capital expenditures. We expect that timing to reverse in third quarter and continue to expect 2022 CapEx spending 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 $5.1 and $6.6 million. On the bottom line, we expect non-GAAP net income between $4 and $5.5 million, reflecting non-GAAP earnings per share between $0.15 and $0.20. 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 Impinj 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. MJ?
spk00: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. 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. The first question comes from Jim Rusciutti with Needham & Company. Please go ahead.
spk03: Hi. Good afternoon. I wanted to focus first on the systems business. You might begin to see some easing in some of the components shortages that you indicate, I guess, are 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 you'll be able to meet the demand that you're seeing?
spk06: So, Jim, thanks for the question. I'll take the first part of it, and then I'll hand off to Kerry. So we had previously indicated in our first quarter call that we expected to see an ability to supply through the latter half of the year. We had some decommits of a few key components that we had line of sight to last quarter, and that led to our revised statement this time around. And Kerry, hand off to you in terms of the go-forward estimates.
spk04: Yeah. So Jim, thanks for the question. This is Kerry. You know, these component shortfalls have have been a reality of our life for several quarters at this point. And, you know, 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 of navigating what seems to be a new list of component 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, I signaled that reader and gateway revenue would be down slightly sequentially. You know, we'll 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, you know, at least flat to hopefully slightly up in Q4 on the reader and gateway business.
spk03: Got it. And my follow-up question just relates to... what you're seeing from your foundry partner. I guess some encouraging signs 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?
spk06: Jim, this is Chris. How it's trending is we're seeing incremental wafer upsides and the pace seems it's gradually increasing. We're also seeing some incremental pull-ins of scheduled deliveries. And as I said in my prepared remarks, we're guardedly optimistic that that trend will continue. However, our process notes and the process notes 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 a little bit of daylight, we would like to see a lot more daylight going forward.
spk04: And maybe I can add to that as well, Jim. I think, you know, 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 out-quarters, upcoming and the following quarter. This is the 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 increase them again in Q4. You know, that's great news, but it's still, to Chris's point, well short of the demand that's out there.
spk06: And what Kerry noted, shipments, those are, he spoke to revenue in the prepared remarks, shipment volumes are also increasing.
spk03: Got it. Thanks very much. Thank you, Jim.
spk00: The next question comes from Harsh Kumar with Piper Sandler. Please go ahead.
spk01: Yeah, hey, guys. First of all, you know, strong congratulations on what you're doing, managing to grow in this tough environment, particularly in challenging economics, and congratulations on that. On the topic of supply, you know, you're welcome, totally. On the question of supply, again, My understanding is the mobile and the PC guys are experiencing some weakness and they're backing off. You're helping out the foundries by stepping in and taking the place. So I'm curious what happens when those guys come back. They're bigger than you, but you're helping out and you're taking the first spot now in a lot of situations with this incremental capacity. When they come back, let's say March or June quarter of next year, do you get put back in line or do you continue to take that first spot in the incremental capacity? And then I do have a follow-up.
spk06: Okay. So Harsh, I will do my best on that question here. So I, you know, as I said in answering Jim's question, supply in our process nodes still remains tight. So I want to be a little cautious in the words helping out our foundry just because the supply is tight. Now, our foundry partner has indicated to us that we are a priority, a high priority for wafer upsides. And we have had that prioritization for an extended period of time. I believe that the demand in our market, the potential for the future, will cause us to maintain a high level of prioritization both for existing wafers and upside waivers so yes other industries are today larger come a time in the future one brain 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 continue to supply upsides and maintain that supply going forward.
spk01: Appreciate the clarity. Chris, my follow-up was on your logistics customers. Last quarter was the first time I think you talked about the big logistics customer or what you call as customer number two having potentially revenues or shipping endpoint ICs in next year, 2023. Then you reiterated again on the earnings call I was curious about your puts and takes on what can cause that program to happen and what can cause that program to maybe be pushed back. Just I'd be curious on color and pros and cons of the situation there.
spk06: 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, if you want to call it a supply chain, or their shipments. The opportunity for them is to reduce missed shipments, reduce errors in handling, basically improve 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, they're going to adopt quickly. And to the extent that there's 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's going to be paced by the 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.
spk01: Chris, Chris, can I just ask on that? Wouldn't all this sort of testing and qualification be done at this point in time already past all that processing, sort of like the testing and the qualification type work at this point?
spk06: Yeah, so the answer is yes and no. Yes, early testing, deployments, piloting things, but at scale, the world changes a little bit. And as you deploy at scale, you uncover challenges that neither side had anticipated. You have to work through just overall scaling in the operational infrastructure. So it is an ongoing joint effort to make that program successful. So like I said, I do feel great about where we are, 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.
spk01: Excellent. Congratulations, guys. Okay. Thank you, Harsh.
spk06: Thanks, Harsh.
spk00: Our next question is from Troy Jensen of Lake Street Capital. Please go ahead.
spk05: Hey, gentlemen, I'd like to also offer my congratulations on the great quarter.
spk06: Thank you, Troy. Thank you, Troy.
spk05: Hey, so, Kerry, did I hear you right? You said OpEx flat on a sequential basis. And, I mean, if I just go back to my history following you guys, you know, Chris, it feels like you were always, this market's huge, we're going to invest in the upside to accelerate business now. And, you know, it sounds like leverage is more kind of in the sights right now. So just curious to know if you guys could talk about, operating margin targets or kind of growth or how long would you kind of try to keep the OPEX on a flatter type basis or slower growth?
spk04: Yeah, so Troy, thanks for the question. The 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 itself And, you know, incremental investment taking its place to keep us in a flat spot. So the investment continues. 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, you know, following the, you know, the 2020 COVID downturn, we were focused on getting to adjust to the EBITDA break even. Our 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 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 generating free cash flows.
spk05: Okay, perfect. Any targets you want to give us, Kerry, or kind of we got to wait and see?
spk04: Not right now, Troy.
spk05: Okay, then my follow-up here. Okay, so 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 succumb to growth for the next two quarters and you're at the tag sales, would you expect to still have a book to build greater than one and exit the year with record backlog level above where it is currently?
spk06: So Troy, I'm going to start on that one. Our bookings are paced today by supply. And so as I said in my prepared remarks, 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 and the incremental bookings we expect to get. But I think you should be looking at it as a supply-limited bookings opportunity. Gotcha. Terry, 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 analyte partners will layer in additional bookings as supply continues to improve.
spk04: 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.
spk05: Great. Understood. All right, guys. This is awesome. Keep up the good work. Thank you, Troy.
spk00: Our next question is from Scott Searle of Roth Capital. Please go ahead.
spk02: 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. Hey, 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're 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're getting for
spk06: incremental wafers um and 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 yeah 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 you know demand picking up back and in the latter half of 2023 for other products it's just Given the kind of macro cross-currents we're seeing, given the foundry's building capacity at some nodes, and with all these pieces swirling around, it's too early to call what's going to happen in 23. In terms of where we're focused right now, we're focused on the latter half of 22. So we're working with our partner, our foundry partner, in getting upsides and pull-ins for the remainder of this year to drive as much of the opportunity as we can this year. And then we'll be transitioning our focus over to 2023. So I prefer not to speak much about 2023 right now because it's still a ways away. We'll be working with our family partner to both build our base and potential for upsides in terms of wafer volumes looking into 2023.
spk02: 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 got mixed, right, in terms of systems and endpoint ICs this quarter. But You know, 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 horizon, but how you're 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 or given the supply constraints that 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? Thanks.
spk06: 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. Yeah.
spk04: And Scott, I would add that, you know, last quarter, you know, we guided gross margin in the 53 to 54% range. I 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, you'll see that 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.
spk02: Great. Thanks so much. Nice quarter, guys. Thank you.
spk00: Again, if you have a question, please press star, then 1. Seeing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Chris Di Iorio, co-founder and CEO, for any closing remarks.
spk06: Thank you, MJ. I'd like to thank you all for joining the call today, and I hope you and your loved ones are and remain safe and well. Thank you very much. Bye-bye.
spk00: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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