[PI stock] Impinj Q1 2021 Earnings Call (4/28/21)

Thank you, Ellen, and thank you all for joining the call. Our first quarter results were strong, with revenue and profitability exceeding our guidance. Already strong fourth quarter 2020 bookings became even stronger in first quarter 2021, setting another quarterly record high. Demand, record bookings, and terrific progress on our retail loss prevention engine highlight underlying strength in the business. But even as those bookings grow, limited wafer supply constrains our ability to fully capitalize on the opportunity. We know the wafer headwinds will abate, but we remain uncertain when. So today, we are carefully managing our partners' needs and those of the growing RAIN market against that limited wafer supply. Influence, I see demand surged in the first quarter. Revenue and bookings exceeded our expectations and set quarterly records, driven in part by enterprises accelerating their digital transformation. At the same time, worldwide wafer demand also surged, restricting our wafer upside. Leveraging that strong demand and tight supply, we sold a significant amount of fully reserved incoming IC inventory in the first quarter. Despite us shipping record endpoint IC volumes, our inlay partners are, for the most part, operating hand-to-mouth, having consumed their own inventory. Recall we anticipated today's wafer shortfalls back in mid-2020 and built 200-millimeter wafer inventory in the depths of the pandemic. In hindsight, we didn't build enough. We shipped that pre-built inventory in first quarter 2021 at a pace that significantly exceeds our quarterly 200-millimeter wafer supply. Also recall our newly introduced Impinj M700 ramped more slowly in 2020 than we hoped, as our partners focused on existing volume runners. Even as we invested in additional 300-millimeter wafer post-processing capacity, in hindsight, we didn't invest soon enough. First quarter 2021 M700 demand was many times larger than third quarter 2020, outstripping our current 300-millimeter post-processing capacity. With our capacity expansion scheduled to begin coming online in third quarter, for now, we are maturing the capacity we have. Looking into second and third quarters, endpoint IC demand far exceeds our wafer supply, and until our M700 post-processing capacity expansion is fully operational later this year, our 300-millimeter output remains constrained. We spoke last quarter about navigating the crossover between our declining 200-millimeter inventory and our ecosystem ramping the M700, but with today's constraints, our focus is simply total unit volumes. Short of a significant wafer increase from our foundry partner, we do not expect endpoint IC revenue to grow in the second quarter, despite 2021 orders already exceeding total unit shipments in 2020. We plan to moderate our inventory burn-down at least for the next two quarters to stretch our IC supply through 2021. In so doing, we recognize our product shipments will not satisfy customer or market demand, and we will need to prioritize those shipments. First quarter systems revenue declined quarter-over-quarter. Delays at our packaging subcontractor restricted our reader IC supply, causing a revenue shortfall that exceeded increased revenue from improved reader sales. We expect those packaging delays to moderate in second quarter, but reader IC supplies will remain below demand, and we expect to carry significant backlog in the third quarter. Like for endpoint ICs, our reader IC partners are operating hand-to-mouth. Reader revenue increased, bucking typical seasonal quarter-over-quarter declines, with green shoots and partner-led dock door opportunities driving reader strength in supply chain and logistics. But here again, demand exceeded supply, with temporary component shortfalls limiting our reader production and causing some opportunities to shift into second quarter. Also, our partner channel reduced our aggregate inventory, with certain reader products at very lean levels. We anticipate the component shortfalls to moderate and supply to normalize in second quarter. In retail, we shipped the first production units of our RAIN-based loss prevention engine, recognizing modest first quarter revenue. We expect to largely deliver the remaining units against the $6 million prepayment from the visionary European retailer in second quarter. For the second consecutive quarter, we also generated meaningful revenue from a self-checkout deployment by a leading global retailer based in Asia, with that retailer now looking at RAIN-based loss prevention. Today, I am even more convinced that self-checkout and loss prevention represent a terrific opportunity for our platform, with the potential to grow our long-term endpoint IC opportunities via the item tagging required by touchless consumer self-checkout. On the organizational side, we are thrilled to welcome Steve Sanghi to our board of directors. Steve brings with him a wealth and depth of operational and business insights and is already providing valuable input to our business. I look forward to Steve's advice and help in the months and years ahead. We are also thrilled to announce that Brian Wong, a four-time private company CEO, will join Impinj in early May as our Chief Product Officer. Brian brings 35 years of technical and business expertise in emerging technology markets, as well as deep semiconductor know-how. Brian, welcome to the team, and happy birthday today. In closing, we delivered a record bookings quarter, strengthened our team, and see strong demand and growth opportunities ahead. We exceeded our profitability guidance, delivered positive adjusted EBITDA, and positive free cash flow. We also face IC supply constraints that require empathy for and close alignment with our partners, as well as superb operational execution by us. With the utmost confidence in the Impinj team, I am energized by the opportunities ahead and our efforts to deliver against them. I will now turn the call over to Karri.

Great. This is Chris. I'll just add a little bit more there. Your question was kind of getting at the visibility that we have in the second quarter, but just recognize there are component faults on the system side of our business, for example, in our readers, and we're also working through packaging constraints on our reader IC. So there's, we still have things to work through in the quarter.

Okay, let me do my best to answer those questions and come back to me if I don't catch all of it. We see strong demand today for both our 200-millimeter products, that's, for example, our existing Monza R6, as well as our 300-millimeter product, being our M700. Strong demand for both. We are constrained in terms of our availability in both. For the latter, the 300-millimeter M700, the constraints are really focused a little bit more right now on the wafer post-processing, which we're maturing at this point in time. But of course, yes, you were right, the whole industry has wafer constraints, as do many other industries. And so I would say that from our perspective, the entire industry is constrained in terms of endpoint IC availability. You also asked a little bit about share. We typically don't give visibility into share until the end of the year when we get the RAIN Alliance numbers. We feel good about our position in the market today, about the M700 and what it brings to the market. So we'll report out later when we actually get the final share numbers, but I can say that from where we stand right now, we feel very good about our position and we look for our ability to maximize total unit volumes going forward from here, and especially in the second half of the year.

So thanks, Derrick. This is Chris speaking. As of right now, the bottleneck is on our side. We are constrained by our 300-millimeter post-processing capacity, getting wafers through the pipe. As we said, we've got additional capacity that we invested in will start coming online in the third quarter, and we expect to continue to ramp that post-processing throughput through the end of the year, especially as we mature the technology that we're using, the plasma dicing, and essentially build up our machine capacity. That said, we are not unlimited in our 300-millimeter wafers, and we will have 300-millimeter wafer constraints through the latter part of the year unless we get additional wafer upside from our foundry partner. So as we stand right now, post-processing constraints are the limit, wafer constraint.

Sure, I will do my best to answer those questions. The answers will be kind of a little bit soft answers because it depends on how you evaluate the market and the time framework over which you do your evaluation. Our best estimate of the total retail apparel market opportunity worldwide is about 200 billion units. We have judged that down to about 80 billion based on what we think is the serviceable market or the market that's available to us. But basically, the serviceable market, that's the whole market including the long tail of adoption, kind of if you want to use the crossing the chasm model, the laggards as well. The nearer-term opportunity, of course, is a bit smaller, and depending on where you cut your time frame, you may end up with smaller or larger volumes. We continue to believe that total available market opportunity on the retail side for us is about 80 billion units. That's from where we stand today. Supply chain and logistics is a little bit of a different answer. It depends on how broadly you cast your net for supply chain and logistics. If you're just looking at boxes and cartons and pallets that are shipped, it's a smaller number. If you look at kind of all the parcels that get shipped, including for automotive and retail and so many other opportunities, the number becomes very, very large. And it's the same in the food space. You look at food with the lens of boxes and pallets going, for example, to restaurants, relatively smaller opportunity in several hundred million units per year. If you look at the total food opportunity, including food items to go to consumers, it's gigantic. It's measured in the trillions. So we feel that our view of the market is very consistent with our partners. It's just we take a little bit different lens on things.

Thanks, Jim. This is Chris. I'm going to take the first part of the question and answer, and then I'm going to hand off to Jeff. Of course, double ordering is always a risk, especially in a two-step distribution model like we have. But from our perspective today, our purchase orders are non-cancelable. Our visibility into our partner inventory levels is relatively good, and it shows they are lean. So we do believe that the demand is real out in the market. In terms of how much of that opportunity can push out because it's not, you know, if you want to use the word mandatory, when you're on the other end of customer calls as we are, every project is important to every customer. Everything that we can deliver against is important. Some, of course, have a higher level of criticality, which is where we talk about prioritization. For example, items that are going into hospitals or pharmaceuticals or, you know, COVID-19, of course, would have a higher priority. But our goal is to support all of our customers and our markets as best we can. Jeff, anything you'd like to add there?

And Jim, this is Chris. I want to jump in and say one more thing, and I think this is very important for everybody to realize. You know, our industry delivered more than 20 billion units last year. RAIN RFID touches the fabric of everybody's life. It's in state department-issued IDs, it's in retail apparel items, it's in pharmaceuticals, it's associated with food delivery, it goes on aviation baggage, it goes on automotive parts, on airbags and bumpers. It's part of the fabric of the supply chain today. And you can say, well, can some things push out and go back? Yeah, they can. But the disruption that can be caused by a severe shortfall in our industry can ripple through the entire supply chain. So we are focused on, as best we can, delivering against that opportunity and minimizing the impact. But the point I'm trying to make here is that it's not like RAIN is optional anymore. We're woven into the fabric of the worldwide supply chain.

Now, this is Chris speaking. I'd just like to say thank you all for joining the call today, and I hope you and your loved ones are and remain safe and well. Thank you again. Bye-bye.