© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Impinj Second Quarter 2022 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. 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.
Thank you, Anja. Good afternoon, and thank you all for joining us to discuss Impinj's second quarter 2022 results. On today's call, Chris Diorio, Impinj's Co-Founder and CEO, will provide a brief overview of our market opportunity and performance. Cary Baker, Impinjs'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 Dossett, Impinj'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 are non-GAAP. Balance sheet and cash flow metrics are on a GAAP basis. Please refer to our earnings release for a reconciliation of non-GAAP financial metrics to the most comparable GAAP metrics.
Before turning to our results and outlook, note that we will participate in the 11th Annual Needham Industrial Tech, Robotics and Clean Tech one-on-one conference on August 1; Oppenheimer's 26th Annual Technology Internet and Communications Conference on August 9; the 42nd Annual Canaccord Genuity Growth Conference in Boston on August 11; the Jefferies Semi IT hardware and com Infrastructure Summit in Chicago on August 30 and 31; the Piper Sandler Growth Frontiers Conference in Nashville on September 13 and the Goldman Sachs 2022 Communacopia and Technology Conference in San Francisco on September 14. We look forward to connecting with many of you at those events. I will now turn the call over to Chris.
Thank you, Andy, and thank you all for joining the call. Our second quarter results were strong, driven by robust secular demand for all our products -- endpoint ICs, reader ICs, readers, and gateways. Revenues set a new quarterly record and strong profitability highlighted the leverage in our operating model as our revenue scales.
Based on my conversations with Impinj'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. The 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 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 systems side, second quarter demand exceeded our ability to supply as it has for the past 3 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 endpoint IC revenue exceeded our expectations, setting a new quarterly record. Demand remains strong, driven by retailers adopting RAIN or inventory visibility and omnichannel fulfillment and supply chain and logistics providers for item traceability, including parcel tracking and operating efficiencies. 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 multiyear 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 product.
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 e-family reader IC volumes and growing supply of e-family 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 retailers 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 RAIN to new classes of smart edge devices with design wins and 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 the 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 customers, 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. We delivered record revenue and growing profitability, introduced market-leading new products, advanced our platform, ensured 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 Cary for our financial review and third quarter outlook. Cary?
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 IT 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 the first quarter of 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 of 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 GAAP 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 or $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 removed 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 the 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 million 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 million and $6.6 million. On the bottom line, we expect non-GAAP net income between $4 million 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?
[Operator Instructions]. The first question comes from Jim Ricchiuti with Needham & Company.
I wanted to focus first on the systems business. You might begin to see some easing in some of the component shortages that you indicated, 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?
So Jim, thanks for the question. I'll take the first part of it, and then I'll hand off to Cary. 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 Cary, I'll hand it off to you in terms of the go-forward estimates.
So Jim, thanks for the question. This is Cary. These component shortfalls have been a reality of our life for several quarters at this point. And 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 operation as an 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. 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 at least flat to hopefully slightly up in Q4 on the Reader and Gateway business.
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?
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 processes 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.
Yes. And maybe I can add to that as well, Jim. I think over the last several quarters, you've heard us give almost a 2-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 2 out quarters, coming in 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. That's great news, but it's still, to Chris' point, well short of the demand that's out there.
And what Cary noted shipments, those are -- we spoke to revenue in the prepared remarks, the shipment volumes are also increasing.
The next question comes from Harsh Kumar with Piper Sandler.
First of all, 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, 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 hopping out and you're taking the first part 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 part in the incremental capacity? And then I do have a follow-up.
So Harsh, I will do my best on that question here. So 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 wafers. So yes, other industries are today larger. There will come a time in the future when RAIN 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 continued supply upsides and maintain that supply going forward.
Appreciate the clarity. Chris. My follow-up was on your logistics customers. Last quarter, it was the first time I think you talked about the big logistics customer which brought us customer #2, having potentially revenues in our shipping endpoint ICs in next year 2023. Then you reiterated it again on this 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 push -- to be pushed back? Just I'd be curious, some color on pros and cons of the situation there.
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 their shipments.
The opportunity for them is to reduce missed shipments, reduce errors and handling, reduce or basically improve labor efficiencies, reduce manual scans and overall approve 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 is going to be paced by the successes.
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.
Chris, can I just ask on that, wouldn't all this sort of testing and qualification be done at this point in time already passed all that sort of like the testing and the qualification type work at this point?
So Harsh, 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, cover 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.
Our next question is from Troy Jensen of Lake Street Capital.
So Cary, did I hear you right? You said OpEx was flat on a sequential basis. And I mean if I just go back in my history from you guys, Chris, it feels like you're always -- this market is huge. We're going to invest in the upside to accelerate business now. And it sounds like leverage is more kind of in your 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 at a flatter type basis or slower growth?
Yes. So Troy, thanks for the question. The flat OpEx is not an indication of lack of investment or slowing 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 and incremental investment taking its place to keep us at 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, following the 2020 COVID downturn, we were focused on getting to adjusted EBITDA breakeven. 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 flow.
Any targets you want to give us, Cary, or kind of we got to wait and see.
Not right now, Troy.
So I think I know the answer to this question, but I just want to get it out there. So assuming you guys are going to have great [indiscernible] of growth for the next 2 quarters and your IC, the tag sales, would you expect to still have a book-to-bill greater than 1 and exit the year with record backlog level above where it is currently?
So 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 as a supply limited bookings opportunity. 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 inlay partners will layer in additional bookings as supply continues to improve.
And then, Troy, I would just add, remember that historically, this is a business that turns 50% in the quarter. So being well booked into 2023 is pretty substantial.
Our next question is from Scott Searle of Roth Capital.
Nice to see supply loosening up a little bit as we move into the back half of this year. 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 incremental wafers 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?
Yes. 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 about demand picking up back in the latter half of 2023 for other products. It's just -- given the kind of macro crosscurrents we're seeing, given the foundries building capacity at some nodes and with all these pieces swirling around, it's really -- 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, on getting upside and pull-ins for the remainder of this year to drive as much of the opportunity as we can to 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 foundry partner to both build our base and potential for upsides that's in terms of wafer volumes looking into 2023.
Fair enough. And if I could, following up on the gross margin front, you guys are doing a good job on that front. You've got mix, right, in terms of systems and endpoint ICs this quarter. But 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?
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.
Yes. And Scott, I would add that last quarter, 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.
[Operator Instructions]. Seeing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Diorio, Co-Founder and CEO, for any closing remarks.
Thank you, MJ. I'd like to thank you all for joining the call today, and I hope you and you loved ones are and remain safe and well. Thank you very much. Bye, bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.