Impinj, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated. Impinj sells RAIN RFID endpoint ICs, reader ICs, readers, gateways and software, largely through channel partners.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $32.6 | $31.0 | $98.4 | $78.6 |
| Gross profit / margin | $17.0 / 52.1% | $16.4 / 52.8% | $51.9 / 52.8% | $41.1 / 52.2% |
| Operating income (loss) | $(4.7) | $0.8 | $(7.5) | $(0.8) |
| Net income (loss) | $(4.9) | $0.8 | $(8.0) | $(1.8) |
| Adjusted EBITDA, non-GAAP | $(1.5) | $2.2 | $0.1 | $2.7 |
- Q3 revenue rose 5.1% year over year, primarily on higher reader and gateway demand. Reader and gateway shipment volume increased 68%; endpoint IC revenue was pressured by lower average selling prices and product mix.
- Nine-month revenue grew 25.2%, with higher endpoint IC and reader/gateway demand. Monza R6 shipment volume increased 140%, while Monza 5 volume declined 47%; reader and gateway shipment volume increased 47%.
- Operating expenses increased substantially: 39% in Q3 and 42% for the nine-month period. Management attributed increases to investment in engineering, sales and marketing, headcount and professional services.
- Q3 gross margin declined 0.7 percentage points year over year, mainly reflecting endpoint IC pricing and product mix and higher-cost reader/gateway products used to meet demand. Nine-month gross margin improved 0.6 points.
Cash flow, balance sheet and debt
- Cash, cash equivalents and short-term investments were $62.5 million at September 30, 2017, down from $100.5 million at December 31, 2016. Working capital was $118.3 million.
- Operating cash use was $33.1 million for the first nine months, compared with $9.5 million in the prior-year period. Major uses included an $18.1 million inventory increase and an $8.1 million increase in receivables. Capital expenditures were $6.2 million.
- Inventory rose to $45.8 million from $27.7 million at year-end 2016. The company cited inventory investment to support anticipated demand.
- Debt principal outstanding was approximately $10.7 million, including $9.3 million of term loans and $1.4 million of equipment loans; there were no revolver borrowings. The amended facility provides a $25 million revolver. Weighted-average borrowing interest rate was 4.2%.
- Management said current cash, investments and available credit were expected to fund anticipated needs for at least 12 months. The credit agreement includes conditional financial covenants if specified cash and availability fall below $50 million; the company reported compliance with all covenants at quarter-end.
Outlook, risks and notable matters
- No specific revenue or earnings guidance is provided. Management expects continued investment in research and development, sales and marketing, and growth initiatives; it also expects hardware selling prices to fluctuate and generally decline over time.
- Management described limited visibility into end-user demand and volatile deployment timing, particularly in retail. Several large customers delayed or slowed planned 2017 deployments in Q2, and the filing said their posture had not materially changed by the report date. Retail deployment seasonality may also affect demand.
- Principal risks include uncertain RAIN adoption, customer and channel concentration, competitive pricing and margin pressure, inventory forecasting and obsolescence, dependence on third-party manufacturers, and execution of new products and software. The company committed to purchase $14.8 million of inventory from third-party manufacturers.
- Operating lease commitments totaled $36.1 million; total contractual obligations, including debt, capital leases and purchase commitments, were $63.8 million.
- A previously disclosed material weakness in internal control over financial reporting remained unremediated at September 30, 2017; remediation work continued, but operating-effectiveness testing was incomplete. Management nevertheless concluded disclosure controls and procedures were effective at quarter-end.
- The company reported no material legal proceedings. It expects adoption of the new lease accounting standard to materially affect the balance sheet, primarily through recognition of lease assets and liabilities; it did not expect a significant effect on earnings or cash flows.
Key investor verification points
- Assess whether delayed large-customer deployments resume and whether RAIN adoption and channel demand support future growth.
- Track endpoint IC average selling prices, product mix, gross margins and the competitive environment.
- Monitor inventory conversion, receivables collection and operating cash burn after the significant 2017 inventory build.
- Verify progress in remediating and testing controls related to the previously identified material weakness.
- Review liquidity and covenant headroom if cash, investments and revolver availability decline, alongside debt service and the $14.8 million purchase commitment.