RFID manufacturer Impinj (NASDAQ:PI) reported Q4 FY2023 results beating Wall Street analysts' expectations, with revenue down 7.8% year on year to $70.65 million. Guidance for next quarter's revenue was also optimistic at $73.5 million at the midpoint, 3.8% above analysts' estimates. It made a non-GAAP profit of $0.09 per share, down from its profit of $0.41 per share in the same quarter last year.
Impinj (PI) Q4 FY2023 Highlights:
- Revenue: $70.65 million vs analyst estimates of $69.63 million (1.5% beat)
- EPS (non-GAAP): $0.09 vs analyst estimates of $0.01 ($0.08 beat)
- Revenue Guidance for Q1 2024 is $73.5 million at the midpoint, above analyst estimates of $70.84 million
- Free Cash Flow was -$1.20 million compared to -$4.48 million in the previous quarter
- Inventory Days Outstanding: 240, down from 284 in the previous quarter
- Gross Margin (GAAP): 47.9%, down from 52.4% in the same quarter last year
- Market Capitalization: $2.90 billion
Founded by Caltech professor Carver Mead and one of his students Chris Diorio, Impinj (NASDAQ:PI) is a maker of radio-frequency identification (RFID) hardware and software.
Impinj was founded in 2000, and the company’s name stands for “impact-ionized hot-electron injection”. Impinj went public in 2016, touted as a cornerstone in the ‘Internet of Things’ revolution.
Visibility into exact inventory positions can help retailers avoid costly out-of-stock positions. Data related to units passing through a supply chain can increase operational efficiencies. However, digitally connecting every consumer product on a grocer’s shelf or every component passing through an automotive supply chain was historically too difficult or costly.
Impinj addresses this problem with the RFID technology it pioneered. The company’s key product consists of endpoint chips that can wirelessly connect to most physical things, leading to item-to-cloud connectivity. Because these radios-on-a-chip cost pennies, they can be deployed at a massive scale. Each of Impinj’s chips attaches to a host item and includes an identifying number. The chip may also include features such as user data storage, security or loss prevention. When a consumer uses self-checkout, for example, RFID can help the retailer manage inventory by highlighting exactly what is being bought while also providing insights on theft by identifying items that leave the store without being scanned.
Competitors offering endpoint chips include NXP B.V., EM Microelectronic, and Alien Technology.Sales Growth
Impinj's revenue growth over the last three years has been very strong, averaging 34.3% annually. But as you can see below, its revenue declined from $76.59 million in the same quarter last year to $70.65 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
Even though Impinj surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 7.8% year on year. This could mean that the current downcycle is deepening.
Impinj's revenue growth has slowed over the last three quarters and its management team projects revenue to fall next quarter. As such, the company is guiding for a 14.4% year-on-year revenue decline, but Wall Street thinks there will be a recovery next year. Analysts' estimates call for 12.6% growth over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Impinj's DIO came in at 240, which is 80 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
Pricing Power
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Impinj's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 47.9% in Q4, down 4.5 percentage points year on year.
Impinj's gross margins have been trending down over the last 12 months, averaging 49.2%. This weakness isn't great as Impinj's margins are already slightly below the industry average and falling margins point to potentially deteriorating pricing power.
Profitability
Impinj reported an operating margin of 1.9% in Q4, down 13 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Impinj's operating margins have been trending down over the last year, averaging 5.5%. This is a bad sign for Impinj, whose margins are already below average for semiconductor companies. To its credit, however, the company's margins suggest modest pricing power and cost controls.
Earnings, Cash & Competitive Moat
Analysts covering Impinj expect earnings per share to grow 2,005% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Impinj's free cash flow came in at negative $1.20 million in Q4, up 90.2% year on year.
As you can see above, Impinj failed to produce positive free cash flow over the last 12 months and shareholders will likely want to see an improvement in the coming quarters.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).
Impinj's five-year average ROIC was negative 30%, meaning management lost money while trying to expand the business. Its returns were among the worst in the semiconductor sector.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Impinj's ROIC has averaged a solid increase each year. This is a good sign, and if Impinj's returns keep rising, there's a chance it could evolve into an investable business.
Key Takeaways from Impinj's Q4 Results
We were impressed by Impinj's strong improvement in inventory levels. We were also excited its EPS outperformed Wall Street's estimates. On the other hand, its operating margin regrettably fell and its gross margin shrunk. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is up 13.6% after reporting and currently trades at $121 per share.
Is Now The Time?
When considering an investment in Impinj, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in the case of Impinj, we'll be cheering from the sidelines. Although its superb revenue growth over the last three years implys it's winning market share, Wall Street expects growth to deteriorate from here. On top of that, its relatively low ROIC suggests it has struggled to grow profits historically and its growth is coming at a cost of significant cash burn.
Given its price-to-earnings ratio based on the next 12 months of 115.4x, Impinj is priced with expectations for long-term growth, and there's no doubt it's a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
Wall Street analysts covering the company had a one-year price target of $101.13 per share right before these results (compared to the current share price of $121), implying they didn't see much short-term potential in the Impinj.
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