RFID manufacturer Impinj (NASDAQ:PI) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue up 45.7% year on year to $76.6 million. Guidance for next quarter's revenue was $83.5 million at the midpoint, which is 8.64% above the analyst consensus. Impinj made a GAAP loss of $118 thousand, improving on its loss of $20 million, in the same quarter last year.
Impinj (PI) Q4 FY2022 Highlights:
- Revenue: $76.6 million vs analyst estimates of $76.3 million (small beat)
- EPS (non-GAAP): $0.41 vs analyst estimates of $0.39 (6.3% beat)
- Revenue guidance for Q1 2023 is $83.5 million at the midpoint, above analyst estimates of $76.9 million
- Free cash flow was negative $12.3 million, down from positive free cash flow of $12.2 million in previous quarter
- Inventory Days Outstanding: 116, up from 94 previous quarter
- Gross Margin (GAAP): 52.4%, down from 55.5% same quarter last year
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 strong, averaging 24.2% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $52.6 million to $76.6 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).
This was a great quarter for Impinj with 45.7% revenue growth, beating analyst estimates by 0.41%. This marks 7 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.
However, Impinj believes the growth is set to even accelerate, and is guiding for revenue to grow 57.1% YoY next quarter, and Wall St analysts are estimating growth 28.4% over the next twelve months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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 inventory days came in at 116, 56 days below the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.
Pricing Power
Impinj's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 52.4% in Q4, down 3.1 percentage points year on year.
Over the past year, Impinj has seen its already reasonably high gross margins continue to rise, averaging 53.5%, indicative of a solid competitive offering, efficient cost controls, and relatively low pricing pressure.
Profitability
Impinj reported an operating margin of 15.5% in Q4, up 13.3 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.
Operating margins have been trending up over the last year, averaging 10.7%. A welcome development for Impinj, as its operating margins are below industry average, a result of a cost structure that isn't particularly efficient.
Earnings, Cash & Competitive Moat
Wall St analysts are expecting earnings per share to decline 1.06 thousand% over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Impinj's free cash flow came in at -$12.3 million in Q4, up 105% year on year.
Impinj didn't produce any free cash flow in the last year, so shareholders will want to see that improve in the short term.
Over the last 5 years Impinj has reported an average return on invested capital (ROIC) of just -33.7%. This suggests it may struggle to find compelling reinvestment opportunities within the business.
Key Takeaways from Impinj's Q4 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Impinj’s balance sheet, but we note that with a market capitalization of $3.34 billion and more than $173.7 million in cash, the company has the capacity to continue to prioritise growth over profitability.
We were very impressed by the strong improvements in Impinj’s operating margin this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the inventory levels increase and gross margin deteriorated. Overall, this quarter's results still seemed pretty positive and shareholders can feel optimistic. The company is flat on the results and currently trades at $125 per share.
Is Now The Time?
When considering Impinj, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Impinj we will be cheering from the sidelines. Its revenue growth has been solid. But while its gross margins are suggestive of good pricing power, the downside is that its its relatively low return on invested capital suggests suboptimal growth prospects and its growth is coming at a cost of significant cash burn.
Given its price to earnings ratio based on the next twelve months is 90.8x, Impinj is priced with expectations of a long-term growth, and there's no doubt it is 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.
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