Impinj Delivers Solid Beat and Raise As RAIN RFID Deployments Accelerate
Impinj PI 0.00%↑ reported solid 2Q24 results, which came in above Managements and Street expectations. Furthermore, Impinj provided better than expected 3Q24 revenue, EPS and adjusted EBITDA guidance. Strong Q2 results and outlook had shares up 5%+ after-earnings, and we expect shares to trade even higher in the near term with improving demand trends and profitability expectations.Â
We believe Q2 results and specifically upbeat Q3 outlook were caught as a positive surprise after Impinj’s largest customer Avery Dennison (33% of 2023 sales) provided cautionary commentary to a slow down in deployments across key end-markets one day prior to Impinj’s earnings call. On the contrary, Impinj Management was very upbeat on 2H24 and does not see any slow-down in their key IC end markets. We were impressed with Impinj’s results as they return to their traditional cadence of beat and raise. That said, we believe shares are fully valued and reiterate our HOLD rating. In the event of a meaningful pullback we would use the opportunity to consider building a position given Impinj’s long term growth opportunity.Â
Source: Company Filings, FactSet
Key 2Q24 Earnings Takeaways
Impinj generated $102.5M in revenues in Q2, which was up 19.2% Y/Y and came in above the high-end of Managements guidance ($96 - 99M), as well as consensus estimates ($97.5M). Endpoint IC revenues were $89.4M in Q2, up 37.7% Y/Y. Multiple trends drove that outperformance including apparel and footwear strength, early signs of retail rebuying, steady growth in general merchandise, continued secular growth including a long tail of specialty applications. However, Q2 results were also positively impacted by the settlement awarded to Impinj from the patent lawsuit with NXP. As part of the settlement, starting in Q2 NXP is required to pay Impinj $15M annually for the next 10 years, as long as they continue to use specific IP owned by Impinj. This $15M has 100% gross margin. When backing out the $15M, which will fall into IC Endpoint revenue, Impinj revenues were up 2% Y/Y. System revenues were $13.1M in the quarter, down 37.8% Y/Y.
Non-GAAP gross margins in Q2 were 58.2%, which were up 490 bps Y/Y; however, when excluding the benefit from the licensing fee, gross margins were ~51%. Better than expected revenues, strong cost controls and licensing fee, drove adjusted EBITDA of $26.8M, which was above the high-end of Managements previous range ($21.7 - $23.2M) and consensus estimates ($24.7M). Strong profitability also translated into robust cash flow generation with Impinj reporting $44.1M in free cash flow in the quarter. That said, cash flow in 1H24 was positively impacted by working capital efficiencies, which will normalize in 2H24.
Looking ahead, Impinj provided upbeat Q3 guidance, which includes revenues in the range of $91 - 94M. This implies 42.3% Y/Y growth at the midpoint, which came in above consensus estimates ($90.4M). We believe strength in apparel and footwear, recovery in retail, as well as increasing deployments in logistics (UBS) and new markets is driving the upside in the guidance. Impinj does not formally guide to Non-GAAP gross margins, but they expect them to be up Q/Q based off 51% gross margins when excluding the licensing fee. Higher than expected revenues will also result in better than expected profitability, with Impinj guiding adjusted EBITDA in the range of $13.8 - 15.3M (consensus $13.1M).
5-Year Financial Outlook
Following the better 2Q24 results and Q3 outlook, we have increased our financial estimates. Although we are still cautiously optimistic the operating environment improves in 2H24, we do believe the company can now grow ~20% Y/Y, which is higher than our prior 8% growth estimate. As we enter 2025, we believe Impinj can sustain 20%+ revenue growth for the next several years as RAIN RFID becomes increasingly adopted in several industries.Â
We do believe the company has a scalable operating model, but Impinj will need to continue to invest in R&D to maintain its leadership in the RAIN market. We expect Impinj to improve operational efficiencies and see robust operating margin expansion that will result in $65M in adjusted EBITDA in 2024. Assuming the company can grow in-line with the overall industry, we foresee the company hitting ~25% adjusted EBITDA margins in 2027. We expect the company to generate $100M+ in free cash flow per year by 2027.
Below is an overview of our 5 year outlook with a full financial model here.
Source: Industrial Tech Analyst
Investment Thesis
We believe Impinj is a clear leader in the fast emerging RAIN RFID industry, which we anticipate will be one of the fastest growing tech markets over the next 5 years. We believe expansion across Impinj core markets, retail and logistics, and new verticals will enable the company to sustain 20%+ growth. Heading into 2024, elevated inventory levels remained a headwind, and we are cautiously optimistic of a stronger recovery in 2H24. However, as a result of this newly announced annual IP fee, faster than expected demand recovery for endpoint ICs in retail and strong cost controls, our concern about Impinj’s lofty profitability expectations has dwindled. That said, with shares trading at 57x EV/EBITDA based on 2025 estimates heading into earnings, we feel shares are fully valued and reiterate a HOLD rating. However, we believe Impinj is one of the best growth stories out there with a massive untapped market opportunity. In the event of a meaningful pullback we would use the opportunity to consider building a position given Impinj’s long term growth opportunity.
As shown in our table below we use a 5 year DCF model to value Impinj shares. Based on our current forecast we value Impinj shares at $146.84. We increased our price target as a result of higher revenues and lower assumed costs.
Source: Industrial Tech Analyst
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