Impinj (NASDAQ:PI) has taken investors on a roller coaster ride since its 2016 IPO. The maker of radio-frequency ID (RFID) tags for retail inventory and other items surged out of the gate, climbing as high as $60 in 2017. But the stock has collapsed over the last year as revenue growth turned negative, which seemed to dash investors' growth aspirations.
Impinj returned to growth in the third quarter as sales increased 5.5% to $34.4 million, which topped its own guidance of $33 million to $34 million, but the company continued to lose money on the bottom line. Its adjusted loss per share narrowed from $0.08 to $0.05. Without adjustments, the company posted a loss of $0.33 per share. However, one item in its adjustments stood out as distorting an accurate representation of Impinj's financials.
All about depreciation
Unlike the vast majority of publicly traded companies, Impinj adjusts its non-GAAP earnings for depreciation, excluding that expense from adjusted earnings. Though depreciation is a noncash expense, it is a very real cost of doing business.
Depreciation is an accounting expense used to measure the declining value of a useful asset. It's how capital expenditures like buildings, equipment, or renovations are accounted for on the income statement, and those costs need to be factored in one way or another. Instead of expensing those purchases at the time they are made, depreciation allows companies to deduct those costs over the asset's useful life, which makes net income smoother and more representative of the underlying business, as actual capital expenditures may fluctuate considerably from one quarter to the next.
In its most recent quarter, Impinj adjusted for $1.14 million in depreciation expense, or the equivalent of $0.05 per share. If those depreciation expenses had been included, as is the normal accounting practice, the company would have reported an adjusted loss of $0.10 a share, rather than $0.05.
Over the first three quarters of the year, depreciation expense totaled $3.4 million, or $0.15 per share, making its adjusted loss $0.74 instead of $0.59.
Companies are allowed to determine their own adjustments and non-GAAP measurements. But the purpose of adjusted earnings is generally to strip out the effect of one-time items that disguise the underlying performance, not to make results look better than they really are. By excluding depreciation, Impinj seems to be dressing up its results rather than giving investors an accurate picture of the business.
What's an investor to do
While it's easy enough to back out depreciation expense, Impinj still adjusts for things like stock-based compensation -- which, though more normal for small businesses to do, can still cloud the picture of its underlying performance.
A better way for investors to get a more honest assessment of the company's performance is to look at free cash flow, or operating cash flow minus capital expenditures, which shows how cash is moving in and out of the business, and is harder to manipulate than net income.
Here, we see that Impinj has had negative free cash flow of -$19.8 million over the first three quarters of the year, or -$0.09 per share, which was an improvement from the year before, when free cash flow was -$39.2 million, or -$0.19 per share.
Looking ahead to the fourth quarter, Impinj is forecasting an adjusted loss of $0.17 to $0.10 per share, but backing out the impact of depreciation, the loss is likely to be at least $0.05 worse than that forecast. On the top line, it sees revenue at $31 million to $33 million, which represents 19% growth at the midpoint as the company recovers from the sales slide from the year before.
While that's a sign that Impinj is moving in the right direction, the continued losses show that a profitable turnaround won't be easy. Meanwhile, management's decision to exclude depreciation from adjusted earnings shows that investors should look beyond the headline numbers when examining Impinj's results. The company has put an internal investigation stemming from an employee complaint behind it, but the depreciation adjustment is a sign that investors should still view the company with some skepticism.