Impinj Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 10 speakers on the call.

Operator

Welcome to the Impinj Third Quarter 2023 Financial Results Earnings Conference Call and Webcast. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mr.

Operator

Andy Cobb, Vice President, Strategic Finance. Please go ahead.

Speaker 1

Thank you, MJ. Good afternoon, and thank you all for joining us to discuss Impinj's Q3 2023 results. On today's call, Chris Diorio, Impinj's Co Founder and CEO, will provide a brief overview of our market opportunity and performance Terry Baker, Impinj's CFO, will follow with a detailed review of our Q3 2023 financial results and Q4 outlook. We will then open the call for questions. Jeff Dossett, Impinj's CRO, will join us for the Q and A.

Speaker 1

You can find management's prepared remarks plus trended financial data on the company's Investor Relations website. We will make statements in this call about financial performance and future expectations that are based on our outlook as of today. Any such statements are forward looking under the Private Securities Litigation Reform Act of 1995. While we believe we have a reasonable basis For making these forward looking statements, our actual results could differ materially because any such statements are subject to risks and uncertainties. We describe these risks and uncertainties in the annual and quarterly reports we file with the SEC.

Speaker 1

We do not undertake and expressly disclaim any obligation to update or alter our forward looking statements, except as required by law. On today's call, All financial metrics, except for revenue, or where we explicitly state otherwise, are non GAAP. Balance sheet and cash flow metrics are GAAP. Please refer to our earnings release for a reconciliation of non GAAP financial metrics to the most comparable GAAP metrics. Before turning to our results and outlook, note that we will participate in Baird's Global Industrial Conference on November 9 in Chicago.

Speaker 1

We look forward to connecting with many of you there. I will now turn the call over to Chris.

Speaker 2

Thank you, Andy, and thank you all for joining the call. As I reflect on our results, while I'm disappointed that 2023 has been far more challenging than we anticipated entering the year, I am pleased with our execution this quarter. We beat our revenue guide midpoint and exceeded our profitability guide. Looking forward, we see green shoots in the 4th quarter, expect our full year 2023 endpoint IC volumes to be consistent with our industry's historical 29 percent unit volume CAGR, anticipate a market rebound in 2024 and remain a growth leader despite the difficult macro. We also continue improving our demand forecasting and inventory management.

Speaker 2

To quote Winston Churchill, we are not letting a good crisis go to waste. Challenging periods have always made us a stronger company And I have no doubt this one will as well. Focusing first on endpoint ICs, 3rd quarter revenue slightly exceeded our expectations, but declined sequentially. Weakness in the overall retail apparel market and softness in the general merchandise ramp at the large North American retailer eclipsed strong unit volume growth at our 2nd large North American supply chain and logistics customer. While IC inventory at many of our inlay partners declined, the aggregate decline was less than we had anticipated.

Speaker 2

Looking to the Q4, Green Shoots and Retail Apparel are driving improving demand at our inlay partners. While it is too early to call a bottom, it appears that at least in North America, the worst of the retail inventory destocking is behind us. That said, we expect our inlay partners to continue reducing their IC inventory in the Q4 even as they deliver into that improving retail demand. Looking into 2024, we see secular growth in both parcel tracking and retail, The latter buoyed by self checkout driving 100% tagging and a general merchandise expansion. Turning to systems, 3rd quarter rear end gateway revenue was slightly below our expectations due primarily to macro headwinds Slowing partner led deployments.

Speaker 2

Our enterprise engagements continue to be a bright spot, led by expanding parcel tracking at the 2nd supply chain and logistics end user, self checkout and loss prevention at the Visionary European retailer and a successfully concluded self checkout deployment at the Asia based global retailer. Looking to the Q4, we expect a sequential decline in reader and gateway revenue due to continued weakness and our partner Led Reader deployments and unfavorable delivery timing to our enterprise end users. Looking farther out, We will continue investing in solutions that leverage our entire platform, working hand in hand with Lighthouse Enterprises to solve their previously unsolvable business problems. Those efforts paid dividends in 2023, both in systems and recurring endpoint IC volumes and we expect that trend to continue in 2024. I remain confident that our focus on Enterprise Solutions will yield further dividends in the years ahead.

Speaker 2

3rd quarter reader IC revenue declined as we expected due primarily to weak macro demand in China and our Partners continuing their transition from our older indie product line to our new Impinj e family. Looking to the Q4, we see similar reader IC revenue to 3rd quarter with China demand remaining soft and our partners focused on selling down their indie based product inventory before fully ramping sales of e family based designs. That said, we're pleased with the pace of our e family design wins and our traction with emerging opportunities. Turning to our intellectual property dispute with NXP, we prevailed in Washington, California and China. The California court issued post trial rulings instructing the parties to agree on a monetary award to impinge Upholding the jury verdict in our favor on one patent, but denying our request for an injunction and ordering a retrial on a second patent's validity, while upholding its infringement and willfulness verdicts in our favor.

Speaker 2

We appealed the injunction denial, requested an ongoing royalty and are pursuing further damages from NXP's Dutch affiliate. The first of 3 Texas trials involving 3 impinged patents versus 2 patents NXP recently licensed from a third party starts next week. Overall, we remain confident in our position and anticipate seeing the litigation through to a successful outcome. In closing, despite the macro headwinds impacting our 4th quarter outlook, we see signs of retail demand improvement, Expect strong annual endpoint IC unit volume growth and remain optimistic for the future. As I said earlier, We as a company have been through industry cycles before and have come through each of them stronger.

Speaker 2

With excitement for the future, our leading market position and the strength of our platform and strategy, I have no doubt we will do so again. Before I turn the call over to Carey Our financial review and Q4 outlook, I'd like to again thank every member of the Impinj team for your constant effort driving our bold vision. I feel honored by my incredible good fortune to work with you. Cary?

Speaker 1

Thank you, Chris, and good afternoon, everyone. On today's call, I will review our Q3 financial results and Q4 financial outlook. 3rd quarter revenue was $65,000,000 down 24% sequentially compared with $86,000,000 in Q2 2023 and down 5% year over year from $68,300,000 in Q3 2022. 3rd quarter endpoint IC revenue was 48 point $6,000,000 down 25 percent sequentially compared with $64,900,000 in Q2 2023 and down 5% year over year of $51,200,000 in Q3 2022. Looking forward, while we typically see 4th quarter endpoint IC revenue decline sequentially, This year, we expect improving inlay partner demand to drive an increase.

Speaker 1

3rd quarter systems revenue was 16,400,000 down 22% sequentially compared with $21,100,000 in Q2 2023 and down 4% year over year $17,100,000 in Q3 2022. 3rd quarter systems revenue was slightly below our expectations, driven by weakness in our Speedway reader business. On a sequential basis, revenue decreased across all product lines. On a year over year basis, Gateway revenue increased while reader IC and reader revenue decreased. Looking ahead, we expect a sequential decline in 4th quarter systems revenue led by weakness in our partner led reader business.

Speaker 1

3rd quarter gross margin was 50.5% compared with 53.3% in Q2 2023 and 56.9% in Q3 2022. The sequential decrease was driven by lower revenue on fixed costs. The year over year decrease was driven by lower endpoint IC product margins, specifically a smaller specialty and industrial IC mix and lower systems product margins driven by increased costs. Looking to the Q4, we expect our gross margin to increase. 3rd quarter operating expense was $32,600,000 compared with $35,900,000 in Q2 2023 $29,000,000 in Q3 2022.

Speaker 1

Effective spend management across all major functions drove the lower than expected operating expense. Research and development expense was 15,500,000 Sales and marketing expense was $7,300,000 General and administrative expense was $9,700,000 including litigation expense of $3,400,000 We expect a sequential increase in 4th quarter operating expense due in part to increased litigation spend. 3rd quarter adjusted EBITDA was $300,000 compared with $10,000,000 in Q2 2023 and $9,800,000 in Q3 2022. Delivering positive adjusted EBITDA despite the significant revenue headwinds this quarter is a testament to both the strength of our business model and the execution of our team. 3rd quarter GAAP net loss was 15,800,000 3rd quarter non GAAP net income was $100,000 or $0.00 per share on a fully diluted basis.

Speaker 1

Turning to the balance sheet. We ended the Q3 with cash, cash equivalents and investments of $113,200,000 compared with $114,900,000 in $6,800,000 down $5,500,000 from the prior quarter. 3rd quarter net cash due by operating activities was 1,700,000 Property and equipment purchases totaled $2,800,000 Free cash flow was negative $4,500,000 Before turning to our Q4 guidance, I want to highlight a few items unique to our results and outlook. First, as Chris mentioned, Our partners made progress reducing their endpoint IC inventory in Q3. We expect them to continue reducing their endpoint IC inventory in the Q4.

Speaker 1

That reduction will position us well to capitalize on the large number of partner M800 inlay designs currently in certification and to begin ramping the M-eight hundred in 2024. 2nd, our 3rd quarter inventory decreased with lower endpoint IC inventory more than offsetting higher systems inventory. Looking to the Q4, we anticipate Further reducing our overall inventory, again with declining endpoint IC inventory more than offsetting a small increase in systems inventory. We are confident inventory will normalize as demand recovers. Finally, we recently launched our first ESG materiality assessment, surveying a cross section of our investors, customers and employees on ESG matters that are important to them.

Speaker 1

Impinj is strongly committed to ESG. At the same time, we view our journey as a partnership with all of our stakeholders to build a strong EST roadmap for the future. Turning to our outlook. We expect 4th quarter revenue between $65,500,000 68,500,000 compared with $65,000,000 in Q3 2023, a 3% quarter over quarter increase at the midpoint. We expect adjusted EBITDA between a loss of $900,000 and a profit of $700,000 On the bottom line, we expect non GAAP net income between a loss of $1,200,000 and a profit of $300,000 reflecting non GAAP fully diluted earnings per share between a loss of $0.04 and a profit of 0 point 0 $1 In closing, I want to thank the Impinj team, our customers, our suppliers and you, our investors, for your ongoing support.

Speaker 1

I will now turn the call to the operator to open the question and answer session. MJ?

Operator

Thank you. We will now begin the question and answer session. As a courtesy to others, we ask that you limit yourself to one question and one follow-up. If you have additional questions, please re queue and we will take as many questions as time allows. At this time, we will pause momentarily Today's first question comes from Harsh Kumar with Piper Sandler.

Operator

Please go ahead.

Speaker 3

Yes. Hey, Chris, Gary and the team at Impaint, you guys sound a lot better this time around. Looks like progress is in sight. Thanks, Hart. Thanks, Chris.

Speaker 3

I had a quick question. Could you give us I know you guys were working on destocking your inventory at the Inlay Partners, and I know you talked about it in the script. But could you give us a sense of how much is left in the system and how much do you think you might have left in the December quarter? How much you want to take out in the December quarter? In other words, If none of this had happened, where would your real revenues have been in the December quarter?

Speaker 1

Hey, Harsh. Thanks for the question. This is Terry. I think I'll take that one. Our progress in burning down channel inventory in Q3 was mix.

Speaker 1

We had some partners on track or ahead of schedule and some behind. In aggregate though, we burned down less than I expected going into the quarter. Based on our estimate of demand, We will take out more channel inventory in Q4 and anticipate our large partners exiting the year reasonably healthy. Our smaller partners, however, may take a little more time to get healthy. We're not given a specific number of weeks Channel inventory because those are based on our estimates of demand and that demand environment remains very fluid at this point.

Speaker 1

So But at the end of the day, we're making good progress on reducing channel inventory.

Speaker 3

Great. Thank you. And it's good to hear you think you'll be done by And then I had a second one. Your largest one of your largest customers reported this afternoon and they also seem to imply that we're close To bottom on the retail apparel issues and things are actually starting to look up just kind of like you mentioned. But I was curious, I can get your thoughts on the topic.

Speaker 3

How believable do you think this is this time around? Are you seeing independent validation of this outside of what your partners And then also they seem pretty excited about food as a category as well. Could you also comment on that? And I'll get back in line.

Speaker 2

Yes. Thanks Harsh. So we and our largest customer are seeing roughly the same thing. We obviously talk to our direct inmate partners, but we also talk to end users. I was just at the wireless IoT event in Germany last week, met with several of our end users.

Speaker 2

And although the macro environment is still difficult and as we said in our prepared remarks, still too early to call bottom, We do see improving demand out there. Our direct our end users are They see things picking up a little bit. Import data and sales out data at least in the U. S. Are starting to normalize.

Speaker 2

And so we're feeling those green shoots. But like we said, it's too early to call bottom. I guess I'd like to add that North America seems to be Well ahead in terms of the correction. Europe feels behind and certain parts of Asia are mixed obviously because Asia is large, but China is So time will tell, but I'm personally feeling pretty good that things are improving out there in the market. On the food side yes, okay, go ahead.

Speaker 2

I'm sorry.

Speaker 3

No, no, no, that was it.

Speaker 2

Okay. On the food side, we do see food as an opportunity. There are 2 aspects to food. One is tracking items at the pallet, carton and case level. And we have been categorizing those food opportunities in What we call supply chain and logistics because it's primarily moving the food items around.

Speaker 2

There are also food opportunities in direct item tagging. And those opportunities are moving forward. We have not commented on them directly in our calls because I I feel it's a little bit premature to be citing some of these opportunities when they're just starting to get going, but they are certainly out there. And as they come forward, I can guarantee that some of them are going to be quite large. But our preference is to focus right now on where we actually see the movement, which is on the pallet card in that box And to kind of keep our powder dry on the individual food opportunities, which of course, like I said, can be much larger, but I think it's premature.

Speaker 3

Thanks, Sherry and Chris. Thank you.

Speaker 2

Thank you.

Operator

The next question comes from Toshiya Hari with Goldman Sachs. Please go ahead.

Speaker 4

Hi, good afternoon. Thanks so much for taking the question. I wanted to follow-up on how to think about inlay partner inventory and I guess your sell in going forward. Carrie, I think you mentioned that you expect your large partners to exit the year with relatively healthy inventory, but perhaps some of your smaller partners To have maybe access inventory at the end of the year. Did I catch that right, 1st of all?

Speaker 4

And then second of all, assuming your large partners exit the year in a healthy spot And you're selling into, I guess, sell through starting Q1. How should we think about the sequentials in your endpoint IC business in Q1? And I guess any preliminary results on 2024 for your Endpoint IC business would be super helpful as well.

Speaker 1

Yes. Thanks, Toshiya. This is Carey. So yes, you got it right. The larger inlay partners, we expect to exit the year reasonably healthy.

Speaker 1

The smaller inlay We're knitting here and guide just 1 quarter at a time. The market remains very dynamic. We're just now starting to see improvement in endpoint ICs, While our systems are remaining soft, and that's not unlike what we saw as we exited COVID. The endpoint ICs recovered before systems did, But we're still in the early stages of what we hope to be a recovery. So we're not going to lean too far forward on our guidance for beyond Q4 at this point.

Speaker 2

Joshi, I will point you to my prepared remarks where we lean in about as far as we want to where I said looking into 2024, this is with respect to our Looking into 2024, we see secular growth in both parcel tracking and retail and then cited The self checkout driving 100 percent tagging and expansion in general merchandise. Of course, we anticipate seeing a pickup in retail apparel as well, Driven by more than just 7% tagging due to self checkout, but that is a driver as well. And so we are Guardedly optimistic for 2024, but I think that's about as far as we want to go right now.

Speaker 4

Got it. That's very fair And helpful. As my follow-up on gross margins, Carrie, you talked about Q4 being up sequentially. I was hoping you can kind of walk through the Puts and takes not only for Q4, but also over the next couple of quarters. If you can kind of touch on your expectations for foundry costs or wafer costs, Your pricing profile going forward and you talked about M800 coming in starting next year, but how can that help your gross margin profile Over the next couple of quarters?

Speaker 4

Thank you.

Speaker 1

Yes. I got this, yes. So as I look to start with Q4, I think gross margin

Speaker 2

is going to increase.

Speaker 1

If you think back to my guidance on Q3 gross margin, I signaled that we'd be impacted by 2 things. First, we'd have lower revenue scale against fixed cost in our operating cost structure. And then we had a softer mix of product, particularly reader IC. As I look into the Q4, I think our Product mix normalizes, so we get some of that back, but we're still subscale at a guide midpoint of 67,000,000 So that's the dynamic. We'll see a little bit of lift, but I don't anticipate us getting back

Speaker 2

to the 53%

Speaker 1

that is our targeted level right now. As I look into 2024, I expect the mix to continue to be normal. I expect Eventually, revenue to start growing again as the retail market recovers. And as we grow back into the revenue level that we were in the first half of this year, I would expect to get the full realization of scale in our gross margin. And that takes us back to that 53 Percent targeted range.

Speaker 1

Now on top of that, as the M800 layers in, I expect gross margin to further improve. We're at the very early days of the M800 ramp. Most of our partners are still in the certification or qualification process. So we're not really shipping M800s at this point. As they make their way through that qualification process, we'll start shipping in and then the demand will start ramping.

Speaker 1

I will keep you up to date on our progress on that ramp.

Speaker 2

Yes. And when Carrie says we're not really shipping M800s yet, it really Relative to the overall opportunity in front of SRAM 800 which is quite large, the ramp has started and we have smaller opportunities out there going now, But our direct partners are waiting for certifications and approvals. And they're all in the approval cycle right now, for the most part in the approval cycle right now. And as those approvals start coming through, We expect the ramp to accelerate.

Speaker 4

Thank you so much.

Speaker 2

Thank you. Thanks, Bashir.

Operator

The next question comes from Jim Ricchiuti with Needham and Company. Please go ahead.

Speaker 1

Thank you. I think

Speaker 5

earlier in your script, you talked about steps you're taking to Improved demand forecasting and inventory management. I was just wondering if you could elaborate on that.

Speaker 2

I will start with the demand forecasting and I'll probably let Terry layer in as well. On the demand forecasting side, When the market turned earlier this year, it wasn't just we who We're who didn't anticipate the magnitude of the decline. It was our direct partners. Well, when I was at this conference just last week, I had many of our partners and partners and service providers basically say they didn't see it coming. And I'm feeling personally we should have seen it coming.

Speaker 2

We should have seen it coming at least better than we did and it's a learning experience for us. We were significantly relying on our industry's view. What I want to do now is rely both on our industry's view and a lot more on the macro view, Leveraging what our enterprise end users are saying directly, trends in the overall market, trends in the retail market, trends in the supply chain and logistics market And take into account at a higher level, what the macro is doing and use that to kind of set a basis for ourselves. So be more forward looking In terms of what we're doing from a larger macro perspective. I'm not saying we did anything wrong in the past.

Speaker 2

We did everything we could do in terms of engaging with our partners and working with them and understand what they expected their demand to be, but I want to layer on top of that overall understanding of the broad market because Frankly, that's what we're selling into right now. We are selling into the retail macro. Cary, you want to make a point on inventory management?

Speaker 1

Yes, Jen, this is Carey. So on the end of the channel inventory side, we're doing multiple things. We're increasing the frequency of our channel inventory reporting so

Speaker 2

we can Stay closer to,

Speaker 1

call it, sudden swings in the channel inventories, which will help inform demand planning as well. We're also going reaching further into our distribution model, if you will, to talk to customers and partners beyond our inlet partners, our direct to understand how their demand is trending, how their inventory levels are, all in an effort to better inform How we and our partners run the level of inventory in the channel.

Speaker 5

Got it. My follow-up question. Chris, Amazon recently talked about their use of RFID for this, Just Walk Out Technology Solution. Can you comment at all if you're working with them? And if you can't Talk specifically about it.

Speaker 5

I'd be curious just to get your perspective on their comments about this RFID application.

Speaker 2

So Jim, to the first part of the question, I obviously can't say anything about any particular That has been identified publicly as associated with us or not associated with us. In terms of the broader opportunity, I have always firmly believed that the Just Walk Out solution or whatever you want to call it in different opportunities will include both a combination of RAIN RFID and Vision. It just makes logical sense. If you use RAIN RFID, you could tag individual items and for example, for a meat product or something like that, we know exactly what the item's cost is because The guidance cost is attached to the tag. The vision system can just tell you what the item is, not its weight.

Speaker 2

For loss prevention opportunities, we can identify the item being stolen, but can't tell you anything about the person stealing it. A vision system can tell you about the person stealing it And not much typically about the item. So I see going forward the opportunity to blend the 2 technologies together to provide an overall just walk out opportunity which will include loss prevention as we're driving into. So without speaking about any one company's I will say again that I had several meetings last week around this overall opportunity To speed consumer checkout and quite frankly to delight consumers in their shopping experience And those conversations all relied on the same thing. It's a combination of RAIN RFID and Vision Systems and self track out to drive an overall positive customer experience.

Speaker 2

Got it. Thank you. Okay. Thank you, Jim.

Operator

The next Question comes from Mike Walkley with Canaccord Genuity. Please go ahead.

Speaker 6

Great. Thanks. It's Good to hear some of the GreenChute comments. But Chris, I'm going to switch gears a little bit. Just you mentioned updates with NXP.

Speaker 6

Pete, can you help us maybe frame the opportunity there? You talked about a potential monetary award. Is this something maybe you you could reach a royalty type agreement with them over time. And I know you're trying to go back after the injunction and maybe you could share with us how Your customers feel about the potential of an injunction with NXP if you're able to meet demand should an injunction happen down the road?

Speaker 2

Yes, Mike, thank you. And I'm going to pause here a little bit because those are difficult questions for me to answer Given that we're in the thick of it right now, I'll say a few things and then I'll turn it back to you to kind of follow-up, but I'll answer what I can. In terms of the monetary award in California, the jury initially awarded us roughly $18,000,000 in damages and lost profits. The judge went back and said there are some foreign sales that shouldn't be included in there and instructed the parties to get together and discuss what the actual damages of gross profits And that came out to be roughly $13,100,000 subject still to ongoing appeals, but that would be the amount in the California case. Our California case was against NXP USA.

Speaker 2

It did not include the NXP Dutch Affiliate, which whose sales are much larger. So we have filed suit on the same patents against NXP Dutch affiliate. We do no longer we don't need to litigate the patents in that case anymore. We will just be litigating the damages and lost profits amounts coming to us. And that patent that case has not been scheduled yet, but we look forward to it Happening hopefully soon and getting awarded significantly additional damages and loss profits.

Speaker 2

In terms of a settlement with NXT, I can't really comment on anything at this time. Like I said, we're in the thick of it and anything I say could be construed one way or another or another in our damage. In terms of the overall market, we are obviously in discussion with our in light partners and service bureaus. I can't speak for NXP, but I would imagine they are as well. We obviously want to see the market continue to grow and go forward.

Speaker 2

At the same time, we feel it is very important to protect our intellectual property. And I will note that in California, one of the patents was sound to be willfully infringed. So, we're in this delicate situation where we want to drive the market, but at the same time we want NXP to respect our intellectual property. We are navigating that dynamic as best we can and navigating a resolution as best we can and confident in our case I'm confident in the eventual outcome. I'll turn it back to you to see if you have a follow-up or if there's anything I can answer a little bit more, but I'm not trying to go much further.

Speaker 6

That's very helpful to help us think about it. I'll switch gears for my second question. Just maybe for Carrier, just the overall team. I know we're in Q4 now and it's a time when you start to negotiate pricing and You have new products come in like the M800. Any thoughts on how we should think about endpoint pricing in 2024 versus 2023 or

Speaker 2

is it Too early to tell.

Speaker 1

Hey, Mike, this is Terry. I can take a shot at that. So historically, if you go back multiple years, We've seen ASPs decline annually, call it, the low to mid single digit range. Those declines have been accompanied by wafer cost downs. And that's how we've been able to maintain and improve gross margin over the years.

Speaker 1

Over the last couple of years, however, we've been in an inflationary environment. As a result, our ASPs have actually gone up. We're still in that inflationary environment As we're not expecting a wafer cost down this year. As we go into those conversations, which are happening Not just happening now, they're in constant dialogue with our partners. But as we go into those types of pricing discussion, our goal remains the Same.

Speaker 1

We need to maintain the integrity of our margin model.

Speaker 6

Great. That's helpful. Thanks for taking my questions. I'll pass the line.

Speaker 1

Thanks Mike. Thanks Mike.

Operator

The next question comes from Scott Searle with ROTH MKM. Please go ahead.

Speaker 7

Hey, good afternoon. Thanks for taking my questions and congratulations on a nice job in a tough environment.

Speaker 2

Thank you. Thank you, Scott.

Speaker 7

Hey, guys. Maybe to start digging a little bit on the green chute, starting to clear the decks for M800 adoption. I was wondering if you could dive in on that a little bit more, some more details in terms of, what you're seeing in terms of the interest level, the timing of the adoption cycle and how that's teeing up Additional services such as Authenticity going forward.

Speaker 2

Hey, so I'll start here and I'll let others jump in. So In terms of the M800 itself, there is very high excitement level about that product out the market. I had multiple of our partners, direct partner and service peers talked to me about NM800 and said you guys have created an incredible chip. It has better sensitivity, better overall performance, better reliability, quality. It's just that we're really excited about this product.

Speaker 2

It's not that Well, we did badly in any of our prior ones. It's just this one. I feel really good about where we are. And in some ways, it's not really that surprising because we did our 1st chip the M700 in a 65 nanometer node, 1st chip in that node. Every time you do something the first time you're cautious.

Speaker 2

So you don't pull out all the stops. We turned that 800 and we pulled out all the stops. Our partners see it. In terms of where we are in the market, our leading partners have multiple inlay designs. Those inlay designs are in certification, both in the U.

Speaker 2

S. And at the University of Auburn, at their ARC lab, at direct end customers and in Europe in the same. There is a lot of enthusiasm for that product. And so the pace of adoption will be paced by how quickly Those inlays get through certification and qualification at the end users, but as Carey noted, we expect to see a ramp Starting significant ramp starting early next year. It's a little bit early to size the pace, but I'm guardedly optimistic that M800 will rapidly become our key volume.

Speaker 2

In terms of the authentication opportunity, that is our M775, which is basically our M700 series with an authentication engine built in. We have multiple use cases right now in tax tracking, healthcare and specialty food applications. We've seeded the market. We've shipped a significant number of chips into the market. That product will go kind of Through the typical S curve of adoption where we see the market, the opportunities are there and then they get qualified and used in and then it picks up.

Speaker 2

And so we're in that Seeding the market and getting going. We also see other opportunities out there in fashion apparel and footwear and pharmaceutical And others. So I am excited for that product. That said, because it's a completely new offering, Really the first general purpose authentication I see. I don't think you should expect a super rapid pace of adoption because we've got to get in front of customers We are now and our partners are as well.

Speaker 2

So basically educate them in terms of what this thing is and what we've done for the market. That's going to take a little bit of time. Just as a fun fact, I had last week one newest partner come to me without citing any of the details, I'm raised the opportunity again of, well, can't you put this chip into currency to protect against counterfeit currency? And of course, that opportunity is way out in the future and not prepared to do that and the chips has to be made dinner and more there's a lot of things you have to do. But we've got partners who are thinking at that level That the M-seven seventy five with its authentication capability is a game changer and that's what I really like.

Speaker 7

Perfect. Very helpful. And as a follow-up, I think you indicated that this year despite the headwinds, you're still anticipating endpoint IC growth in the ballpark of 29% CAGR, which has been in the historic range. Yes, as we look to 2024, you've got some other items that are coming on board, In terms of general merchandise, big logistics customers starting to ramp up. I'm wondering if you could kind of give us some benchmarks in terms of how we should be thinking about 2024, is it an inflection year that we start to see this start to accelerate beyond that historic rate?

Speaker 7

Thanks.

Speaker 2

I'm almost prepared to quote Lincoln, with excitement for the future, but no prediction with respect to it is ventured. We feel excitement for 2024, as I said in my prepared remarks, but we guide 1 quarter at a time and I don't want us to get too far ahead of ourselves. Kerry, anything you'd add?

Speaker 1

I'd just reiterate that, as Chris said, that the opportunities are there for secular growth for additional programs But the market is still pretty dynamic right now. We're still seeing the softness in our systems business while retail start or while endpoint XCs are starting So just given that dynamic nature, we're going to hold off on

Speaker 2

leaning too far into the future at this point. And I think Lincoln said with optimism, Future, not excitement, but I misquoted him a little bit. Sorry.

Speaker 7

That's okay. It sounds like you guys have some excitement and optimism. So thank you.

Operator

The next question is a follow-up from Harsh Kumar with Piper Sandler. Please go ahead.

Speaker 3

Yes. Hey, Chris, I wanted to go back to the question that Just asked about the growth for endpoint IC in 2023. I think Correct me if I'm wrong, but I heard 29% endpoint IC growth for the business in 2023. Is that accurate?

Speaker 2

What we said was we expect our endpoint IC volumes to be consistent with our industry's Historical unit volume CAGR. The historical CAGR has been 29%. We didn't peg ourselves at 29%. What we basically said is we're implying a range around that number. But in the general vicinity of our the historical industry unit volume taker without citing an accurate number and not to be within like 1 Accuracy or something like that.

Speaker 3

Okay.

Speaker 2

But the historical CAGR has exceeded 25%. If you look back years years, right now it's in the range 29%, depending on what each year brings. And so we expect ourselves we expect our unit volume growth

Speaker 3

So as I'm looking at my model and the reason why I asked This question was, as I'm looking at my model, for me to be close to that number of 29%, call it even 27% or 28% implies a pretty Significant sequential uptick in the December quarter, somewhere in the neighborhood of 30% to 40% sequential uptick. Is that how we should think about Your guidance or am I missing something here in the middle?

Speaker 1

I think something may be missing And that because it's not that type of a volume increase in the Q4. Last year included a high mix of Specialty and Industrial IC. So that impacted revenue, but not the unit volume. So you have to make sure that these normalized for that. And then if the commentary we've made throughout this year on unit volume growth, you can roughly estimate what we're thinking

Speaker 2

Fair enough. Thanks. Parekh, I'll add. Kerry's point is spot on about specialty. But the one point I want to add is that the fact that we're able to deliver Growth in unit volumes in a significantly down market is what gives us significant confidence and our long term opportunity.

Speaker 2

We're driving Massive improvements at enterprise end users in terms of them being able to track every item they manufacture transport and sell. And even in a down market, we still see growth in that opportunity. We see our large North American slide channel logistics end user We're continuing to press forward because of the value proposition that Rayna Rfid brings, which is why we're bullish on the long term future. It's unfortunate. We have to go through the pain of this current downturn.

Speaker 2

We're down with the retail market overall. We remain excited about our long term opportunity.

Speaker 3

Understood, guys. Thanks for the clarification. That wasn't what I had pressed the buttons for to ask, but Todd's question was interesting, so I jumped on it. But I know you don't want to talk about 2024, but you are citing Sort of thing is green shoots and you are citing some numbers for the industry unit volume of your unit volume of 20 high, call it high 20s. Maybe you could help us think about how we should think about 2024 as a year that's coming off the bottom.

Speaker 3

Would you expect yourself to do better than the industry numbers in 2024 as everything rebounds? Would the growth rates be in excess? And then what's a good growth rate for the systems business and if there's any seasonality that we should think about with your business in 2024?

Speaker 2

Harsh, you fix the retail market And we'll do the rest. No, but in all seriousness, we're just coming through Very difficult environment. Where we said in our prepared remarks, it's too early to call a bottom. Field green shoots, We really can't estimate the pace of that turnaround. It depends on factors that are so much larger than us.

Speaker 2

Macro factors in terms of retail, in terms of spend, in terms of government spending, there's just too many variables in there. What I believe we can say We see unit volume CAGR growth in a difficult market this year And we fully anticipate there will be significant unit volume growth next year. Magnitude of it, exactly what it turns out to be, exactly where it's going to be and everything, it's far too early for us to predict. But our industry has grown year over year, every year since 2010 in terms of unit volumes, and we have no doubt that 2024 will follow the similar trend. I just can't peg where it's going to be.

Speaker 3

Great. That's it for me. Chris and Carey, thank you for all the input today.

Speaker 6

Thank you, Harsh.

Operator

The next question comes from Natalia Winkler with Jefferies. Please go ahead.

Speaker 8

Hi, guys. Thanks for taking my question. So the first one was just on the logistics end market, right? It sounds like given the retail is kind of weak, this is where we see a lot of the spotlight. So Could you guys speak about the opportunities beyond this project that you're seeing ramping right now?

Speaker 8

How is your engagement with maybe some of the other potential customers there? And what is is like at which point of this current ramp do you think you will see sort of any potential further inflection in demand in that logistics end market.

Speaker 9

Hi, Natalie. This is Jeff. I think I'd first reiterate what we've said often, which is the pace and timing of New enterprise deployments is very hard to predict. But what I will say is That the supply chain and logistics industry is engaged and closely monitoring what others in the industry are doing that would impact their competitive opportunity in the same marketplace. So I'm encouraged by the level of engagement that we have with other supply chain and logistics organizations that are considering how Impinj platform and RAIN RFID can help them improve their competitiveness in a difficult market.

Speaker 2

Natalie, this is Chris. I'm going to add one or Natalia, I'm sorry. This is Chris. I'm going to add one thing. If you look at our markets, our industry's history, it's generally been the case That one of our small number of end users have caused a segment to go.

Speaker 2

So if I look at retail opportunity, it was Macy's and Marks and Spencer and Decathlon back in the early days. If I look at Aviation, it's led by Delta Airlines and then KLM Air France joined in and then IATA voted that all member airlines would follow court Now of course that's been stalled by the setback that we had during COVID time. It was the same in the automotive space With a small number of automotive companies, led for example by Volkswagen, to drive forward. And so our industry tends to get pulled When a giant end user decides to adopt and basically proves the use case. And so, all I can guarantee that's what's going to happen here again suggests comments.

Speaker 2

Others are watching closely and are engaging. And so, we're doing everything we can to make this first opportunity successful And then to pursue everything else we can in the supply chain and logistics space.

Speaker 8

Awesome. Thank you. This is super helpful. And then the second one, could you guys Provide an update on the Voyantec acquisition like how has that been and how are you seeing maybe any kind of integration or revenue potential there?

Speaker 2

So the Voyantec integration from both my perspective and I spent time last week with I'm Yuka, Voyantec's CEO. The integration is going well. Teams are working well together. We started with the financial integration, HR integration, IT integration just because Landig was running just fine before we acquired them. And as we go forward, we are going to be significantly focused on improving the quality, reliability and performance of labels in the market, Easing the design process and helping ensure to enterprise end users that the labels that they deployed with the ICs that are in them and the hope set of the deployment It's sufficiently reliable for them to base their business on it.

Speaker 2

And so we have very high hopes for the future, close integration between the teams to drive Enterprise adoption and our solutions focus as a company by adding that quality, reliability and perform manufacturability and performance to the equation that we already were bringing to bear, which is the endpoint ICs, the reader ICs, the reader's gateways and the software. So it's just a piece of the puzzle that we think makes a stronger whole solution.

Speaker 1

And Natalia, this is Carey. In addition to the strategic benefits that Chris just outlined, From a financial perspective, it's gross margin accretive, it's operating margin accretive, it's checking all the boxes for us.

Speaker 2

They are a good team.

Speaker 8

Awesome. Thank you.

Speaker 2

Thank you, Natalia.

Operator

The next Question is a follow-up from Scott Searle with ROTH MKM. Please go ahead.

Speaker 7

Yes. Just a quick follow-up on Harsh's question on the systems side. Chris, This business has tended to be a little bit lumpy and depending on where customers are, it's kind of been a little erratic sometimes from quarter to quarter. But the general direction seems like it continues to build. I was wondering if you could give us some metrics or help us frame a little bit How big the opportunity is today?

Speaker 7

How does that pipeline look like on the project and the systems front versus maybe where we were at the start of the year or 12 months ago? Thanks.

Speaker 2

Yes. I'm going to start that with an overall strategic perspective and then I'll hand off to Jeff in terms of Just any comments you want to say on the pipeline, but I'd like to start kind of with where we are strategically. We as a company are focused on enterprise solutions, enabling enterprise end users, the likes of our large North American supply chain and logistics end user to successfully deploy a solution that completely delights them and their customers. And so our systems business is really the tip of the spear that gets us into those accounts, helps us invent solutions to hard business problems, as I said in my prepared remarks, and drive That use case drives a solution to that problem which drives the use case and then flow our learnings down to our reader ICs over time Such that we can enable broad market adoption of that particular solution and use case and then step on to the next. So as you think about what we're doing with readers and gateways, The focus is on Enterprise Solutions.

Speaker 2

We typically don't give that pipeline numbers in terms of where we are and things like that, but I'll let Jeff say maybe a few words on kind of the overall systems business and opportunity.

Speaker 9

Thanks, Chris. I'd start with That our systems pipeline remains strong. To Chris' point, our strategy of engaging with Visionary Lighthouse Enterprises to solve previously unsolved problems is reflected increasingly in our systems pipeline. That is the proportion of our overall pipeline that is represented by these large enterprise engagement opportunities is increasing. It is strong.

Speaker 9

I would say that the broader pipeline broader reader and reader and gateway channel pipeline reflects some of the impact of the macroeconomic that is It is not growing currently at the same rate as the large enterprise engagements in our pipeline. I think, Can't predict when, but I think sometime in 2024, when overall macroeconomic conditions improve, We'll see a return to the growth in the broader channel partner led reader and gateway pipeline.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Co Founder and CEO, Chris Diorio, for any closing remarks.

Speaker 2

Thank you, MJ. I'd like to thank you all for joining the call today. I hope you and your loved ones are and remain safe and well.

Remove Ads
Powered by Quartr
Earnings Conference Call
Impinj Q3 2023
00:00 / 00:00
Remove Ads