Impinj Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 23, 2024

There are 11 speakers on the call.

Operator

Welcome to the Impinj Third Quarter 20 24 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, Gary. Good afternoon and thank you all for joining us to discuss Impinj's Q3 2024 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 financial results and Q4 outlook. We will then open the call for questions.

Speaker 1

Hussein Mekhli, Impinj's COO will join us for the Q and A. 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. Whereas 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.

Speaker 1

We describe these risks and uncertainties in the annual and quarterly reports we file with the SEC. 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. All balance sheet and cash flow metrics except for free cash flow are GAAP. Please refer to our earnings release for a reconciliation of non GAAP financial metrics to the most comparable GAAP metrics.

Speaker 1

Before turning to our results and outlook, note that we will participate in the Baird 2024 Global Industrial Conference on November 13 in Chicago and the UBS Global Technology Conference on December 4 in Scottsdale. 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. Our Q3 results were strong with revenue and profitability well above our guidance. Excluding last quarter, with its $15,000,000 licensing revenue, 3rd quarter revenue and adjusted EBITDA both set new records. Strength in supply chain and logistics, steady growth in retail general merchandise and continued secular growth in both apparel and long tail applications drove these strong financial results. As Carey will highlight, these results again demonstrate the leverage in our operating model.

Speaker 2

Starting with silicon, 3rd quarter M1 IC product revenue exceeded our expectations. We expect M point IC revenue to decline modestly versus 3rd quarter with typical seasonal trends partially offset by market strength. We also expect continued M-eight hundred adoption as more M-eight hundred based inlays achieve market qualification. Turning to reader ICs, 3rd quarter volumes exceeded our expectations, driven by stronger than anticipated demand for both Indy and e family ICs. Looking to 4th quarter, project timing at the large supply chain and logistics end user will push e family revenue lower.

Speaker 2

Longer term, as we wind down our legacy IndyICs, we see continued e family adoption across the broad rain market. On solutions, we expect the current phase of the visionary European retailers ongoing rollout of our self checkout and loss prevention solution to spike in the Q4, driving strong Q4 gateway revenue and growing endpoint IC volumes. At the large North American retailer, IC volumes continue ramping, driven by expanding general merchandise tagging. And we see the 2nd large North American supply chain and logistics end user increasing label consumption this year and next. These very public enterprise successes are driving additional Fortune 500 Enterprises to us, both in existing markets like retail general merchandise and new ones like perishable foods and with them endpoint IC volumes.

Speaker 2

Our enterprise account pipeline is much larger today than our current base. Expect us to continue investing in enterprise solutions, including software and cloud services that we believe are key to our long term success. Touching now on the broader market, our conviction in food tagging continues buoyed by multiple supply chain and quick serve restaurant rollouts

Speaker 1

as well as grocery parents.

Speaker 2

While we are still in the early days, the endpoint IC opportunity is at least an order of magnitude larger than any of today's markets. In retail general and merchandise, we continue seeing retailers piggyback on the pioneering rollout at the large North American retailer. And Qualcomm's statement about RAIN reading and mobile devices galvanized expectations of RAIN as a digital product passport data carrier. It also peaked retailer interest in engaging consumers through their connected items. At the recent RAIN Alliance meeting at Florence, I highlighted one potential use case, which is consumers crowdsourcing their location of items in our everyday world.

Speaker 2

Think Bluetooth trackers, no additional cost and with 10,000 times today's footprint. With overall rank penetration still less than 1% of the total connectable market, we remain laser focused on winning the race to connect everything. In closing, we delivered a very strong Q3. Our solutions focus continues paying dividends and I am personally heartened by the consumer opportunity, which I've been touting for what feels like ages finally seeming within reach. Looking ahead, we see continued secular endpoint IC growth, category expansion and burgeoning solutions opportunities.

Speaker 2

As we continue driving our bold vision, I remain confident in our market position and energized by the opportunities ahead. Before I turn the call over to Carrie for our financial review and Q4 outlook, I'd like to again thank every member of the Impinj for your tireless effort. As always, I feel honored by my incredible good fortune to work with you. Gary?

Speaker 1

Thank you, Chris, and good afternoon, everyone. 3rd quarter revenue was $95,200,000 down 7% sequentially from $102,500,000 in Q2 2024 and up 46% year over year from $65,000,000 in Q3 2023. 3rd quarter endpoint IC revenue was $81,000,000 down 9% sequentially from $89,400,000 in Q2 2024 up 67% year over year from $48,600,000 in Q3 of 2023. Excluding the $15,000,000 second quarter licensing revenue, endpoint IC revenue grew 9% sequentially. Looking forward, we expect Q4 endpoint IC revenue to decline, but on the favorable side of normal seasonality.

Speaker 1

3rd quarter systems revenue was $14,200,000 up 9% sequentially from $13,100,000 in Q2 2024 and down 13% year over year from $16,400,000 in Q3 2023. Systems revenue exceeded our expectations driven by strength in both test and measurement and reader IC sales. Looking forward, we expect 4th quarter systems revenue to increase sequentially. 3rd quarter gross margin was 52.4% compared with 58.2% in Q2 202450.5 percent in Q3 2023. The year over year increase was due primarily to less excess and obsolescence charges in the current year.

Speaker 1

The sequential decrease was due primarily to 2nd quarter licensing revenue. Excluding the licensing revenue, 3rd quarter product gross margin increased 140 basis points sequentially, driven primarily by endpoint IC product mix, including fewer 200 millimeter wafers. Looking forward, we expect 4th quarter gross margin to increase sequentially. Total third quarter operating expense was $32,500,000 compared with $32,800,000 in Q2 202432,600,000 in Q3 2023. Operating expense was below expectations driven by engineering program timing.

Speaker 1

Research and development expense was $17,900,000 sales and marketing expense was $7,100,000 general and administrative expense was $7,600,000 Looking forward, we expect 4th quarter operating expense to increase sequentially. 3rd quarter adjusted EBITDA was $17,300,000 compared with $26,800,000 in Q2 2024 and $300,000 in Q3 2023. 3rd quarter adjusted EBITDA margin was 18.2%. 3rd quarter GAAP net income was $200,000 3rd quarter non GAAP net income was $16,900,000 or $0.56 per share on a fully diluted basis. Turning to the balance sheet.

Speaker 1

We ended the Q3 with cash, cash equivalents and investments of $227,400,000 compared with $220,200,000 in Q2 2024 and $113,200,000 in Q3 2023. Inventory totaled $88,400,000 up $7,600,000 from the prior quarter. 3rd quarter capital expenditures totaled $5,400,000 Free cash flow was 4,700,000 Before turning to our guidance, I want to highlight 3 items specific to our results and outlook. First, we expect Q4 gross margins to increase sequentially driven by lower 200 millimeter endpoint IC volume, a larger mix of systems revenue and endpoint IC replenishments into Asia based authenticity pilots. 2nd, as we signaled last quarter, we increased our second half twenty twenty four wafer purchases.

Speaker 1

We will move some of those wafer seed inventory ahead of 2025 growth and the remainder to fulfill stronger than anticipated second half twenty twenty four demand. Finally, with the additional revenue and disciplined investment in Q3, our adjusted EBITDA margins are approaching the long term range we presented at our 2023 Investor Day. As our revenue scales, we anticipate incremental leverage and cash flow generation. Turning to our outlook. We expect 4th quarter revenue between $91,000,000 $94,000,000 compared with $70,700,000 in Q4 2023, a 31% increase at the midpoint.

Speaker 1

We expect adjusted EBITDA between $13,600,000 $15,100,000 On the bottom line, we expect non GAAP net income between $13,400,000 $14,900,000 reflecting non GAAP fully diluted earnings per share between $0.45 $0.49 In closing, I want to thank the Impinj team, our customers, our suppliers and you, our investors for your ongoing support. I will now turn the call to the operator to open the question and answer session. Gary?

Operator

Our first question is from Jim Ricchiuti with Needham and Company. Please go ahead.

Speaker 3

Hi, thanks. Good afternoon. I wanted to go back to some of the commentary that you had about the systems business. I'm trying to reconcile some of the comments you made. You're talking, I think, about the current phase of your European retailer, this visionary retailer you talked about and talking about thinking that in the text of your transcript, you're talking about solutions spiking in Q4.

Speaker 3

Now normally, Q4 is a better quarter seasonally, right, in the systems business. So are you anticipating a stronger systems quarter as a result of some of the factors I just mentioned?

Speaker 1

Hi, Jim. Yes, this is Carey. Thanks for the question. And you've interpreted things correctly. So we are expecting 4th quarter systems revenue to increase sequentially due to a few factors and you've highlighted a couple.

Speaker 1

First, just as a matter of baselining, Q4 has historically been a seasonally stronger quarter for the systems business as our customers typically look to deploy capital ahead of the end of their fiscal years. And then specific to this Q4, we're seeing the benefits from the visionary European retailers ongoing self checkout and loss prevention rollout. And that deployment will spike in terms of volume and therefore revenue in Q4 before normalizing in Q1. And then finally, the indie reader IC end of life process has elongated a little bit. We anticipated last time shipments in the Q2, though some of those have moved into Q3 and to Q4 And as a result, that's adding a little bit of a tailwind to Q4 systems revenue as well.

Speaker 3

Okay. Thanks, Kerry. A follow-up question, actually unrelated, your large inlay customer earlier today was talking about the adoption that they're seeing RAIN RFID in grocery stores, in particular, I think, bakery being one of the early use cases. I'm wondering, and maybe Chris, this is a question for you, if you could frame the opportunity, how that might look like for the industry? You've obviously been getting more positive about the opportunity in food, both in the grocery and QSR.

Speaker 3

I'm just wondering if you could talk

Speaker 1

a little bit to that.

Speaker 2

Yes, Jim, thank you. So I've been talking about food on the past couple of earnings calls. If you recall, I it's a little bit slow and coming to the table here to talk about food because it's such a big opportunity. I didn't I wanted to give it some time to see how things would play out. But what we're really seeing right now is exactly what you said.

Speaker 2

We're seeing opportunities in quick serve restaurants, in the food supply chain and now in individual grocers. We feel very well positioned in these opportunities. And although given the size of these enterprises, the overall size of the 2025 food volumes will not be as will be just a start down this gigantic path. We still think that we're submitting for volumes in 2025. So we're excited by the food opportunity.

Speaker 2

We're excited by the announcement that I that you just saw. And there are more opportunities out there in the market today. Okay. Thanks very much. Thank you.

Operator

The next question is from Harsh Kumar with Piper Sandler. Please go ahead.

Speaker 4

Yes. Hey, guys. First of all, congratulations on very strong results to the whole team. I had 2. Maybe the first one for Chris.

Speaker 4

Chris, you had quite a bit of outperformance in your September quarter results. I mean, I wanted to ask the question if there was one thing that stood out, but it seems like it's very broad based. However, if I was to ask you that question, if there was, you think, one driver that stands greater than the rest in driving the September quarter results, what would that which one would that be?

Speaker 2

Thanks Harsh for the question. You know, one driver. You know Harsh, I don't think I can give you one. And I'm going to apologize for that, but we're seeing supply chain and logistics strength, steady growth in retail, general and merchandise, secular growth in apparel and long tail applications. And we're seeing our solutions efforts paying dividends across the solutions that we're driving into.

Speaker 2

So I feel that we as a company are pushing hard in several areas, the areas that I just said. We see the market overall pushing hard in those areas. And we just are now really in the thick of broad based industry adoption, not market adoption, not any one particular market, broad based industry adoption. And if you look at the food announcement, and we're kind of where we've been talking about food, that broad based industry adoption is poised to continue. So I feel I'd hope my prepared remarks conveyed my enthusiasm about the market overall.

Speaker 2

And I really I truly feel that enthusiasm. So I'm sorry, I can't point to 1. I gave you 4, but they're all meaningful.

Speaker 4

Hey, thank you. This is very good color. I was trying to pin you down, but it seems like you are seeing broad adoption. I a follow-up, maybe a 2 part question. I'm cheating here a little bit.

Speaker 4

You mentioned in the logistics segment, your second customer will increase adoption in 2024 and then again in 2025. I was curious if you could give us some idea of where they are, how much are you penetrated into that customer? And then part 2, separate question is, I've gotten this from a client already. Seems like your logistics systems business will be down, but you'll see a spike in Europe from your visionary European customer. And it seems like the balance is positive.

Speaker 4

But I was curious if you could give us an interplay between those 2, what is happening with the logistics customer to come down? Is it just the end of life of one thing versus the other or something else going on there?

Speaker 2

Okay. Going back to the first question, Harsh, I can't really cite volumes or where they are. We obviously have a very good relationship with that customer, but I think you need to listen to their remarks. What I can say is their execution has been very strong. I think I used the word before and I mean this in the most positive way that they're a machine and they're executing like a machine.

Speaker 2

And I mean that very positively, execution has been strong. They're not fully deployed. Obviously, they wouldn't be fully deployed if I said things are going to pick up next year or increase next year. But if you look at their publics, if there was no public statements, I think they give the best picture in terms of where they are overall. In terms of the go forward, NFI and IC volumes we expect to increase next year.

Speaker 2

Our reader IC that we some project timing related items as I noted, we see reader IC is down in Q4 due to that project timing. But you shouldn't read anything really meaningful into that. It just it truly is project timing and the projects they've got going on right now continue to move at pace. I wish I could give you more specific answers, but obviously, I can't say anything more specific at this point in time, but I think the customer speaks a lot for themselves.

Speaker 4

Very helpful, Chris. Congratulations again. Thank you.

Speaker 2

Thank you very much.

Operator

The next question is from Troy Jensen with Cantor Fitzgerald. Please go ahead.

Speaker 5

Hey, gentlemen. I also want to say congrats on another great quarter here.

Speaker 2

Thank you. Maybe, Naya.

Speaker 5

You're very welcome. Maybe first question here for Chris. Could you just talk a little bit more about the Qualcomm partnership? What are the implications and the timing? And is this at all related to RFID getting into tablets and iPhones and just are you seeing eye watches and whatnot, but just an update there would be great.

Speaker 2

Yes, Troy. So I might go a little bit long on this one, but I kind of want to set the stage a little bit. I'm going to start by saying that we impinge and the overall RAIN industry are very thankful to Qualcomm for them coming out with a public statement about RAIN in mobile devices, because that public statement has dramatically helped advance the position of the Ring as a data carrier for the particular product Passport in the EU. Combination of that statement and push from major retailers in Europe has essentially the ball forward such that rain is no longer questioned within the standards bodies in Europe as whether it's going to be part of DPP, but now exactly what the implementations come. As we project forward in Qualcomm statement and in some of the follow-up that's happened, particularly at the RAIN Alliance meeting in Florence, the first opportunities are going to be in enterprise mobile.

Speaker 2

Qualcomm declined to cite a timeline for consumer mobile other than to say it's following the enterprise mobile. I actually myself don't believe that it's going to be the implementation in the phones that's going to be pacing us in consumer mobile. But it's going to be the readiness of the entire community in terms of item data resolution, in terms of the back end services and other stuff that has to all get prepared in advance of consumers being able to engage with those connected items. So you shouldn't be thinking in months or quarters, it's going to take a bit longer than that to build up the entire back end. But I'm personally incredibly excited because when was the last new significant radio incorporated into a mobile device?

Speaker 2

Neither big so minor introductions, but think back when was the last big one? And I firmly think that Reign is going to be a big one. We're going to have to get it right. We're on our focus on getting it right. But I'm super excited.

Speaker 2

So I did my best answer to your question. I didn't give you exact date, but that's the best I can do.

Speaker 5

No, that was great. Let me ask you, said the first implementation into enterprise mobile applications, was that specifically be into logistics? Would it be into logistics, I guess is my question?

Speaker 2

Not necessarily. No, it's going to be it will be broad based because those enterprise mobile devices think mobile devices that employees carry around in stores, they carry on in supply chain of logistics centers. They're basically they're kind of the broad base of enterprise mobile devices. But those chipsets that go into those enterprise devices are essentially the same chipsets that go into mobile phones. So that's why I said it's not the implementation is not going to be the phone implementation is not going to be what paces the adoption.

Speaker 2

It's going to be the readiness. And so we all of us, not just in PIM, but the entire community needs to work on that readiness for consumers to connect to items.

Speaker 5

Yes. Awesome. I love the excitement. Follow-up then quick for Carey. I always love when you kind of give us a little bit more incremental gross margin guidance and thoughts on kind of how much does it spike here in Q4?

Speaker 5

And is there any roll through in the next year or just any insight would be helpful?

Speaker 1

Yes, sure, Troy. So if you unpack our guidance, you could reasonably get to a Q4 gross margin around 53%. Understand that there's a couple of benefits in Q4 that we're calling out. 1st, with the strength that we already talked about in systems, we see a richer systems mix on the revenue profile. And then we're also shipping some high margin authenticity endpoint ICs into those Asia based pilots, which there's small quantity, but those are a little bit higher IC and therefore higher margin products for us.

Speaker 1

So that provides a little bit of a tailwind into the Q4 gross margin. Then as you look over the long term, clearly M800 plays a role in our gross margin accretion. And what I would say is that we remain confident in the gross margin targets that we outlined at our 2023 Investor Day.

Speaker 5

Okay, perfect. All right, guys. Keep up the amazing work.

Speaker 1

Thank you, Troy. Thanks, Troy.

Operator

The next question is from Christopher Rolland with Susquehanna. Please go ahead.

Speaker 6

Hey, guys. Just following up on that Qualcomm topic as well. Excuse me. Are there any ways to monetize the reader IC in the mobile device or does Qualcomm provide that? Like just on the mobile device side, maybe you can talk about if there are any economics there either IP or hardware or is this really just a driver of endpoints and more general adoption for you guys?

Speaker 2

Yes, Chris, thanks for the question. I'm pausing a little bit here. Without saying anything specific, I think you really should think about it. Number 1, as a driver of broad based industry adoption. Number 2, as a driver for differentiation and advancement in the market.

Speaker 2

That differentiated and advancement in the market is around authentication, privacy, sustainability, security. The differentiation in the market is cloud services that support not only those protection features, but also consumers. Think about it as the opportunity for enterprises to engage consumers through their connected items. And in that engagement rely on the prior two things I just spoke to. So you think of it 1st and foremost as a broad endpoint, I see opportunity and perhaps equally important as a broad ecosystem play and much less so as an opportunity for the ICs and the phones.

Speaker 6

Understood. I was just wondering if you share in any economics in the reader at all.

Speaker 2

Yes. I told you what the prices are. I can't answer that question directly. We haven't said anything publicly on that front. But I think it kind of gave you our thought process in terms of what we see as the price.

Speaker 2

And the prize are the things that by a huge amount, the prize are the things that I just highlighted and those are our focus areas. It's the endpoint ICs and the ecosystem opportunity at large, which gets monetized by those endpoint ICs, cloud services, software, just a bunch of stuff.

Speaker 6

Excellent. And then for a second question, Chris, I think you talked about food and order of magnitude bigger than general merchandise. That's pretty incredible if I understood that correctly. As these products are attached to lower and lower priced products and of course higher volumes with those. Is there any point at which these tags which could be call it $0.05 to $0.10 each could be reused by your customers?

Speaker 6

Or do you fully expect them to be disposable? Thanks.

Speaker 2

Yes. So a couple of points there, Chris. Number 1, I think you should be thinking about lower price points even straight out the gate. It's not $0.05 to $0.10 or 12 under that. Number 2, you should be thinking about the we've spoken a lot about the elasticity of demand and that is the label price point comes down and drives new opportunities and you should view the food opportunity as getting to the point where we can hit the price points needed by the food market to actually tag individual everyday items.

Speaker 2

And number 3, I don't see much if any opportunity for reusable tags, food items, the packaging is disposable. In fact, it would be hard to even think of a scenario where the FDA would allow reusing a tag or any part of packaging associated with an item. So the price points of the additional labels that go on food items needed for such that the tag itself can be discarded. The price point that I believe will allow gigantic industry adoption It's probably best set by METI in Japan a couple of years ago. They did an analysis and said basically, we can get down to about a $0.01 a half incremental costs for the wireless digital identifier.

Speaker 2

It makes sense to tag every item in Japanese convenience stores. And the average selling price for those items was between $1.50 So that'll kind of give you a benchmark of where we need to get to in order for broad, super broad adoption to happen.

Speaker 6

That's great. That's a great piece of data. Thanks, Chris. Appreciate guys.

Speaker 2

Okay. Thank you. Thank you. Thank you.

Operator

The next question is from Guy Hardwick with Freedom Capital Markets. Please go ahead.

Speaker 7

Hi, good afternoon.

Speaker 2

Good afternoon.

Speaker 7

Congratulations on the results, tremendous. Thank you. So could you update us on the M800 certification? How many more inlay partners have been certified? And maybe you can give us some bit of color around that and the sort of continued ramp of the M800 chip, please?

Speaker 8

Hi, guys. This is Vasanth. I'll field that question. Thank you for the question. So far, we've heard that 2 of our major inlay partners have gotten certification for the M800, are in the process of designing multiple inlays and multiple products to service their enterprises.

Speaker 8

And we believe that behind them there are additional major customers that are on the verge of getting their certification. We expect to see in general we're seeing the loud jam break and we're expecting to see multiple customers coming out fairly soon with products space. So right now the M800 ramp is looking very promising. It's going as we had expected and hoped. It's a healthy ramp and it looks like customers are pleased with the product and they're getting their certifications be able to launch it in the market.

Speaker 7

Okay. And just as a follow-up on the systems, you've guided to sequential growth and systems revenue. Is there a percentage kind of number you can put behind that for us?

Speaker 1

Maybe the way I would this is Terry Guy. Maybe the way I would think about it is we do look at our guide in context of endpoint ICs and systems. So we have guided endpoint ICs to be down sequentially based on normal seasonality. And the reason we have down seasonality in Q4 is we ship in front of the holiday season for both retailers and logistics providers. Normal seasonality in Q4 for endpoint ICs is down 5% to 10%, and I signaled that we'd be on the more favorable side of that.

Speaker 1

So if you use that as an anchor point and our overall guide, you can back into where we think our systems business is.

Speaker 2

Thank you.

Operator

The next question is from Scott Searle with ROTH Capital. Please go ahead.

Speaker 9

Hey, good afternoon. Congrats on the quarter and thanks for taking the questions. Hey, Chris, just a quick clarification first off on DPP. I just want to make sure I heard this correctly. It sounds like there's been a lot of advancements since the original RAIN Alliance blog post and momentum with Qualcomm.

Speaker 9

But is RAIN certified at the current time and or do you still expect it to be a multimodal technology in terms of DPP implementation? And then maybe, Carey, seasonality into the March quarter? I know it's a little bit early, but historically, it's in recent years, it's kind of been all over the place. So I was wondering if you can remind us about how things are starting to shape up at this point in time. And if pricing discounts, right, we used to we typically had the annual price decline kick in, in the March quarter.

Speaker 9

Is that something that's coming back into play in 2025?

Speaker 2

So thanks, Scott. And I'll take the first question. So RAIN is not yet an approved data carrier for DPP, but that doesn't really say anything because nothing's done approved data carrier for DPP because the standards aren't done yet. So what's happened now is the dialogue has changed. Previously the dialogue was barcodes and QR codes couldn't be an approved data carrier.

Speaker 2

NFC could be an improved data carrier. But RAIN is this new thing is how are consumers going to get access to information. With Qualcomm statement and a major push from significant enterprise end users, not just as I said in the retail space before, but it goes beyond the retail space. It includes automotive and tires and others, significant push. The dialogue has fundamentally changed.

Speaker 2

It's now really no longer about whether Ring is going to be an approved data carrier, how we get the standards and done and everything approved. So you should expect multimodal

Speaker 8

approvals,

Speaker 2

given the strength of the end user commitments that they signaled in those standards meetings in Europe. If you want me to place my bet and of course I'm biased, but if you want me to place my bet, RAIN will be the carrier everybody goes the data carrier everybody goes forward with because it's already in the supply chain and will extend it to consumers and the opportunity is huge. That doesn't mean the other stuff is going to get locked out. But, I think we've moved from a question mark to being in a poll position.

Speaker 1

Okay, Scott. And then I can take the second part of your question. So from an endpoint, I think pricing negotiation, those conversations just now getting underway. So stay tuned, we'll keep you apprised of that. To your question regarding Q1 seasonality, you're right, it's been all over the place.

Speaker 1

I would say historically, we saw seasonality being flat to slightly down. More recently, we've seen it as flat to slightly up. So we kind of think of it right now as flattish for endpoint ICs. I'm speaking specifically to endpoint ICs here. And I think that's why I believe it.

Speaker 1

You know our philosophy, we guide 1 quarter at a time and then we go out and execute against that.

Speaker 9

Got you. Very helpful. And maybe if we could just quickly on the systems front, look, that's a lead indicator. I know there's it seems like there's a lot of activity in the pipeline, but I'm wondering if you could help us understand either pilots or other activity to be that lead indicator as we get into 2025. You start to talk about foodservice.

Speaker 9

It sounds like other big box guys are being pulled in by the conditioning of the Walmart supply chain. I'm wondering if you could just leave us a few more bread crumbs in terms of how that is shaping up as we go into 2025? Thank you.

Speaker 2

Okay. I'm going to start, Carrie and Hussein, feel free to jump in. So, Seth, we're putting a very significant effort into solutions and the systems that enable those solutions, including our fixed readers, our rear ICs and software and cloud services. We typically don't cite anything publicly until the end customers themselves says something publicly. But as I noted in my prepared remarks, our pipeline is fairly large.

Speaker 2

Our pipeline is additional Fortune 500 and Fortune 100 enterprise who are coming to enterprises who are coming to us with unsolved or unmet business needs. Those business needs can be around inventory, parcel sortation, dock doors, food, just many, many use cases. I can't give you a number. We didn't cite a number. I can't tell you how soon we're going to be able to go public.

Speaker 2

What I can say is that given the size of those enterprises, adoption doesn't happen overnight. But given the enthusiasm I'm conveying, I feel really good about the solution space. And I'll say one more thing and then I'll see if the other gentlemen want to add anything in. I said multiple times over the past years that in our industry, really what it takes for an industry to move forward is to have 1 giant end user take the leap. So we had in the early days in retail apparel, that's how we got off the ground with Decathlon, Marks and Spencer and Macy's.

Speaker 2

In later years, the 2nd large North American supply chain and logistics end user is pulling supply chain and logistics across the line. The large North American enterprise that's for general merchandise that's going back forward. Now we've got a very large grocer, very, very large grocer stepping in. And that's my experience. It's one big one to galvanize an industry moving.

Speaker 2

So I am incredibly so excited about the solutions opportunities in front of us today and just stay tuned.

Speaker 1

Yes. And Scott, this is Kerry. To your question on system seasonality, it is a little more variable just given project timing. But generally what we see is Q4 is the strongest for the reasons I mentioned previously and then Q1 is down in the 10% to 20% range. Thanks so much guys and congrats on the quarter.

Speaker 2

Thank you. Thank you.

Operator

The next question is from Mark Lipchus with Evercore. Please go ahead.

Speaker 10

Hi, thanks for taking my question. Chris, when you mentioned earlier in the script, and I forgot the exact language you used that other retailers are piggybacking on the large retailer. Can you just give us a sense of what that means? Maybe talk about the design cycle to win a big program, like what are the steps? And does this mean that you got a bunch of companies on the sidelines just watching and doing check ins or they start to do working on designing their systems or business processes with you.

Speaker 10

If you could provide maybe color on that or the design cycle and where some of these guys are, I think that'd be helpful. Thank you.

Speaker 2

Yes. Thanks, Mark, and I'm happy It's actually fairly simple. So at least for retail store inventory, the inventory is driven by handheld counting. The store employee carries handheld around, they can read 100 items per second or even faster and they do quick inventory in the stores maybe, let's call it, twice a week. And so the difference between retail apparel and retail general and merchandise is you send somebody over to the general merchandise category.

Speaker 2

What's difficult or what has historically been difficult is getting the tags on the items because there wasn't the infrastructure to put tags on this whole gigantic range of items, everything from stationary to toys, to car batteries and all these things. And so that's where the real work effort is.

Speaker 8

How do you

Speaker 2

put a tag on car battery? How do you put it on a small stationary item without degrading the look of the stationary item? How do you put it in a box? Like think of a box that the toys in when there's no other stickers on the box. The large North American retailer has cracked a lot of those nuts and the tags are going on items today.

Speaker 2

So what we're seeing now is other general merchandise retailers basically as they place RFQs for products in the coming year, they're just saying the products need to come packed. And it's nothing more than that. They're just placing our accusants, send this category of products with fans on. And then they go and do the inventory and expand the inventory in their stores. So that piggybacking is actually a very fast piggyback.

Speaker 2

Does that help or is there did I answer it all else?

Speaker 10

Yes. And if I may just have a follow-up on that, because that is very helpful. So they placed RFQs to their suppliers that the products need to be tagged, but it seems like there's also a process of making the decision to flip the switch and what does that involve? I imagine that they need to redesign business processes and that takes some kind of effort also. So if you could just help us understand how that next step plays out?

Speaker 2

Thank you. Yes. So think about it this way. If you've got an enterprise that sells to people and customers and they are ready using tagged apparel items, then they already have the business processes in place. They just say, okay, we were doing 1st apparel, then

Speaker 1

we moved to footwear and

Speaker 2

we just added categories and now we're adding this other category and this other category and this other category. So flipping the switch, it's not instantaneous, but

Speaker 8

it's way faster than anything, then kind of opening or creating a

Speaker 2

whole new market or than anything, than kind of opening or creating a whole new market or something like that because they already know the processes for apparel and footwear. So they just add some additional categories there. And they already have the employees in the store, the employees with handhelds in the stores. So essentially the ability to leverage those tags is already built out. And so it is a quick process to add additional items if you're already using tags on apparel and footwear.

Speaker 10

Got you. All right. That's very helpful. Thank you.

Speaker 2

Okay. Thank you, Mark.

Operator

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

Speaker 10

Hey, guys. Thanks for letting

Speaker 4

me ask a follow-up. Chris and Kerry, I did want to ask about you mentioned that you had you will have some authentication type opportunity

Speaker 8

come through

Speaker 4

for you in the Q4 related to Asia. Could you just talk about is this the start of something big that you've been talking about last year? Or you think this is just one time in nature? How should we look at this opportunity?

Speaker 2

So Harsh, we've had this Asia opportunity for a while. And what we're seeing now is some replenishments into that opportunity. And so we're happy to see those replenishments. I will say 2 things are about our authentication opportunity. Number 1 is, I believe it's critically important going forward to not just to us, but to the market overall.

Speaker 2

In fact, I'd say it's essential. If you think about rain going into consumer mobile devices, today, tags just expose a number and they send it to plain text and there's no protection around it. I don't know of any other wireless technology on a mobile device that doesn't have protection and security built into it. So I firmly believe that the authentication is absolutely necessary. And that's why we introduced our product line, our cloud service associated with it.

Speaker 2

That said, the pace of adoption has been slower than we had originally hoped for. And we will be redoubling our efforts going forward to ramp authentication and additional security efforts to drive adoption so that we are ready for that consumer opportunity from a consumer perspective as it comes.

Speaker 4

Understood. Thank you so much.

Speaker 2

Thank you, Harsh.

Operator

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

Speaker 2

Thank you, Carrie. I'd like to thank all of you for joining our call today and thank you for your ongoing support. Bye bye.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Impinj Q3 2024
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