Impinj Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 11 speakers on the call.

Operator

to the Impinj Fourth Quarter and Full Year 2023 Financial Results Earnings Conference Call and Webcast. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Mr. Andy Cobb, Vice President, Strategic Finance.

Operator

Please go ahead.

Speaker 1

Thank you, MJ. Good afternoon, and thank you all for joining us to discuss Impinj's 4th quarter and full year 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. Kerry Baker, Impinj's CFO, will follow with a detailed review of our Q4 and full year 2023 financial results and Q1 2024 outlook. We will then open the call for questions.

Speaker 1

Jeff Dossett, Impinj's CRO, will join us for the Q and A. You can find management's prepared remarks plus trended financial data on the Investor Relations section of the company's 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, 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.

Speaker 1

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 our non GAAP financial metrics to the most comparable GAAP metrics. Before returning to our results and outlook, note that we will participate in Susquehanna's 13th Annual Technology Conference On February 29 in New York, Loop Capital's 6th Annual Investor Conference on March 11 and the 36th Annual ROTH Conference on March 18 in Dana Point. We look forward to connecting with many of you at those events.

Speaker 1

I will now turn the call over to Chris.

Speaker 2

Thank you, Andy, and thank you all for joining the call. We exited 2023 on an upswing With 4th quarter revenue and profitability above both our 3rd quarter results and 4th quarter guidance, Our focus on silicon and enterprise solutions paid dividends and strong 4th quarter endpoint IC volumes led by our 2 strategic verticals, Retail and supply chain and logistics. We will sharpen that focus as we enter 2024, increasing our investment in silicon and enterprise solutions while streamlining our organization to accelerate our pace and improve our profitability. Every January, we kick off the year with the National Retail Federation trade show in New York. This year, Raynor AppAD felt like the bell of the ball.

Speaker 2

Solution providers across the show touted use cases from inventory visibility To self checkout, end users are excited delighting customers with Just Walk Out and retail necessities like loss identification, Coming off the significant retail inventory destocking that characterized 2023, the excitement at NRF was palpable. Although I still feel it is premature to call the retail downturn over, the green shoots I cited last quarter feel a shade greener post NRF buoyed by secular growth opportunities in supply chain and logistics, retail general merchandise, apparel and a long tail of other applications. From my perspective, Impinj stood out as the leading Rains silicon provider and enterprise solutions enabler, which is precisely where we want to be. Turning to silicon, Our 2023 endpoint IC unit volume growth exceeded our industry's historical 29% CAGR with opportunity expansion and in late partner inventory rebuilds more than offsetting the retail destocking headwinds. 4th quarter endpoint AC revenue exceeded our expectations as growth in retail demand outpaced headwinds from some inlay partners still dialing in their inventory levels.

Speaker 2

Looking forward, we anticipate Q1 to again deliver modest endpoint IC unit volume growth. Arena ICs, our revenue held firm despite continued macroeconomic headwinds in China as partners transition from older indie based products to new e family designs. 4th quarter also showed strong test and measurement product deliveries to our inlay partners as they expand their inlay manufacturing capacity. We believe those capacity expansions bode well for the long term endpoint IC opportunity. Before we turn to solutions, I would be remiss and not against citing our multiple intellectual property trial wins against our primary endpoint IC competitor, NXP.

Speaker 2

With steadfast determination, we intend to pursue the dispute to a long term successful outcome. Moving to solutions, the Visionary European retailers' ongoing rollout of our self Checkout and Loss Prevention solution contributed strong 4th quarter gateway revenue. We expect this deployment, their 3rd to date, To conclude in the Q2, even as it accelerates their embedded tagging ramp, we anticipate future self checkout and loss prevention opportunities with this retailer and other brands and geographies. In general merchandise, the large North American retailer continued their rollout, albeit at a slower pace than they and we originally expected primarily due to the breadth of their supplier base and large diversity in the products being tagged. Regardless, they continue making progress.

Speaker 2

Finally, in supply chain and logistics, we expect the 2nd large North American supply chain and logistics end user to increase their label volumes in 2024. We expect all these projects to provide a tailwind to our 2024 endpoint IC revenue. On the product front, Impinj M800 deliveries are poised to ramp as our inlay partners finish their calls and begin shipping production inlays. The M800 is our best performing and most feature rich endpoint IC ever and So far, customer feedback has been very positive. Although we are assuming the M800 will follow a typical multi year ramp, We remain hopeful that our hard work on product performance and market readiness will accelerate that ramp.

Speaker 2

We also continue shifting our focus away from channel readers and gateways to our reader ICs and enterprise solutions. The former as partner products built on those ICs become able to unlock channel opportunities and the latter leveraging our readers and gateways as indispensable elements of whole platform solutions. Turning to new market drivers, late last year, the European Commission and European Parliament provisionally included the Digital Product Passport or DPP in the EU's revised sustainability product legislation. DPP will provide information product sustainability and traceability and help consumers and businesses make informed purchasing decisions. We expect a phased introduction, including apparel to start in 2027.

Speaker 2

We already see leading European retailers planning for and investing ahead of it. We believe DPP is a pivotal opportunity for us because Reign already used extensively in retail apparel can provide the information required by DPP. We also believe DPP can be the impetus for post purchase consumer RAN use cases. We began investing in DPP related R and D in 2023 and will continue doing so in 2024.

Speaker 3

In closing,

Speaker 2

2023 was another year of solid growth despite market headwinds With annual revenue crossing the $300,000,000 threshold for the first time, we delivered 4 quarters of positive adjusted EBITDA, successfully defended our IP, introduced market leading new products and are well down the path to normalizing our inventory levels. Looking forward, we are sharpening our strategic focus to improve our profitability and increase our competitiveness. As we continue driving our bold vision to connect every item in our everyday world, I remain confident in our market position and energized by the opportunities ahead. I will now turn the call over to Cary for our financial review and

Speaker 4

first quarter outlook. Cary? Thank you, Chris, and good afternoon, everyone. 2023 was another year of strong revenue growth driven by our enterprise solution wins and end market diversification into supply chain logistics and retail general merchandise. That said, we also navigated a fluid retail environment Marked by significant retail apparel inventory destocking that elevated our first half revenue and depressed our second half revenue as our inlay partners first overbuilt endpoint IC inventory and then adjusted stock back to healthier levels.

Speaker 4

Despite those fluctuations, our team executed well, delivering non GAAP profitability in each quarter of the year. Another 2023 highlight was our Voyantec acquisition, which extends our solutions to include inlay test and measurement. The cultural and financial fit between the companies is fantastic and the integration is proceeding as planned. The Voyantec test and measurement systems used by both our inlay partners and end users are a key element of our focus on silicon and enterprise solutions. 4th quarter revenue was $70,700,000 up 9% sequentially compared with $65,000,000 in Q3 2023 and down 8% year over year from $76,600,000 in Q4 2022.

Speaker 4

4th quarter endpoint IC revenue was $53,900,000 up 11% sequentially compared with $48,600,000 in Q3 2023 and down 8% year over year from $58,700,000 in Q4 2022. The sequential endpoint IC revenue growth exceeded our expectations, especially when compared to typical 4th quarter declines. Looking to the Q1, we again expect sequential endpoint IC revenue growth Now that our large inlay partner inventory levels are relatively healthy. 4th quarter systems revenue was 16,800,000 up 2% sequentially compared with $16,400,000 in Q3 2023 and down 6% year over year from 17,900,000 Q4 2022. The sequential increase overcame our expectation of a decline due to strength in test and measurement.

Speaker 4

Looking to the Q1, we expect similar systems revenue to 4th quarter. Total 2023 revenue was 307,500,000 up 19% year over year compared with $257,800,000 in 2022. Endpoint IC revenue grew 22% year over year with enterprise solution wins and inlay partner inventory rebuilds more than offsetting retail apparel destocking headwinds. Systems revenue grew 10% year over year with test and measurement and gateway strength more than offsetting weakness in our partner led reader business. 4th quarter gross margin was 50.9% compared with 50.5% in Q3 2023 and 53.8% in Q4 2022.

Speaker 4

The year over year decline was driven by higher indirect costs against lower production volumes. Full year 2023 gross margin was 51.9% compared with 55.5% in 2022, with the decrease due primarily to lower endpoint IC product margins from less specialty and industrial ICs as well as mix within those specialty and industrial ICs. Looking to Q1 2024, we expect gross margin to sequentially increase. Total 4th quarter operating expense was $33,000,000 compared with $32,600,000 in Q3 2023 and $29,500,000 in Q4 2022. Research and development expense was $15,000,000 Sales and marketing expense was $7,700,000 General and administrative expense was $10,300,000 including litigation expense of $3,800,000 2023 operating expense totaled $137,800,000 compared with $114,200,000 in 2022.

Speaker 4

We expect total Q1 2024 operating expense to increase sequentially driven by annual payroll tax and bonus accrual resets. We expect 1st quarter litigation expense to decline sequentially. 4th quarter adjusted EBITDA was 3,000,000 compared with $300,000 in Q3 2023 and $11,800,000 in Q4 2022. 4th quarter adjusted EBITDA margin was 4.2%. 2023 adjusted EBITDA was $21,800,000 compared with $28,900,000 in 2022.

Speaker 4

2023 adjusted EBITDA margin was 7.1%. 4th quarter GAAP net loss was $15,200,000 4th quarter non GAAP net income was $2,500,000 or $0.09 per share on a fully diluted basis. 2023 GAAP net loss was $43,400,000 2023 non GAAP net income was $19,800,000.70 per share on a fully diluted basis. Turning to the balance sheet. We ended the 4th quarter with cash, cash equivalents and investments of $113,200,000 Inventory totaled $97,200,000 down $9,600,000 from the prior quarter with the decrease coming primarily from endpoint ICs.

Speaker 4

4th quarter net cash provided by operating activities was 1,400,000 Property and equipment purchases totaled $2,600,000 Free cash flow was negative $1,200,000 For the full year, net Cash used in operating activities was $49,400,000 Property and equipment purchases totaled $18,600,000 Free cash flow was negative $68,000,000 driven by our endpoint IC inventory rebuilds. Before turning to our guidance, I want to highlight a few items unique to our results and outlook. 1st, in 4th quarter, our inlay partners made further progress reducing their end IC inventory and our large partners exited the year relatively healthy, leaving them well positioned to ramp M800 volumes.

Speaker 5

Some of

Speaker 4

our smaller partners still hold elevated inventory, which we expect them to bleed down as their project based demand returns. 2nd, As we conclude our e family reader IC transition, we will end of life our prior generation indie product family with last time shipments scheduled in first half twenty twenty four. Turning to our outlook. We expect 1st quarter revenue between $72,000,000 $75,000,000 compared with $70,700,000 in Q4 2023, a 4% quarter over quarter increase at the midpoint. We expect adjusted EBITDA between $3,000,000 $4,500,000 On the bottom line, we expect non GAAP net income between $2,200,000 $3,700,000 reflecting non GAAP fully diluted earnings per share between $0.08 and $0.13 In closing, I want to thank the Impinj team for your outstanding this quarter.

Speaker 4

We have delivered 9 consecutive quarters of positive adjusted EBITDA even as we continued investing in our business. We now turn our focus to the next goal, generating consistent free cash flow. I believe our efforts to streamline our organization will accelerate progress towards that goal. With that, I will now turn the call to the operator to open the question and answer session. MJ?

Operator

Thank you very much. As a courtesy to others, we ask that you limit yourself to one question and one follow-up. If you have additional questions, Today's first question comes from Harsh Kumar with Piper Sandler. Please go ahead.

Speaker 3

Yes. Hey, guys. First of all, congratulations. You guys are back to beat and raise, which is fantastic. And Chris, you sound fantastic about the prospects of the business.

Speaker 3

We appreciate that. So on that note, Chris, my first question to you is, Historically, you've had endpoint IC unit growth, call it 20%, 25%. You're coming off of a pretty healthy inventory Correction, but your end markets are all looking nicely up. Is it fair for us to think about endpoint IC unit growth in the 25% range for 2024 year?

Speaker 2

Well, first I'm going to say thank you for your kind words Harsh. So we guide 1 quarter at a time, as you know, and making predictions at this point in time relative to overall 2024 is quite difficult. You've probably heard some of our partners talk about 2024 overall and say they potentially see some macro Pickup in the back half of the year. If that macro improvement actually happens, then we see strength in the back half of the year as well and the potential for gains as we have seen in other years, but a lot depends on what happens in the macro environment. I'm not willing to call yet we're going to see that pick up in the back half of the year because as I said in my prepared remarks, it's a bit too early for us to call the downturn over, But I'm guardedly optimistic for the back half of the year.

Speaker 2

And if it picks up, we're going to see it in the end when I see volumes. Fair enough. And as I said, green shoots, Green shoots look greener. So let's hope those green shoots continue growing. We're going to do our best to water them.

Speaker 6

Got you.

Speaker 3

Great. For my follow-up, I wanted to clarify on what you call as your second logistics customer. Now they do, I think $6,000,000,000 some odd shipments a year. Is it fair to think that you are now fully penetrated in 2024 with that sort of $6,000,000,000 sort of shipment number? Or, do you think that the endpoint actually installation within that particular customer will continue to ramp not just for 2024, but possibly into 2025?

Speaker 2

So, just I think you meant 6,000,000,000 units rather than $6,000,000,000 in terms of the total number of products they ship. Harsh, it's difficult for me to speak to the pace and timing of an end customer ramp. What I said in my prepared remarks is we see increases in volumes in 2024. That said, that end user has diverse operations. And so I think it's probably fair to say that there will be opportunities for continued gains with that end user and we will do our best to support them at every opportunity to support their deployment and make it successful.

Speaker 2

In terms of the pace and timing at which they ultimately go, I think I'm going to have to defer to them in the remarks that they often make in their earnings calls.

Speaker 3

Fair enough, Chris. I'll get back in line. Thank you and congratulations, guys.

Speaker 2

Thank you, George. Thank you.

Operator

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

Speaker 7

Hi, good afternoon. Thank you so much for taking the question. I had two questions The first one is on the M800. I think it was you carried toward the end of your remarks, you talked about your large partners being in a pretty good spot from an inventory position perspective and how they're well positioned to ramp the M800. As the M800 kind of comes in into your mix, how should we think about the penetration rate exiting the year?

Speaker 7

And how should we think about the impact that could have on both ASP expansion as well as your gross margins? And then I have a follow-up. Okay.

Speaker 4

Thanks, Toshiya. This is Carey. The customer feedback on the M800 has been overwhelmingly positive. Our partners are moving forward with and we expect some initial production shipment volumes this quarter. Historically, however, new endpoint IC ramps have taken multiple years.

Speaker 4

We're optimistic that the excitement around the M800, we can accelerate that historical product ramp, but it's too early to predict the pace of the ramp at this point. I would add, in addition to the performance and manufacturability gains, the M800 also carries a significant cost advantage for Impinj given the die strength built into that endpoint I see. When fully ramped, we expect the M800 to deliver approximately 300 basis points of gross margin accretion. Given how early we are in the product ramp, however, I do not think I'll see or we will see the M800 impacting gross margin in the first half of this year. Give us another 6 months and we'll see how that ramp goes, but we're very encouraged by what we've seen so far.

Speaker 7

Great. That's helpful. And then as my follow-up, Chris and Carey, I think you both mentioned Something about streamlining your organization. You've generated positive EBITDA on a consistent basis. You talked about Being focused on generating consistent free cash flow, when you say streamlining your organization, like what do you mean?

Speaker 7

What are you doing today internally? And what kind of cost reductions or efficiencies can we expect and model going forward in 2024 and beyond? Thank you.

Speaker 4

Thanks, Doshiya. This is Carey again. I'll take that one. We are streamlining and adjusting our channel reader investment to better align that portion of our reader business to its revenue profile. We're not exiting the channel reader business and we'll continue supporting our partners in the market.

Speaker 4

This move will allow us to do that and support our partners in a more profitable fashion. This change is a natural progression of our strategy As our partner designs with efamily are increasingly able to unlock that channel reader business and we are therefore able to focus our efforts on the Enterprise Solutions. We remain focused on our 3 financial goals that we outlined last year at the Investor or the Analyst Day, long term revenue growth, profitability and free cash flow. Thank you and congrats.

Speaker 2

Thank you. Thank you, Sashir.

Operator

Thank you. Your next question comes from Christopher Rolland with Susquehanna. Please go ahead.

Speaker 5

Hey guys, this is Matt Myers on for Chris. So first off, congrats on the quarter. But also just wanted to get some more clarity around the inventory dynamic you guys have been seeing. So is this largely over now for you? Do you still see much excess inventory on the endpoint IC side or is it on the reader side?

Speaker 5

And I know you mentioned smaller partners that still have some elevated inventory. How incremental is this? And is there any inventory still with your in light partners?

Speaker 4

Hey, Matt, this is Carey. I think I could take a shot at that. In the Q4, our inlay partners made further progress reducing their endpoint IC inventory. And the large partners exited the year relatively healthy. So they're now able to ramp the M800 as the production volumes increase.

Speaker 4

Think of our inlay business as an eightytwenty rule with a handful, maybe 6 or so inlay partners driving the bulk of that volume. There are smaller partners whose inventory levels remain a little elevated. We're not as concerned about that. Their demand has been project based. And as that project based demand comes back, they'll get healthy again.

Speaker 4

But we're feeling pretty good about where we are at this point. And we think in the Q1, we'll be shipping closer to demand, whereas the last couple of quarters, we've been pulling down channel and as a result, undershipping demand.

Speaker 2

And I guess I'll say a tiny bit more there. As you look at the overall market, we do see the retail inventory destocking at the end user level starting to taper, but sales out still exceeds imports. And so It's not clear how long that destocking is going to go on at some point in half to end. We're seeing a tapering now. And as that destocking ends and Assuming demand stays healthy, then we expect to see accelerating retail demand on the other side.

Speaker 5

That's great color. Thanks guys. Another quick follow-up to I know you talked about your second logistics customer, but curious if there were any updates around your first customer here.

Speaker 2

Matt, I don't think we there have been any public comments from that customer and I don't think we've got anything that we can add at this point in time. Sorry about that. No problem. Thanks, Chris.

Operator

Thank you. The next question is from Jim Ricchiuti with Needham and Company. Please go ahead.

Speaker 8

Hi, thanks. Good afternoon. I may have missed it and I joined the call a little bit late, but can you elaborate just on of the restructuring that you're doing to what extent that's impacting OpEx, Kerry?

Speaker 2

I think Carey and I are going to share this one a little bit. As part of sharpening our focus and as Carey mentioned to an answer to one of the prior questions, I'm kind of adjusting our spend and normalizing our spend in our reader and gateway channel business. We have reduced our headcount by about 10% and refocused our company along the lines of our Silicon and Enterprise Solutions. We believe that refocusing will drive both our profitability and our success, kind of our focus going forward and the growth opportunities for the company. So although it's painful, very painful to go through a headcount reduction, it's not something we take lightly or easily, something that we felt we needed to do.

Speaker 2

And in refocusing the company, we're going to be focusing on growth, on accelerating our growth even as we drive profitability. So we're aligning to our strategy and I think you'll see us tighten that alignment as we go forward not in terms of further headcount reductions but just in terms of how we're really focusing on the opportunity in front of us. Chris, I think you

Speaker 4

did a fine job answering it. Jim, I would just reiterate that this is The natural next step in our strategy, you've heard us talk about enterprise solutions for the last several quarters at this point. This is allowing us to do that in a better way while also running our channel reader business in a more profitable fashion. As I think about OpEx in the Q1, I still expect OpEx to step up, and a little bit lighter litigation spend.

Speaker 8

Got it. Thank you for that. My follow-up question, Kerry, in the past, when you've Given guidance, you've given a little bit more color around endpoint IC revenue growth. And I'm wondering is this quarter a little bit more challenging to forecast it. What are some of the puts and takes as we think about the sequential growth that you're anticipating in endpoint IC revenue?

Speaker 8

And is there any color as we think about the Q2?

Speaker 4

Jim, I think the color is about the same. Maybe I'll provide a little more here. Q4 is seasonally our softest quarter as we typically ship in front of the holiday season. We bucked that seasonality this Q4 and we were able to deliver 11% sequential endpoint IC revenue growth even as we took down more channel inventory in Q4 than we did in Q3. Looking to the Q1, we again expect sequential endpoint IC revenue growth now that our large inlay partners inventory levels are relatively healthy And our shipments, as I mentioned previously, are going to more closely match the underlying demand in the Q4.

Speaker 4

We are very pleased that we are now modeling our 3rd quarter in a row of sequential demand increase. The upticks, however, have been modest And I don't think reflective of the snapback that I would expect when the broader retail recovery occurs. While some of our partners have signaled expectations of a retail recovery in the second half of the year and as Chris mentioned, Some of our green shoots are greener this quarter than they were last quarter. We're a couple of steps removed away from end customer demand and I don't think it's our place to call the timing of a retail recovery. We're very encouraged by the progress that we're seeing in demand and the improvements that we're seeing.

Speaker 4

But at this point, I'm not modeling a retail rebound in the first half of the year.

Speaker 8

Got it. Thank you.

Speaker 2

Thank you. Thank you.

Operator

The next question is from Mike Walkley with Canaccord Genuity. Please go ahead.

Speaker 9

Hi, this is Julian Rajon on for Mike. Thank you for taking the question and congrats on the strong performance. So for Chris, Impinj has strong intellectual property. Can you discuss how you are protecting your IP and update us On the status of your ongoing lawsuits with NXP, and also with the potential for a monetary award given your recent wins, How should we think about a potential amount or could a royalty type of arrangement happen with NXT? Thank you.

Speaker 2

Duane, thank you. And the answer to that question could take more time than I think we have here. We'll say that we have gone through 3 separate trials with NXP, 1 in Washington, 1 in California, 1 in Texas. We have prevailed in all three of those trials. In addition, NXP sued us in 3 separate trials in China and subsequently dropped all three of those trials.

Speaker 2

So I feel good about where we are to date. There have been jury awards both in terms of damages and lost profits as well as ongoing royalties, but the final judgments haven't yet been entered by the courts. So it's a bit and there's motions back and forth and a lot of the other things that go on at the legal front. So it's too early for us to call where we will net out. I said in my prepared remarks, we're prepared to take this litigation through to a successful completion.

Speaker 2

We feel that we need to defend our leadership position in the market, our intellectual property that we expended So much effort to develop as the market creator against people who copy our products and infringe our IP. You should expect us to continue pursuing that litigation. Settlement takes 2 parties. To date, there hasn't we haven't been able to reach a settlement with NXP. I don't know if

Speaker 10

we will or we won't.

Speaker 2

Either way, We feel that it's our obligation to protect our company, protect our IP, protect against people who copy it. And so expect us to do our best here going forward. And like I said, pursue this litigation to a successful outcome. Thank you. Thank you, Julien.

Operator

Thank you. Your next question comes from Chris Kapsch with Loop Capital Markets. Please go ahead.

Speaker 10

Hi, good afternoon. My questions are focused around the M800 offering. And so I understand the manufacturing yield benefits that you'll get with that chip being produced at an advanced technology node given the much greater die per weight for yield. And I appreciate the gross margin tailwind that you mentioned, the 300 bps of upside as that transition happens. I'm just curious if any of that IC unit cost improvement accrues to your inlay customers as well.

Speaker 10

I'm asking because I was wondering if that might be an incentive for them to ship more of their inlay footprint or your production to inlay based on your chips? And I had a follow-up.

Speaker 2

Yes, Chris. Got it. Thank you. Good question. So the M800 has Roughly 25% greater read range than the M700.

Speaker 2

That's with the same size antenna. Or said another way, if you shrink the size of the antenna and save money on the inlet costs, you can get the same effective regrains as the M700. So our lead partners have the opportunity to either get that greater range for applications that need it or as is often the case, reduce their inlay costs, their antenna costs, their PET costs, other costs and achieve the same performance that they've been able to get in the market. So there is definitely an incentive for our inlay partners move forward with the M800. It's just overall goodness for them, for us, an incredible product and they will see a benefit from it.

Speaker 4

And then Chris, this is Carey. I would add that from a pricing perspective, we made the conscious decision to price the M800 even though it is more performant and more manufacturable, slightly below the M700 to accelerate that adoption. As I mentioned earlier, the typical adoption ramp is multiple years. We want to do that much quicker than that. We'll know more if we're successful in accelerating this adoption in another 6 months, but that is our goal.

Speaker 4

At this point, I'm not modeling a visible gross margin impact in the first half of the year. Like I said, no more than 6 months.

Speaker 10

Got it. That's very helpful color. And then separately, you mentioned one feature, the greater read range. And I believe there's other features that are imparted into the M800 chip design. And just curious if those benefits are In and of themselves enough to for the market to see impetus to To embrace adoption of a program based on the capabilities of this new product.

Speaker 10

And just Curious because if that's the case, it would also be something that helps extend your IP mode as the industry continues to grow and mature. Thank you.

Speaker 2

Yes, good question. Thanks, Chris. The answer to your question is yes, absolutely yes. We've talked about at least one feature on our products, our protection mode, which allows a retailer to make the tag invisible at point of sale to protect consumer We believe that feature will have value in DPP going forward. We have introduced other features in the M800 that we haven't spoken to publicly yet, but we will over time that we think will drive enhanced performance in enterprise solutions, make those solutions work better and drive preference for ImpinGen 2ICs.

Speaker 2

Not all I can say on that topic at this point in time. Just know that as we migrated to a more advanced process node, cost of digital logic came down. We took advantage of that effective savings to introduce features in the IC that we believe will solve previously unsolvable enterprise problems as well as going forward give us an opportunity to address DPP as we said in our prepared remarks.

Speaker 10

Appreciate the color.

Speaker 2

Thanks, Chris.

Operator

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

Speaker 6

Good afternoon. Thanks for taking the questions. Congrats on the quarter and nice to see the inventory in the channel normalizing at this point in time. Hey, I apologize, I joined the call late. But On the systems front, I was wondering if you could provide a little bit of color looking into 2024, what you're seeing from a pipeline opportunity perspective And linearity perspective, I think there were some larger contracts or projects that were reaching a conclusion or at least a phase of conclusion.

Speaker 6

I'm wondering what the visibility on that front is and how that pipeline is shaping up?

Speaker 4

Hey, Scott, this is Carey. I can take a start at that And then Jeff can jump in. So looking to the Q1, we expect similar systems revenue in the 4th quarter. Looking a little bit further out than that, first half systems revenue benefits from the Indi Reader I see last time shipments related to that product's end of life. Additionally, Phase 3 of the Visionary European Retailers Loss Prevention deployment will conclude in the Q2.

Speaker 4

So we've got some benefit in there. There is more opportunities beyond Phase 3, But we're taking a conservative approach right now because they may not line up perfectly Phase 4 that is may not line up perfectly with the conclusion of Phase 3. We had the same similar situation back when we knew Phase 2 was completing, but we didn't know when Phase 3 would kick off. And then I would just add maybe a final thought on the systems outlook. We've historically seen that after economic downturns, Our endpoint IC business recovers before our systems business.

Speaker 4

So good color on the first half of the year. We're in kind of a little bit of a wait and see mode to see how systems recovers in the back half of the year. Great. Very helpful.

Speaker 10

If Jeff,

Speaker 2

when I go ahead, Scott.

Speaker 6

No, no, please continue Jim. Thanks.

Speaker 5

Thanks very much. I was just going to add that our systems pipeline remains strong. I think what's encouraging to me and our team is that we and our partners are seeing increased Sales activity, increased detailed project planning, increase in the number of proof of concepts that are reactivating at this time. And really it's in the context of our customers and our partners increasingly understanding the importance of end to end supply chain visibility and process digitization, that ability to sort of digitize and optimize the entire flow of everything they manufacture, transport, sell and even process back into their business in returns or other forms of circularity. So, we're encouraged, but the pace and timing of these deployments is always determined by the individual end customers.

Speaker 5

So, As we get more visibility, we'll integrate that into our guidance each quarter.

Speaker 6

Great. Very helpful. And if I could for a follow-up on the DPP front, it sounds like you had some comments. So I apologize if this is redundant and can take it offline. But I thought the initial discussion was contribution maybe starting in 2025, not in 2024, But the opportunity to spread to not only different categories, but other geographies.

Speaker 6

So I'm wondering if you framed it at all in terms of the opportunity as we to go into 2025 and 2026 kind of permeating not just within the EU but into other geographies? Thanks.

Speaker 2

Yes. So, Scott, we did say some words about DPP. And I personally am very excited about DPP, what it means for our business going forward. There's 2 aspects that I would really focus on for DPP. Number 1, requirement for retailers initially and other enterprises and other markets going forward to provide true traceability Through our products lifecycle from really initially at the time of manufacturing through point of sale, what that visibility requires, what the laws are going to require, what those customers need to be able to show and do.

Speaker 2

And the fact that I believe RAIN RFID can provide all the data they need and we can do it in a proper way. 2nd aspect and actually we see retailers already today and we're going to see more from other customers as well. Retailers today already planning for DPP, speaking with us about it, talking about integration, talking about their needs. So it truly is an opportunity for us. Second aspect that I find very exciting is that DPP doesn't end at point of sale.

Speaker 2

It ends at an item's end of life. So, hesitance at an item's end of life, it will, I believe, open up the opportunity for us In post purchase consumer use cases, initially focus on recyclability at end of life, but there's more. Just when you have an IC that lasts for the life of an item, it's embedded in the item and becomes part of the item for recycling at end of life. It opens up consumer use cases that today our market and our industry has touched. We as a company have been very excited about the opportunity for consumer use cases.

Speaker 2

It's very early to say anything about them. In fact, I can't say anything about them or how they materialize. I believe DPP will be the impetus for those consumer use cases over the next couple of years and expect us to put some effort into it because it's just an exciting opportunity for us overall.

Speaker 6

Hey, Chris, maybe just to follow-up quickly. When do you expect, I'll call it meaningful impact, right? I think Some of the initial deployments are around things like tires, etcetera, but not necessarily high volume items. Is this 25, does it become meaningful or is it beyond that and we just got a lot of infrastructure that's starting to go out the door in the next 12 to 24 months to support this deployment?

Speaker 2

As I've said in my prepared remarks, which is there, the real opportunity is further out in time. We already see retailers and others planning for DPP, but the regulations on the apparel side, I believe, at least with the current timeline, effectively come into force in 2027. So you'll see planning, you'll see work going on, you'll see us doing some investments, you'll see us working directly with enterprises as we prepare for that time line. So PPP is a long term, not term opportunity and it's a long term gain for us. So think about it in the same time frame as we think about these large Enterprise opportunity wins, they don't happen in a month, they don't happen in a quarter, they don't even happen in a year, they take time.

Speaker 2

But as they roll in, they're really meaningful for our business. And I view DPP in that same light, except much larger than any single enterprise investor.

Speaker 10

Great.

Speaker 6

Thanks so much.

Speaker 2

Okay. Thank you.

Operator

Thank you. 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, MJ. I'd like to thank you all for joining the call today And especially to thank you for your ongoing support.

Operator

The conference has now concluded.

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Key Takeaways

  • Impinj reported Q4 revenue of $70.7 million, up 9% sequentially and closing 2023 with over $307 million in annual revenue—the first time crossing $300 million—and delivered four consecutive quarters of positive adjusted EBITDA.
  • Strong Q4 growth was driven by endpoint IC unit volumes in the retail and supply chain & logistics verticals, and the company expects modest endpoint IC volume growth in Q1 2024 as inlay partner inventories normalize.
  • Management is sharpening focus on its core silicon and enterprise solutions, including a ~10% workforce reduction and channel reader realignment, to accelerate innovation and improve profitability.
  • The new M800 RF IC, offering ~25% greater read range and lower manufacturing cost, is set to ramp production this quarter and deliver about 300 bps of gross margin accretion when fully adopted.
  • Impinj secured multiple IP trial victories against NXP and is preparing for the EU’s upcoming Digital Product Passport legislation—effective 2027—for enhanced sustainability and traceability use cases.
A.I. generated. May contain errors.
Earnings Conference Call
Impinj Q4 2023
00:00 / 00:00