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Edited Transcript of PI earnings conference call or presentation 27-Apr-20 9:00pm GMT

Q1 2020 Impinj Inc Earnings Call

Seattle May 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Impinj Inc earnings conference call or presentation Monday, April 27, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cary L. Baker

Impinj, Inc. - CFO

* Chris Diorio

Impinj, Inc. - Co-Founder, Vice Chairman & CEO

* Jeffrey Dossett

Impinj, Inc. - EVP of Sales & Marketing

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Conference Call Participants

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* Charles Lowell Anderson

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst

* Craig Matthew Hettenbach

Morgan Stanley, Research Division - VP

* Michael Joseph Cikos

Needham & Company, LLC, Research Division - Associate

* Scott Wallace Searle

ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Thomas Michael Walkley

Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst

* Troy Donavon Jensen

Piper Sandler & Co., Research Division - MD and Senior Research Analyst

* Ellen Davis Hayes-Roth

The Blueshirt Group, LLC - Director

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Impinj First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Ellen Hayes-Roth of Investor Relations. Please go ahead.

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Ellen Davis Hayes-Roth, The Blueshirt Group, LLC - Director [2]

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Thank you, operator. Good afternoon, and thank you all for joining us to discuss Impinj's first Quarter 2020 results. On today's call, Chris Diorio, Impinj's Co-Founder and CEO, will provide a brief overview of our market opportunity and performance. Cary Baker, Impinj's CFO, will follow with a detailed review of our first quarter 2020 financial results, and second quarter 2020 commentary. We will then open the call for discussions. Jeff Dossett, Impinj's Executive Vice President of Sales and Marketing, is also on the call and will join Chris and Cary in the Q&A session. Management's prepared remarks, along with trended financial data, are available on the Investor Relations section of Impinj's website.

Before we start, please note that we will make certain statements during this call that are not historical facts, including those regarding our plans, objectives or expected performance; the expected or potential impact of COVID-19 on our business, operating results, financial condition or prospects; and the expected or potential responses of government authorities, customers, partners and the company to COVID-19. To the extent we make such statements, they are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements represent our outlook only as of the date of this conference call.

While we believe any forward-looking statements we make, including concerning COVID-19 are reasonable, our actual results could differ materially because any statements based on current expectations are subject to risks and uncertainties. Please see the risk factors in the annual and quarterly reports we file with the SEC and the COVID-19 related disclosures and risk factors in the Form 10-Q we filed today for more information about these risks.

We do not undertake, and expressly disclaim, any obligation to update or alter our forward-looking statements, whether as a result of new information, future information or otherwise, except as required by applicable law. During today's call, all financial numbers we discuss, except for revenue or where we explicitly state otherwise, are non-GAAP financial measures. Balance sheet and cash flow metrics are on a GAAP basis. Free cash flow is a non-GAAP measure.

Before turning to our results and outlook, I'd like to note that the company will virtually attend Oppenheimer's 5th Annual Emerging Growth Conference on May 12; and Baird's 2020 Global Consumer, Technology & Services Conference on June 2. We look forward to connecting with many of you at these upcoming events.

I will now turn the call over to Chris Diorio, Impinj's Co-Founder and Chief Executive Officer. Chris?

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [3]

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Thank you, Ellen. Thank you all for joining our call. I hope you and your loved ones are and remain safe and well. The past few months have been among the most tumultuous many of us have known. COVID-19's impact is all around us, indiscriminately impacting people, families, communities and companies. Impinj is no stranger to that impact. COVID-19 has negatively affected our supply chain, channel partners and end users. And the coming months portend no less uncertainty. However, while the prevailing sentiment is negative, particularly in retail, aviation and automotive, there are bright spots as well, such as in omnichannel retail and supply chain and logistics. And while we see uncertainty in the second quarter, our first quarter results were strong.

Consequently, I will focus today on updating you on the steps we are taking to navigate through this crisis, the long-term opportunities we see for our business and the outcome we are driving. With a dedicated team, strong balance sheet, game-changing new products, RAIN market leadership and end users who are, especially today, experiencing the competitive advantage our products enable, we intend to emerge from this crisis a stronger company in a stronger market position than when we entered it.

Impinj's employees have shown amazing resiliency in the face of COVID-19. Even with more than 95% working from home, they not only met our first quarter delivery commitments, but also shipped $6.2 million of unanticipated customer expedite requests in the latter part of March. To meet those delivery commitments, our operations team deftly balanced production among suppliers, staged finished goods to maximize geographic diversity and navigated shipping cost increases and availability.

Our team is well aware that hospitals and health care facilities around the world are using our products in the fight against COVID-19, to track equipment and consumables and to streamline hospital operations. Because our end users use our products worldwide, not only in hospitals, but also in other essential use cases, we understand the importance of continuing to meet our commitments, while we strive to keep our employees safe.

Our first quarter revenue, at $47.8 million, set another quarterly record, exceeding our prior record set last quarter by $7 million. It did so despite typical seasonality, in which revenue usually declines in the first quarter. Endpoint IC revenue was strong, buoyed by the $6.2 million in customer expedite requests, market growth, new opportunities and, we believe, a modest share gain. Systems revenue was also strong, led both by reader ICs and by gateway sales to the large North American supply chain and logistics provider we have discussed previously.

Looking forward to the second quarter, we see pressure on both endpoint ICs and systems as the impacts of COVID-19 ripple through our customer base. Although we entered the quarter with healthy endpoint IC backlog, we are seeing pushout requests as we, and our inlay partners, work together to align their inventory with rapidly changing demand. Retail apparel, which consumes more than half the endpoint ICs worldwide, has been hit particularly hard by store closures. Aviation and automotive endpoint IC demand, although much smaller than retail apparel, has also declined significantly.

On the positive side, retailers who are using RAIN are better positioned to sell online than their competitors who are not, which we expect to drive endpoint IC demand in the long term. RAIN usage and supply chain and logistics is also growing. And although its endpoint IC volumes, at least in the second quarter, are small, shipments today are running at holiday volumes, and those heightened volumes may be the new normal. The ROI from deploying RAIN to track and optimize those shipments, and our consequent long-term endpoint IC opportunities, are both large.

Our systems business, already facing second quarter headwinds from the North American project transitioning from deployment to operations, now also faces tight second quarter customer capital expense budgets due to COVID-19. Consumer-facing use cases, such as race timing and airline baggage tracking have paused. For the most part, retail pilots in loss prevention and self-checkout have also paused. Here again, supply chain and logistics is a bright spot. And although the opportunities, at least in the second quarter, await end-user capital allocation, potential deployments and our consequent long-term systems opportunities, as evidenced by that large North American project we delivered over the last 6 quarters, are both large.

To round out our second quarter perspective, delays in our Impinj M700 endpoint IC production ramp now exceed 2 months, impacted by shelter-in-place orders at our suppliers and partners. That delay engenders a further impact to our second quarter revenue. All told, COVID-19's impacts on our endpoint IC and systems opportunities and new products, combined with headwinds from the North American project, the $6.2 million first quarter expedites and significant order pushouts from second quarter to third, all conspire to a second quarter challenge. Counterbalancing those headwinds is our first quarter momentum and strong RAIN adoption pre-COVID-19, the confidence our partners and end users have in our market leadership and strong balance sheet, and the game-changing new products we have already announced, with others in development.

Looking to the future, we believe our opportunity with continuing organic growth and big ROI-driven use cases remains huge. I will highlight that opportunity with a few recent examples. Our partner, Plexus, implemented an Impinj gateway solution in their Malaysia manufacturing facility that drove a 92% decrease in the time to re-palletize high-mix products. Finland's largest manufacturer of kitchen furniture, Novart Oy, deployed our xSpan gateways and R420 readers, with our partner Finn-ID, to automate a manual order pick-and-dispatch process, saving them hundreds of thousands of euros per year.

Heilan, one of China's largest fashion retailers, with support from our partners, Xindeco IoT and Supoin, deployed an Impinj-based solution across their garment factories, logistics centers and retail stores, automating item sorting and tracking, and saving tens of millions of dollars per year.

Today, COVID-19, in the span of weeks, has shut physical stores and driven demand to retailers and brands with online fulfillment. The visionary retailers and brands that have deployed RAIN systems are well situated to match online orders to product anywhere in their supply chain, and then ship from store. We expect those visionary retailers and brands to leverage RAIN strategically during this crisis. We likewise expect leading supply chain and logistics providers, with demand surging and needing to improve package tracking and operational efficiencies, to advance RAIN adoption. We are laser-focused on both, and on the long-term opportunities they offer us.

With a steady hand on the tiller, we are focused on emerging from this crisis a stronger company in a stronger market position. We know the second quarter will be difficult, but we have not lost sight of the big picture, of the benefits we bring to retailers and suppliers, of the improvements we drive in item-level visibility and logistics management.

Enterprises will emerge from COVID-19 with a fierce determination to strengthen their businesses for the future. So we will continue focusing on leading apparel retailers who we expect will emerge from this crisis with less competition, a renewed focus on omnichannel fulfillment, and a hunger for the item visibility and consumer experience our platform offers. We will also continue focusing on supply chain and logistics, which we believe will see sustained growth well beyond COVID-19 and for which our platform offers compelling operational improvements. We will do so as we tighten our belts and use our balance sheet to increase our competitiveness, charting a path to adjusted EBITDA breakeven on the other side of COVID-19.

One certainty is that this crisis will pass. When that happens, we want our suppliers, partners and end users there with us, in no small part because of how we acted: that we stood by them, that we invested in their and our future, and that we did our part in this time of need. As one example of the latter, we set a company goal of raising roughly $750 per employee via an employee contribution and an Impinj match, or $200,000 overall, for local and global efforts to support those in need. As I wrote in a recent blog post, we want to be proud of how we acted. We want you to see that pride, not out of hubris but because we did our part, that even in the smallest of actions, we responded with care and empathy in the face of adversity. Be safe and be well.

I will now turn the call over to Cary for our detailed financial review and second quarter commentary. Cary?

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Cary L. Baker, Impinj, Inc. - CFO [4]

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Thank you, Chris, and good afternoon, everyone. To echo Chris' comments, we are living through a period of unprecedented economic upheaval with uncertainty about when businesses will return to a more normal operating environment. In that light, today, I will cover both the metrics we typically discuss on each earnings call as well as additional, more detailed metrics that we do not plan to share on an ongoing basis, but which we believe are appropriate for this call, given the market uncertainties.

First quarter revenue was $47.8 million, a new company record. Revenue grew 44.6% year-over-year and 17.2% quarter-over-quarter compared with $33.1 million in first quarter 2019 and $40.8 million in fourth quarter 2019. First quarter endpoint IC revenue was a record $33.7 million, growing 54.2% year-over-year and 30.8% quarter-over-quarter compared with $21.8 million in first quarter 2019 and $25.7 million in fourth quarter 2019. We entered first quarter 2020 with a $25.1 million endpoint IC backlog. Bookings remained strong through mid-March, driven by new end-user deployments and then declined in the last few weeks of March. As Chris already noted, we also had $6.2 million of unanticipated customer expedite requests in the latter part of March as some customers secured supply in a period of uncertainty.

Despite those expedite requests, we still entered the second quarter with a strong $29.5 million backlog, more than double our $11.7 million backlog entering second quarter 2019. Today, with COVID-19 having dramatically reduced end-user demand, second quarter endpoint IC bookings are down significantly, both sequentially and year-over-year. We are also actively supporting our inlay partners to reschedule backlog and manage both their and our inventory in this new demand environment.

First quarter systems revenue was $14.1 million, growing 26.1% year-over-year compared with $11.2 million in first quarter 2019 and led by gateway shipments to the large North American project and strong reader IC and reader sales. On a quarter-over-quarter basis, systems revenue declined 6.2% compared with $15.1 million in fourth quarter 2019, primarily due to typical seasonality, partially offset by reader IC revenue growth.

In the second quarter, systems revenue will decline due to the large North American project transitioning to an operational phase, and generally tighter capital expenditure budgets in the face of COVID-19.

First quarter gross margin was 46.1% compared with 50% a year ago and 50.6% last quarter. We took a significant inventory excess and obsolescence charge related primarily to COVID-19 reducing demand for endpoint ICs optimized for European retail applications and gateways that operate in the older EU frequency band. We expect the demand, when it returns, to be met by our M700 endpoint IC and by gateways that operate in the new EU frequency band. This E&O charge reduced our gross margin by 560 basis points.

Normalizing for the E&O charge, gross margin increased 110 basis points year-over-year, driven primarily by leverage from higher revenue. At this time, we do not expect a material E&O charge in the second quarter 2020.

Total first quarter operating expense was $19 million compared with $18.8 million in first quarter 2019 and $19.6 million in fourth quarter 2019. Research and development expense was $8.5 million. Sales and marketing expense was $6 million. General and administrative expense was $4.5 million. First quarter adjusted EBITDA was $3 million, compared with a loss of $2.3 million in first quarter 2019 and a profit of $1 million in fourth quarter 2019.

First quarter GAAP net loss was $4.3 million. First quarter non-GAAP net income was $2.9 million or $0.13 per share using a weighted average diluted share count of 23 million shares.

Turning to the balance sheet. We ended the first quarter with cash, cash equivalents and short-term investments of $119.2 million compared with $116.5 million in the prior quarter and $56.7 million in first quarter 2019. The inventory totaled $31.8 million, down $2.4 million from the prior quarter and down $9.5 million from first quarter 2019. In the first quarter, net cash provided by operating activities was $1.8 million, and property and equipment purchases totaled $1.1 million. Free cash flow was $700,000.

I will now highlight a few items impacting our business. First, government-mandated shelter-in-place orders have caused several of our suppliers to operate at reduced capacity, and some to temporarily close. In Malaysia, suppliers producing our readers and gateways and post-processing some of our endpoint ICs were shut down for roughly 3 weeks. Currently, those suppliers have returned to between 50% and 80% capacity.

Second, we are experiencing challenges shipping products due to reduced transport capacity and increased costs as a result of COVID-19-related disruptions. Although we were able to fulfill all orders in first quarter 2020 and we believe we have sufficient inventory and supply chain flexibility to satisfy endpoint IC demand in the second quarter, the uncertainties related to COVID-19 affect our supply and demand picture near daily.

Third, in the near term, we are modulating discretionary spending while continuing to invest in research and development and make ROI-driven capital investments. Although COVID-19 impacts our near-term profitability, we have charted a course to return to adjusted EBITDA breakeven on the other side of COVID-19, and we will course-correct as necessary. We believe that our strong first quarter adjusted EBITDA underscores the strength of our business model and of our opportunity when the COVID-19 disruption clears, the economy reopens and demand returns. Our strong balance sheet gives us the flexibility to weather the storm and invest in our future. The investments we are making today will be the foundation of a stronger company in a stronger market position tomorrow.

Turning to our outlook. Considering all the issues we have outlined and perhaps most importantly, that there is no modern precedent for overcoming a pandemic, we feel it is prudent to not give quantitative guidance for the second quarter. Instead, we will share additional metrics about our business. We do not plan to share these metrics on an ongoing basis. As of April 1, second quarter backlog scheduled to ship in quarter was $32.3 million. As of Friday last week, we had already rescheduled $5 million of that backlog to future quarters. And we expect additional rescheduling requests in the remaining 2 months of the quarter. Also as of Friday, second quarter bookings scheduled to ship in-quarter were $5.8 million, down 40% quarter-over-quarter and down 21% year-over-year at similar quarterly dates.

In the near term, we expect end-user demand for endpoint ICs and systems to further decline and we are taking appropriate steps to mitigate the impact that that decline will have on our business. In the longer term, we know that the COVID-19 crisis will pass. The disruption will clear, the economy will reopen and the demand will come back. We remain focused on emerging on the other side of COVID-19 a stronger and more competitive company, delivering against the new opportunities that COVID-19 has created.

In closing, I want to thank our Impinj team, our customers, our suppliers and you, our investors, for your ongoing support in these uncertain times. I will now turn the call to the operator to open the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mike Walkley of Canaccord Genuity.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [2]

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With the very strong quarter results -- with the very strong results in that $6.2 million pulled in, can you just give us some color on maybe the end markets it was pulled in for? Or is this just your -- kind of your end markets trying to build an inventory buffer, just expecting some supply chain issues?

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Jeffrey Dossett, Impinj, Inc. - EVP of Sales & Marketing [3]

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Mike, this is Jeff Dossett, and I'll answer that question. We worked with a number -- proactively with a number of our inlay partners as they elected to adjust shipment dates according to their and our latest understanding of the evolving demand environment. So I would say that it relates to a broad base of change in the end customer demand, in particular in retail, aviation and automotive, as Chris outlined in his initial comments.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [4]

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And then Chris, while clearly, the near-term challenging trends, I have to say I was thinking of your company a lot every time I've been waiting in the long checkout lines at grocery stores. I thought about how nice it would be to have cashier-less checkout and faster way to move through the stores. During this --

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [5]

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You and me both, Mike. You and me both.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [6]

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Yes. I can imagine, everybody on the call. But during these tough times, has it led to any kind of longer-term discussions with customers to really position you guys better on the other side? Is that level of discussion happening yet? Or is it more just everyone is just trying to figure out businesses in the short term?

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [7]

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The answer to the question is yes. I will say that it's a little too early to tell how things are going to emerge on the other side of COVID-19. But we've spoken previously about enabling retail self-checkout and needing to have a loss prevention in order to enable that retail self-checkout. So the desire for self-checkout actually reduces exposure, reduces exposure to sales and other things and actually could potentially drive the ability for retailers to come back online more quickly.

Now of course, that retail self-checkout is only in very limited deployments worldwide, but retailers are seeing that if they have had self-checkout, they could potentially have returned their stores to more normal operating conditions more quickly. So we are seeing opportunities, and we expect those opportunities to grow as our end customers learn more about how they're going to be returning to normal.

So in addition, we see visionary retailers with opportunities around shipping from store, as I mentioned in the prepared remarks. And omnichannel fulfillment will become more and more important in the future. You just know it. And so we see omnichannel fulfillment as well also driving incremental opportunities. So in both of those instances, we see a long-term shift -- and a long-term shift in how our end customers go to market, and a long-term opportunity for us.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [8]

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Great. Last question for me, and I'll pass the line. Cary, thanks for sharing some metrics that you don't -- you won't plan going forward. Just to get maybe a little more clarity. On the $32 million scheduled to ship entering the quarter, can you give us any idea of maybe the split between endpoints and the systems? And just kind of overall, how we should think about trends in those 2 businesses in the intermediate term?

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Cary L. Baker, Impinj, Inc. - CFO [9]

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Yes. So I think we did provide that information a little bit earlier in my comments. So of that backlog, $29.5 million of it was related to endpoint ICs. And then on the rescheduling comment was a total comment. So we've received $5 million as of last Friday that have with request to schedule into future quarters. And we expect more of that. In fact, we saw a request this morning to the same line. So there will be more coming. We know it.

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Operator [10]

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Our next question comes from Troy Jensen of Piper Jaffray.

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Troy Donavon Jensen, Piper Sandler & Co., Research Division - MD and Senior Research Analyst [11]

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Congrats on the nice results. I'm glad to hear everybody's well. Maybe a quick follow-up on Cary and the additional information. The 40% down comment, was that like a bookings month-over-month? Could you just go over that data point one more time?

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Cary L. Baker, Impinj, Inc. - CFO [12]

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Yes, that was -- yes, that was a bookings comment year-over-year at the same point in this quarter.

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Troy Donavon Jensen, Piper Sandler & Co., Research Division - MD and Senior Research Analyst [13]

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So pretty much the month of April...

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Cary L. Baker, Impinj, Inc. - CFO [14]

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Actually, excuse me, it was quarter-over-quarter. 40% quarter-over-quarter, 21% year-over-year at the same point this quarter. These metrics were as of last Friday.

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Troy Donavon Jensen, Piper Sandler & Co., Research Division - MD and Senior Research Analyst [15]

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Okay. Got you. All right. How about -- maybe also can you just remind me -- vertical exposure? Chris, I think you said that retail consumes about half of the Ics. But if you guys had to rank order, how much is your exposure retail, and then rank order what follows that?

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [16]

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So yes, Troy, what I said is that the retail market consumes more than half of the endpoint ICs. I've used -- we've consistently said it's more than half, and typically said it could be around 2/3. Our -- since we sell so broadly to the market, our endpoint IC volumes roughly follow those market trends. So it led by retail apparel and then a long tail after that of just everything from aviation to automotive, to industrial, to race timing, to consumer-facing use cases and just a really long tail. I would say that -- and I'm looking at Jeff as I'm saying this -- I don't know that there's another one that really pokes up above out of that long tail after you account for retail and spend there.

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Jeffrey Dossett, Impinj, Inc. - EVP of Sales & Marketing [17]

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And following retail -- this is Jeff. Following retail, Troy, I think there's growing opportunity as it relates to the shipment and movement of boxes, pallets and cases. And so supply chain and logistics broadly as it applies not only to the retail industry, but virtually every other industry is a very broad-based global opportunity for the Impinj RAIN platform.

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Troy Donavon Jensen, Piper Sandler & Co., Research Division - MD and Senior Research Analyst [18]

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Yes. Understood. Maybe one last one for Chris. Chris, historically, you guys have talked a lot about health care being a very big opportunity for RAIN. It seems to have been kind of cool lately. But I'm just wondering, is this the catalyst that this industry needed to just understands the benefits of having this technology? And just probably still too early to tell, but just thoughts would be helpful.

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [19]

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I'll say that it is too early to tell. We hope so. We see amazing opportunities for RAIN in health care for tracking supply chains and shipments, pharmaceuticals, medical products, to have the right products in the right place at the right time. In surgical crash kits and hospitals, just there's so many use cases, so much benefit RAIN could bring. It is a significant opportunity. And -- but it's too early to predict whether that -- whether COVID-19 will drive adoption forward and manifest that significant value that we believe is there.

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Operator [20]

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Our next question comes from Charlie Anderson of Dougherty & Company.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [21]

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And I echo those sentiments that everyone's safe, that's great to hear. So on the -- and thanks, by the way, for all the color. On the bookings number, the 21% year-over-year drop. I'm curious, Cary, how that's been trending? Do you feel like we're at a trough point yet? I know that was just a moment in time last Friday, but kind of curious what the trajectory of that has been? And then I've got a follow-up.

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Jeffrey Dossett, Impinj, Inc. - EVP of Sales & Marketing [22]

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Charlie, this is Jeff. I think the insight I would provide is that while we work closely and proactively with our inlay partners, they're still in a period of assessing a changing demand environment. And as they were exiting first quarter into a period of uncertainty, we know that many of our inlay partners elected to accelerate or expedite the shipment of endpoint ICs, as they had concerns regarding the ongoing viability of shipping opportunities and wanting to be well positioned with strategic inventory, if you will, to prepare them to meet the demand of their end customers.

So they have been going through a period of reassessment. And during that period of time, have been pausing on additional bookings as they assess their particular position against the demand opportunity they see ahead of them. As time passes, they will get a clearer idea of their customers' demand. And therefore, we'll be able to assess the appropriate level of inventory and we stand ready to serve those requirements as they become clearer.

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Cary L. Baker, Impinj, Inc. - CFO [23]

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And the only other thing I would highlight on that is that our backlog was very strong exiting the quarter. We had $29.5 million in IC backlog. That's more than double, approaching triple where we were a year ago.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [24]

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That was actually my follow-up question. Go ahead.

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Jeffrey Dossett, Impinj, Inc. - EVP of Sales & Marketing [25]

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Yes, Charlie, prior to the broader understanding of the emerging potential impact of COVID-19, we had had a very strong bookings period coming into 1Q and into 2Q and a very strong pipeline. So the market was clearly evolving favorably until it became more clear that there would be a demand impact from COVID-19. And so while we can't predict when this phase will pass, it will pass. And as I said, we stand ready to work closely with our inlay partners to ensure that they have the inventory they need to serve the demand from end customers as it builds through and out of 2Q.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [26]

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Yes. So I was going to ask you on the backlog that was really an interesting statistic. And I was kind of curious because you haven't given it before, how volatile that number tends to be in terms of the read-through on it more than doubling, potentially tripling? And then if you could also maybe walk us through the factors that led to that; if it's a true, nice, clean read-through of the business accelerating to that degree?

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Cary L. Baker, Impinj, Inc. - CFO [27]

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Yes. So Charlie, I think it's not as volatile. Certainly, timing plays into it, and we can see -- let me tell you, if you look at a point in quarter, so we're looking at the first 25 days of a quarter, yes, timing can impact it. But generally speaking, it's going to follow our revenue trends. And then beyond that, the $29.5 million, I would highlight, is not our total backlog. That is just the endpoint IC. The $32.3 million was our total backlog for the quarter.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [28]

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For sure, but I guess the question is, what factors would you ascribe to leading to that large increase in the backlog on endpoint IC?

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Jeffrey Dossett, Impinj, Inc. - EVP of Sales & Marketing [29]

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Charlie, this is Jeff. I think it's a reflection of prior to COVID-19, a very strong outlook in terms of demand for endpoint ICs and the opportunities that were emerging all around the globe. And it's our expectation that as supply chains and our inlay partners assess the changing demand environment, they will return to organic growth that we've experienced prior to COVID-19.

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [30]

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Charlie, I guess the only thing that I'll add is that, as I said on the call, we also believe we had modest share gains. So when you combine the organic growth, modest share gains, new deployments and just total opportunities, RAIN was growing.

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Operator [31]

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Our next question is from Craig Hettenbach of Morgan Stanley.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [32]

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I just wanted to ask on the success of the systems program you talked about that the big 6-quarter kind of ramp in that business. In terms of thinking about the pipeline and other opportunities -- and it might not be the same -- but just wanted to kind of gauge using that as a proof point in terms of some of the opportunity you might see on a go-forward basis.

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [33]

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Yes. So Craig, we continue to pursue opportunities, especially in supply chain and logistics and in the retail space. As we've said before, those opportunities tend to be project-based. And even the existing deployment that we have with that large North American customer is still -- it's in the process of transitioning over to the operational phase, and we continue to support them. So I think you're just going to have to think if we continue to look for those opportunities, pursue them, there are other opportunities out there, but the timing of those deployments, the timing of when they come is really project -- significantly project-based, and COVID-19 also adds another wrinkle and other uncertainties into the timing of those deployments.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [34]

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Got it. And then just a follow-up on the M700 and understanding the visibility is very difficult broadly for every company out there today. Just curious to get your thoughts in terms of some of this delay, like what that ultimately means maybe towards the latter point in the year, once customers are in a position to kind of -- to ramp up and deploy.

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [35]

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Yes. So this is Chris again. So we continue with our production ramp. We are delighted for the factors I said on the call. That said, we still expect to be shipping production volumes in the second quarter. And we expect the Impinj M700 to positively impact our business in 2020.

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Operator [36]

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Our next question comes from Jim Ricchiuti of Needham.

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Michael Joseph Cikos, Needham & Company, LLC, Research Division - Associate [37]

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You have Mike Cikos here in place of Jim Ricchiuti. The first question I had was building on the M700. So understandably, you guys are now a little more than 2 months delayed. Curious as far as how your partners are currently ramping production there.

I think last time we received an update, they had been prioritizing existing lines. Just wanted to get an update on how they are progressing in their production of the M700 and then ramping?

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [38]

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So I think the comment that I made last time would still hold, they were prioritizing existing production. And now as they're adjusting to the new demand environment, they're basically reevaluating and trying to understand what the opportunities for them are going to be going forward. At the same time, they've got to get their qualifications done at the end customers. And those qualifications are either done by the end customers themselves, or by independent bodies that do the qualification. And those qualifications potentially get delayed at the end customer or at the bodies that are doing the qualification. So there are ongoing delays. What our expectation and hope is that we will see more of our M700 IC qualified at end-customer opportunities such that as we exit the other side of COVID-19, we'll see a significant ramp in demand.

And we are still incredibly excited about that product. As I've said before, it's the most significant innovation we've done since we introduced the first Monza IC many, many years ago. And it also has some unique features for loss prevention that will drive loss prevention and thereby enable the self-checkout. So we're excited about the future for it, and we continue pushing it forward.

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Michael Joseph Cikos, Needham & Company, LLC, Research Division - Associate [39]

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Great. That's helpful. And then just one other question, if I could. I know coming into the year, there was the expectation that you guys would be increasing expenses to strengthen product leadership and market position, obviously, in a much different world today versus where we had been. And I think there was a comment, too, as far as you guys trying to, I guess, moderate some of the spending. I'm just interested in where is it you guys are looking to remove or curb some of those cost increases that we were initially looking for? And then how that plays off? Again, obviously, I have to assume that you're investing in R&D behind this M700 launch?

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Cary L. Baker, Impinj, Inc. - CFO [40]

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Yes. So great question. So we have not changed our R&D and capital investment plans. What we have done, though, is we've looked at our discretionary spend, and we are modulating or reducing that across the board. So I think travel is almost nonexistent right now. Discretionary marketing is -- has been reduced. There's a variety of other similar type expenses that we're just not incurring right now. So while we anticipate our overall spend profile increasing, it's not going to increase at the rate we thought at the beginning of the year because of those factors. And as a result, we expect profitability to decline in the near term. But we -- as Chris mentioned, we have charted our path back to adjusted EBITDA breakeven on the other side of COVID-19.

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Operator [41]

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(Operator Instructions) Our next question will come from Scott Searle of ROTH Capital.

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Scott Wallace Searle, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [42]

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Focusing in on the M700 a little bit. Can you give us an idea -- I just want to clarify, the 2-month delay, is that 2 months in total from the beginning? Or is that 2 months incremental to, I think, the last call, when you talked about it slipping by about 30 days due to some of the initial issues in China? And then as it relates to the M700, can you provide a little bit more color in terms of how that was playing into that backlog endpoint IC number of $29.5 million. Maybe give us some idea in terms of the number of designs, the level of engagement. And there was a whole product road map that you guys had hinted at, but not shared. Are you guys still on track to be able to continue to develop that?

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [43]

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Okay. So this is Chris. I'll start with some of the questions. So the 2-month delay is total, it's not incremental on the last call. Although, as we've said on the call, there's still a lot of uncertainties out in the market, both in our supply chain and partners and end customers and qualification. So we're doing our best to navigate the Impinj M700 production ramp through those uncertainties. And as I just said a minute ago, we do expect to be shipping production volumes this quarter, although those production volumes because of the delays will obviously be smaller than we had originally anticipated.

In terms of new products, we obviously continue developing new products. It's the lifeblood of our company. We haven't announced anything recently other than the Impinj M700 endpoint IC and the Impinj R700 reader. And at the right time, when we have the products and it makes sense to announce new offerings, we will, of course, do so. But as Cary just said, we continue investing in R&D, and we see this COVID-19 time as an opportunity to drive our future, to drive our competitiveness and emerge on the other side a stronger company in a more competitive market position.

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Scott Wallace Searle, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [44]

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Was the M700 anticipated to be a big portion of that endpoint IC backlog?

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [45]

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No, it wasn't. It was a smaller portion of the overall endpoint IC backlog, because it's in production ramp. So given the size of the numbers that Cary was setting, it was a small portion of it.

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Scott Wallace Searle, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [46]

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Got you. And are you still able to engage with customers to -- look, with the understanding that qualification and certification still remains an issue, but are you able to engage to try and get new design wins to continue to push additional customers along that path? Or has everything kind of ground to a halt on that engagement front?

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [47]

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We are still able to engage, but things are much slower. I'll just give one example. To the extent we were going to be doing pilots in retail stores, with the retail stores shut down, you can't do pilots. So when we said that the retail stores are closed, it basically delays systems pilots, it delays some of the endpoint IC pilots and other things that were going on. So just as in other industries, we are equally impacted by the store closures and the other effects of COVID-19.

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Scott Wallace Searle, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [48]

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Got you. And if I could, on gross margins, I just want to make sure I heard those numbers correctly. You said there was a number of charges that translated to about a 510 basis point impact in the quarter, which if that's the case, it implies that your endpoint ICs are actually in pretty good shape from a gross margin standpoint in the mid- to low 40s, which is probably a little bit better given the seasonal pricing coming into the first quarter. Is that the correct way to think about it?

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Cary L. Baker, Impinj, Inc. - CFO [49]

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Yes. One correction on that, it was 560 basis point impact on gross margin. So without that, would have been about 51.7%, but the logic everywhere else was exactly spot on.

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Scott Wallace Searle, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [50]

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Got you. And then just lastly, if I could. You talked a little bit about your inlay partners in their process and working with their customers.

Do you have any sense of what the inlay and endpoint IC inventory looks like at the customers? Do you have any idea what that looks like in terms of number of weeks or lead times versus past history?

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Jeffrey Dossett, Impinj, Inc. - EVP of Sales & Marketing [51]

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This is Jeff, Scott. I would say prior to the emergence of COVID-19, we and our inlay partners would assess that inventory levels were healthy and appropriate. Of course, in facing the uncertainty of COVID-19, some of our inlay partners elected to expedite shipments so that they would have the security of on-hand inventory. We anticipate our inlay partners, for the most part, will hold those additional inventories through the second quarter and allow for the return to more normal demand in the latter half of the year to consume those inventories.

So at any given point in time, inventory is an assessment of future outlook for demand, we work proactively and very closely with our inlay partners on a near-daily basis to share data and insights into our understanding of the marketplace. And then our inlay partners assess that information and insight and make decisions about inventory, booking, and shipment schedules. So we'll continue to work very closely with our partners and stand ready to help them as they navigate through this period of uncertainty, and as they plan to prepare themselves for a return to growth in demand that they hope to see in the latter half of the year.

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Operator [52]

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

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Chris Diorio, Impinj, Inc. - Co-Founder, Vice Chairman & CEO [53]

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

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Operator [54]

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