Q2 2020 Impinj Inc Earnings Call
Good day and welcome to the interchange Inc. second quarter 2020 earnings Conference call.
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Investor Relations. Please go ahead.
Thank you operator, good afternoon, and thank you all for joining us to discuss with just second quarter 2020 results on today's call Christy reality, just co founder and CEO will provide a brief overview of our market opportunity is performing.
Very very pundits CFO will follow with the detailed review of our second quarter 2020 financial results and third quarter 2020 commentary.
We will then open the call for questions, Jeff Dossett Impinges Chief revenue Officer is also on the call and will join Chris and carry is acuity session.
Management's prepared remarks, along with trended financial data are available on the Investor Relations section of vintages website.
Before we start the call. Please note that we will make certain statements during the call that are not historical facts, including those regarding our plans objectives for expected performance the expected or potential impact. Its cobot 19 on that business operating result, financial condition or prospects and the expected or potential responses of government authorities.
Tumors partners and the company to cope with 19 to the extent, we make such statements are forward looking within the meeting at the private Securities Litigation Reform Act from 1995.
Any such forward looking statements trees that represent our outlook only as of the date of this conference call.
Well, we believe any forward looking statements, we make including concerning cobot 19 are reasonable our actual results could differ materially because any statements based on current expectation.
Subjects are subject to risks and uncertainties.
Please see the risk factors in the annual and quarterly reports, we file with the FCC.
And risk factors in the form 10-Q for more information about these risks do we do not undertake and expressly disclaim any objection to update or alter our forward looking statements whether as a result at new information future events or otherwise except as required by applicable.
During today's call all financial numbers, we discuss except for revenue or where we explicitly state otherwise our non-GAAP financial measures balance sheet and cash flow metrics are on a GAAP BFS 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 the night annual Needham Industrial Technologies Conference on August six.
Oppenheimer 20, Threerd annual technology Internet Communications Conference on August 11, Canaccord Genuity is 40 of annual growth Conference on August 13th and Colliers Securities Conference on September 10th we look forward to connecting with many of you at these upcoming events I will now turn the call to Christy Oreo Impinges co founder and Chief Executive.
Officer, Chris.
Thank you Alan Thank you all for joining our call I Hope you Andrew loved ones are and remain shaken well.
The 19 has significantly affected intention and our customers in the short term, causing unprecedented volatility in the first second and third quarter is at 2020.
Looking further out we believe common 19 will accelerate our secular opportunities in the mid to long terms and advance our thesis and connecting and getting digital like everything.
Starting with short term over 19 severely impacted retail apparel, our meeting endpoint IC market with non essential stores. Most we closed.
Other markets opened 19 impact Derek I opportunity and geography, the overall impact was negative.
Our inlay partners adjusting to the volatile demand environment.
First expediting endpoint IC shipments from second quarter to first.
Then rescheduled backlog from second quarter to second half well, all slowing second quarter bookings.
Consequently, our second quarter revenue and attracted quarter over quarter and year over year.
The rescheduling requests peaked in may with bookings improving notably in July.
Our in life partners are today consuming inventory the accumulated in the first quarter, we expect that inventory to normalized by the end of the third quarter.
The prior side demand for those endpoint IC is used in industrial supply chain and specialty applications, which are smaller and still meaningful opportunities for us remained steady in second quarter engendering, a richer than typical products mix higher margins.
System side of the business second quarter revenue also declined quarter over quarter and year over year.
And by the North American systems project transitioning to its operational phase and Capex Opex and other end user projects.
The former did bring a bright spot for the customer ordering more gateways. Despite the project transition generating modest second quarter revenue.
The latter height capex manifested in lower deal count and smaller deal size.
Many consumer facing use cases.
Thanks, timing and airline magnets tracking delayed or put on hold.
Also highlights our deployments that required not essential onsite personnel were similarly put on hold.
Finally, our systems distributors are today, reducing their inventory levels lower sell through and only placing new orders for products or quantities not currently in inventory.
Today retail stores are reopening in many geographies, particularly in Asia.
Productivity remains low, particularly in North America.
Well, the pandemics apparent resurgence tempers, our third quarter endpoint IC expectations.
Average retail deployments continue expanding worldwide.
Moving at a notable north American end user.
On the system side heightened end user capex budgets and ongoing slowness in consumer facing opportunities Likewise temper, our third quarter systems expectations.
Today's vantage point also suggests that the fourth quarter may not follow typical seasonality.
Turning to the medium term, we see covered 19 accentuating our opportunity.
So I felt it even in the efforts of the crisis.
Hey, rain enabled retailers with better visibility into their inventories were able to quickly hit it online sales and omni channel fulfillment.
Many of those retailers are today accelerating plans to modernize their in store experience.
Customer satisfaction and reduced actors from virus transmission.
For example over 19 is driving a transition away from traditional loss prevention and toward ran enabled loss prevention touch free self checkout and seamless returns offering large projects, leading loss prevention partners and retail end users.
Supply chain shipment volumes ramped progression to traditionally short lived holiday peaks and stayed there.
End users accelerated their plans to modernize their operations.
We are today seeing traction not only reading items, passing through dock doors, which we have discussed on prior calls on conveyor belts to reduce manual touch and approve shipment accuracy.
Notably a second large north American supply chain and logistics provider has commenced and get deployment.
Scale and database that are difficult to forecast, we believe will be significant by most any measure.
We expect these accelerating retail and supply chain and logistics opportunities not only drive long term systems revenue.
But also significant endpoint IC volumes and deployments transition to operations most me in 2021 and beyond.
With our strong balance sheet and staying power, we will not only whether the impacts of cobot 19, we will invest in these opportunities and exit the other side of co at 19 stronger.
Looking to the long term, we believe 19 will accelerate our vision of connecting and giving digital like to everything.
Leading businesses are investing in modernizing their operations to address structural inefficiencies.
Delivered a seamless E commerce online and in store experiences our partners and customers demand.
To do so they want and need the visibility insights virtualization and customer experience at rain branch.
Our pipeline of large systems opportunities and end user engagements richer then and deeper than at any time in our history.
Leading end users are pushing us expedite innovations and solutions.
Right.
Our also asking from more and better capabilities.
Yes.
Our engagements with top tier Oems.
These anti.
Hi, OTI providers are also advancing.
I feel the same poll, we do from those large visionary end users.
The game changing products, we've introduced at the end pinch and 700 endpoint IC.
And the IR team did you have advanced resonate in a world forever change by cover 90.
We are energized by the pace toward realizing our vision and the partners and end users we are driving it.
Turning to new products.
Action ramps for a bright spot in the quarter as we delivered production volumes of our EMS 700 endpoint IC.
Our 700 reader product families.
The M. 700 will fundamentally change the rain landscape.
Moving our ability to migrate and endpoint IC aggressively down more slot proving performance while at the same time, adding new functionalities that were previously outerbridge.
Our partners and end users are excited by both the performance and the first key new functionality protected mode.
Enables embedded tagging for retail self checkout loss prevention and seamless returns.
We see both the M. 700, and our 700 as growth drivers affirming our position as the leading rain innovator and products supplier now and in the future.
Our 700 also received recognition for its creative design in the 2020 core 77 design Awards.
The intend, Jim 700, and our 700, our central pieces of our platform powerful growth drivers for our business.
We remain committed to further innovation across all our product lines.
On the organizational side second quarter brought both excitement and introspection.
Excitement and Jeff Dolphins promotion to Chief revenue Officer.
Yes, Frank tremendous insight and leadership running our go to market organization.
He has been instrumental in our sales partner and product successes, we foresee continued excellence.
Graduations, Jeff on your well deserved promotions.
We're also happy that from a team perspective.
Well to our virtual work environment and have maintained our productivity.
Employee retention was high and.
We added talent to a few targeted areas.
Lets second quarter also brought the introspection.
George points murder.
Turning up the United States as Memorial day.
25 2020.
Expose those of us.
Included.
We're silent on racism.
As part of the problem.
Today, we can be silent no more.
The next day I wrote a letter to all impinge employees closing with these words.
Gather.
Now, let today's events from our memories as has happened so often in the past.
Strive instead for the better.
Dedicated ourselves in doing so.
In response, so many of our employees committed to making our company model of diversity and inclusion that I am confident that day, and we will make itself.
And we all of us.
Not forget.
In closing second quarter was challenging and cover 19 immediate impact will extend into the third quarter.
Our unless we remain focused on emerging front cover 19, a stronger company stronger market position and when we enter.
As I said last quarter, we've not lost sight of the big picture.
The benefits, we bring to retailers and of the improvements we can drive in supply chain LNG sticks, and we see brightness ahead.
Option accelerating as leading end users leverage the visibility.
Insights virtualization and customer experience that rank brands.
The strong balance sheet game, changing new products and a compelling platform and vision at should squarely in the center of end user business transformations, our future is bright.
We will continue focusing on leading apparel retailers and I'm, beating supply chain and logistics companies.
Being an operational improvements for them and business opportunities for us.
We will do so with a few years determination to win keeping a close eye on expenses as we leverage our resources to increase our competitiveness charter path to adjusted EBITDA breakeven.
Other side of Cobot 90.
Be safe and be well.
Now I'll turn the call over to caring for our detailed financial review second quarter commentary right.
Thank you, Chris and good afternoon, everyone. Today I will cover both the metrics, we typically discuss on earnings calls as well as additional more detailed metrics, which we believe are appropriate given the market uncertainties.
Second quarter revenue was 26.5 million declining 30.7% year over year at 44.7% quarter over quarter compared with 38.2 million second quarter 2019, 47.8 billion first quarter 2020.
Second quarter endpoint IC revenue was 18.5 million declining 21.8% year over year, and 44.9% quarter over quarter, compared with 23.7 million and second quarter 2019, and 33.7 million in first quarter 2020.
Second quarter endpoint, IC bookings declined significantly year over year end quarter over quarter, driven by inlay partners rescheduling, DUC backlog and managing inventory levels in this new demand environment.
We expect our inlay partners to take advantage of the recovery retail demand environment and the third quarter to reduce the inventory they built in first quarter 2020.
Well that dynamic coupled with customer specific adjustments will limit our third quarter revenue recovery, we see positive momentum in our bookings pace as of July 24th July bookings have approved significant significantly over June and are higher than any month in the second quarter. We still have a week of July to go.
We expect our customers to complete their supply chain inventory adjustments and the third quarter and that our fourth quarter endpoint IC revenue will be more indicative of end user demand.
Second quarter systems revenue was 7.9 million declining 45.4% year over year, and 44.1% quarter over quarter compared with 14.5 million in second quarter, 2019, and 14.1 billion in first quarter 2020.
Gateway revenue declined both year over year end quarter over quarter led by the large North American project transitioning to an operational phase with modest revenue from that customer in the second quarter.
Reader revenue declined year over year end quarter over quarter impacted by coated related project delays and type customer capex budgets.
Redirected see revenue grew year over year at quarter over quarter due in part to modest partner inventory builds to reduce supply risk.
We expect third quarter systems revenue to remain constrained by continued tight capex budgets, our distribution partners rationalizing their inventory levels for lower sell through and by lower return IC revenue the latter due impart to reduced demand for retail handheld.
Second quarter gross margin was 51.4% compared with 50% a year ago at 46.1% last quarter on a year over year basis gross margin improved 140 basis points driven by underlying product margins, partially offset by leverage on lower revenue.
On a quarter over quarter basis, gross margin improved 500 basis points, driven by lower charges and improved underlying product gross margins, partially offset by leverage on lower revenue.
Total second quarter operating expense was 18.8 million compared with $18.3 million and second quarter 2019, 19 million in first quarter 2020.
Research and development expense was 8.7 million sales and marketing expense was 4.8 million general and administrative expense was 5.4 million.
Second quarter adjusted EBITDA was a loss of 5.2 million compared with a profit of 800002nd quarter 2019, and a profit of 3 million in first quarter 2020.
We have excluded costs of $5.4 million associated with an expected settlement of our shareholder class action lawsuits second quarter, non-GAAP general and administrative expense adjusted EBITDA non-GAAP net loss.
Second quarter GAAP net loss was 17.5 billion second quarter non-GAAP net loss was 5.7 million or 25 cents per share using a weighted average diluted share count of 22.7 million shares.
Turning to the balance sheet, we ended the second quarter cash cash equivalents as short term investments of 120.9 million compared with 59.8 million second quarter 2019 at 119.2 billion in first quarter 2012.
Inventory totaled 37.1 million now 800000 from second quarter, 2019, and increasing 5.3 million from first quarter 2020.
The quarter over quarter inventory increase was driven by lower demand due to covert 19 as well as the production ramp of the impinge on 700.
Second half 2020, we will maintain adequate supply of our 200 millimeter endpoint IC as we set the stage for our transition to the 300 millimeter and 700 family.
In the second quarter net cash provided by operating activities was 1 million and property and equipment purchases totaled 100000 free cash flow was 800000.
I will now highlight a few items impacting our business.
First our suppliers that operated at reduced capacity or were closed due to temporary government mandates have recovered there today operated at nearly 100% capacity, but we continue to be vigilance around component availability in a dynamic demand environment.
Second we have an agreement to sell all outstanding shareholder litigation, we recorded a 5.4 million settlement related expense in our second quarter, GAAP General and administrative expense and we expect a corresponding cash outflow during third quarter 2020.
We're considering a number of factors, including the significant expense of protracted litigation at this time and time and money. We determined that it was in the company's ended shareholders' best interest to settle the suits.
As Chris noted, we have significant opportunities ahead of us and we look forward to focusing on enabling digital life for everything.
Third in the second quarter, we generated positive free cash flow from strong underlying product mix boosting gross margin and the team effectively managing operating expense working capital and capital expenditures looking into the third quarter. Those benefits will reverse operating expenses will increase working capital will consume.
Cash capital expenditures will increase and underlying product mix will be less favorable.
Well, we will use our balance sheet and the third quarter to fund our business. We remain confident in our plan to return to adjusted EBITDA breakeven on the other side of covert 19.
Turning to our outlook.
Centering the ongoing impact the coven 19 on our partners and end users. We feel it is prudent to not give quantitative third quarter guidance.
We will share additional metrics about our business that we do not intend to share on an ongoing basis.
As of July 1st quarter backlog scheduled to ship in quarter was $16.2 million.
In addition, as of July 24th third quarter bookings scheduled to ship in quarter, four 7 million up 20% quarter over quarter and down 17% year over year further third quarter upside is limited both by continued demand volatility and by our partners rationalizing their endpoint IC and systems inventory levels.
Yes.
Despite the third quarter uncertainty, we see encouraging signs as our partners and end users recover in the new demand environment.
We remain focused on emerging on the other side of covered my team is stronger and more competitive company delivering against the new opportunities to covert 19 is creating.
In closing I want to thank our impinge team our customers are supply first and you are 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.
We will now begin the question and answer session to ask your question, Chris lower than one on your touch.
If you're using a speakerphone please pick up your handset for pressing the keys to.
To withdraw your question. Please press Star then.
And our first question today will come from Jim Shooties with Needham and company. Please go ahead.
Hi, Thanks, good afternoon.
Yeah, I'm wondering if there's a way to look at the business and look at some of the areas of the markets that you address that has opened.
Maybe give us some perspective.
As to the.
Jack to review the recovery, you're seeing is there any way you can we've seen obviously parts of Europe opening up we've seen parts of the U.S. that open on the retail side of course, there are other issues now with the pandemic spreading and I'm wondering if they're experiencing anything you can share with us they might.
Give us some senses to how we might see the recovery.
Thanks, Jim and good afternoon to you as well.
Hi, Chris.
We cannot I think eminent tag team. This one with Jeff, but just and our answer of course will be very qualitative here.
In some of the where as I said in my prepared remarks associated with there.
Rescheduling request, peaking in may and some.
Returned to orders in July and comments carry made about July being a stronger month, we're seeing a return.
I can't use the word normalcy in that return because theres so much uncertainty out there associated with Covance 19.
And.
Wanted to do here was really to give a picture of.
Less about the short term and a little bit more about the mid and long are the medium and long terms and the fact that.
We see transformations happening in our two key focus markets that those being retalix bunch and logistics and then more broadly out in the market as end users really adapt air businesses trip over 19 so.
So we see we see return coming out this year of course, depending what it hasn't fourth quarter, but it's hard to say what we've covered 19.
But we do see Tailwinds now from these large and customers that are striving to change their their organizations I know it in directly answer your question, maybe Jeff can help me out a little bit here with a little bit.
More concise mr. around some other points.
Jim This is Jeff Das it just a couple of things I'll add to Chris' comments first of all I have reinforced that I think that supply chain in logistics, there are bright spots in supply chain in logistics around the globe.
And then I think I would add that of course the.
Timing and pace of recovery.
In different geographies and in different industry sectors varies around the globe.
We are seeing some.
Moderate recovery earlier in Asia as yet.
Recovers and returns to a.
A new normal so we're seeing retail reemerging, we're seeing.
Business in general Reemerging as non essential team members are able to return to work and return to either.
Existing deployments.
And or testing new proofs of concept or proves the value, which are bright spots in terms of longer term opportunity. So I think there is geographic.
Variance in terms of the recovery, but bright spots that we're seeing around the globe.
Okay. The follow up question I had is just.
One of the other players in the order if I may be market has talked about.
That in some cases.
It's difficult to get even into.
Certain locations because of the pandemic to carry out installations and I'm wondering how much of that you are seeing whether its.
Hi, guys see side of the business or more directly on the system side of the business you alluded to another sounds like another potentially nice win within certain logistics customer is there any visibility as to how that it sounds like you don't have much visibility and how that's deployed but to what extent.
Is the pandemic impacting your ability to really see some of these programs carried out in the near term.
Jim It's Jeff again, I would say that.
The inability for non essential team members to return to the workplace does impact some systems projects in terms of timing and pace.
There are other examples where.
Larger organizations have been able to continue testing and preparation for deployments.
So I do think it's impacting.
This systems business differently from the endpoint IC business, whereas the endpoint IC business is more.
Directly impacted by the.
They closures in retail.
So not so much a worker access to the workplace, but rather shoppers returning.
10% to in store experiences.
That being said a bright spot that Chris.
Noted in his opening remarks is that visionary leading retailers have leveraged their rain investments.
To support improved supply chain inventory visibility to support Omnichannel shopping experience is whether its buy online pick up in store buy online pickup that curbside or importantly, too.
By online and shipped from closest available inventory to maximize customer satisfaction and admin minimize shipping costs. So we're seeing I would say, we're seeing amazing resilience and creativity around the globe to adapt to very changing environment.
But the inability for non essential workers to return to work is impacting some systems projects timing and pace.
Thanks, I'll jump back into queue. Thank you.
Okay. Thank you Shannon.
And once again, if you'd like to ask your question. Please press Star then one.
And our next question will come from Charlie Anderson with probably a security. Please go ahead.
Yes. Thank you for taking my questions and good afternoon, I wanted to start on supply chain logistics.
Sounds like a lot of interesting traction there. So firstly on the existing customer were you did get more orders is that just a tale of the prior project or would that be.
The movement into a new project with them and then on the new customer it sounded like Thats a lot of opportunity I Wonder if you could maybe just layer in any more context, there in terms of how it looks relative to the the first project you executed with a customer in the market.
Okay. Charlie Thank you for joining us appreciate it to answer your first question.
[music].
There are some existing opportunities in the existing deployments at that North American.
Switching to logistics customer and of course that being a very large customer. There are also other opportunities that we foresee for the future. So we continue to prioritize that customer support them as best we can and as we said we had a.
A modest modest gateway sale in the second quarter, and we look forward to future opportunities.
In terms of in terms of other supply chain and logistics providers.
Moving forward as I said as we noted on the.
In the script, we there is another opportunity out there a very significant size and scope and we're excited about that opportunity, but we really can't speak at this time to that either the pace of their deployment or kind of really what it means for us we'll be giving further updates.
Further calls as we learn and and see more but I think it's important to note that it is another very large opportunity and and it portends for at least for us.
Future of transition and supply chain and logistics that we've been looking forward to and seeing for a long period of time and.
In some sense cobot 19 has accentuated or accelerated it of course for committed come online quickly meant that they already had to have some ongoing work pilots in a bunch stuff already done, but but we see significant opportunities in supply chain logistics for the future and the fact that theres, another large and and customer coming on line is super promising for us.
Great and then for my follow up a quick couple of questions on inventories. So number one I wonder if you'd be willing to quantify the degree of inventory those out there you are only partners.
How much needs to be worked through given the third quarter to get to that equilibrium in the fourth quarter.
And then secondly, you guys did build inventory yourselves.
At quarter end sound like there was going to be some working capital investments in the third quarter. So I'm wondering if that also means inventory goes up again and just trying to understand the dynamics there in terms of what's driving that thanks.
On to your first question on inventory this is Jeff.
I don't think out quantify the the inventories.
In place in our inlaid channel partners, but importantly, what I would.
Reiterate is that we anticipate exiting.
Third quarter with healthy, meaning appropriate inlay channel inventories so as.
As the our inlay partners respond to evolving demand.
Our aligning their inventories to that.
Level of changing demand and again, we expect to exit third quarter.
With that healthy channel inventories.
No. Charlie this is carry all I'll take the impinge inventory portion of your question.
We have long cycle times in our inventory cycle in wafer buys in the period can take as long as five months to turn into finished goods. So the quarter over quarter increase was really driven by the sudden demand drop more so than anything other than what we have done in terms of managing our inventory.
Looking forward, we anticipate maintaining kind of our current level of 200 millimeter inventory, we will build modestly.
On our production ramp side. So both on the 700 300 millimeter wafers and then also to a lesser degree on the our 700.
That is really to support the product launches.
Okay, great. Thank you so much.
Thank you Charlie Thanks, Charlie.
And our next question will come from gut feeling with Roth capital. Please go ahead.
Good afternoon, Thanks for taking my question.
I apologize if I missed this earlier, but in regard to your systems comments did you provide any sequential directionality I know you had to follow on orders for gateways from your large north American customer.
It sounds like that will be during the third quarter should we be assuming initially that that we're starting from me down third quarter for systems, and then to follow up on the system side could you talk a little bit about how that pipeline is shaping up in terms of the magnitude of the deals that or in the pipeline are they getting larger per site deployments maybe.
Talk a little bit about how the current coven environment is maybe pulling in larger opportunities related to efficiency visibility zero touch environments.
Hey, Scott. This is carry I'll take the first portion of that and then handed over to Jeff So from me.
A systems perspective in terms of guide into the third quarter.
We expect it to be another constrain quarter capex budgets are going to be tight stores are just now opening so projects are going to be delayed we did get.
As Chris noted an additional order from the the first North American.
Just six company.
There will be modest revenue from that but the I would say overall the systems business, we expect it to be constrained in the in the third quarter.
Yep.
And in terms of the pipeline as Chris noted in his remarks.
We do feel encouraged by our pipeline of large systems opportunities some of which not all of which have been.
Positively influenced by Kovac 19, but I would say as percentage of the overall pipeline large opportunities has increased as an overall percentage in part Kovac 19 has had a disproportionate impact on smaller projects, which off.
Ken.
Again in terms of testing and validation of the value and initial deployment within the quarter. So again as non essential team members have been unable to return to the workplace and many geographies those smaller in quarter opportunities.
Have been.
Proportionally impacted in the short term only though.
We have large opportunities.
Welcome.
Okay. So if I could quickly follow up on the endpoint IC front could you recalibrate US just in terms of what that end market makes look like or maybe retail non retail in the second quarter I know it's.
An unusual set of circumstances in the numbers or not normalize but to just calibrate us on that front the maybe in terms of.
That pipeline, that's building as well, particularly around the 700.
What you're seeing on that front, how the early expectation is for for market share on that front and lastly, gross margins I think were expected to be a little bit better as Jim 700 gets introduces that's still the expectation as it starts to ramp into into more meaningful production. Thanks.
Thanks, Scott I think we're going to tag team. This when this is Chris starting that add up to Jeff in the middle part of the question and then carriers in the latter part.
We spoken a good bit in past about the rough breakdown of endpoint IC volumes.
As being roughly two thirds retail on roughly one third that's retail apparel on roughly one theres other opportunities.
As we said for a second quarter.
Some of the other opportunities to specialty opportunities.
We're not impacted as much as some of the retail environments. So that shifted would've been a transient shipped in the second quarter, where the retail percentage would have dropped I don't think leave we have the data that we can quantified for you right now, but just expect Rico.
Sina.
More significant decline than the other opportunities our expectation is that on the other side of Copel 19 that will rebound back and we'll probably go back to the traditional two thirds one third at least until some of those supply chain and logistics opportunities start to ramp up and then we might see overtime as you would expect.
The retail, even though it's still increasing but to gradually decrease as an overall percentage of the total endpoint IC volumes.
In terms of market reception, I'd say, our partners and customers are very excited by the.
Performance and capabilities of the impinge M. 700 endpoint IC series.
We are very appreciative of the work that we've done in close collaboration with our partners to prepare for production ramp at at scale.
And we anticipate.
Market adoption will grow in in the quarters to come.
Hey, Scott this is carry in regard to the margin impact from the M. 700.
Once we get out of the production ramp yes, we expect them 700 to be accretive to margin. So think kind of the end of this year to the beginning of.
Next year, when we'll start to see that benefit.
So we started shipping them 700 in Q2 small volumes.
And it did have an impact on gross margin in Q2, but the margin was more impacted by a favorable product mix that offset both the production ramp impact of the M. 700, as well as leverage on lower revenue.
Great. Thank you.
And these guys.
Your next question will come from Craig Hettenbach with Morgan Stanley. Please go ahead.
Yes, thank you and understanding that to supply chains, and very fluid kind of go around that the pandemic, but.
Maybe just touch on some of the signal you're looking for in terms of that inventory depletion rate in when you. When you think you can kind of get back to two a normal seasonal trend.
This is Jeff.
I think the first thing I would say is that.
We expect to that during third quarter, our inlay partners will continue to address demand which is.
In part by burning down inventories that were accumulated in the first quarter, we expect to exit third quarter.
With healthy inappropriate.
Channel inventories at that time.
And then I'll just add that going forward, we see obviously with the pandemic, we see atypical demanded fourth quarter, it's not really claire's typically fourth quarter is seasonally down at least for endpoint SCS, but it's not clear that that's going to be the case, given what's the what's transpiring in the market right now and so it's really difficult for us to call. What the seasonality is going to be as we exit the year on either the system.
Side or the and I said, hence the comment we major in the script that.
We don't expect this year to follow typical seasonality trends.
Got it thanks for that and then just as a follow up you mention just.
Lower capex for some on that on the system side.
This is understandable given the environment, because maybe Chris can you just speak to kind of design engagements and.
Companies are trying to kind of work through all these different external events as well, but just what the level design. The monies and then hopefully as the environment stabilizes there what that would translate into in terms of the momentum in the business.
This is Jeff My first.
My quicker response would be that theres been some impact.
On systems projects of non essential.
Team members not being able to return to work.
But I would say that the the pace of.
Of innovation or planned.
Plan deployment of rain.
The intention has continued but some of the testing has been impacted by cobot 19, but we expect that to be relatively short term I think both partners and im pinch have been able to remain in close engagement and communication with and customers who are planning.
Rain based deployments and so progress is being made but were.
Specific onsite.
Deployment configuration and optimization is necessary prior to broad scale deployment theres been some impact.
Does that answer your question Craig.
It did appreciate the color.
Okay.
And our next question will come congrats Jim.
Ricchiuti with Needham and company. Please go ahead.
And I realize it's very difficult to forecast the topline, but clarity on wondering if you can give us some indication as to how we should think about operating expense I mean, clearly there arent trade shows going on travel is.
Virtually.
Nonexistent, so how should we be thinking about your opex levels.
Yes, thanks for the question so.
With regard to trade shows and travel and entertainment you're exactly right that started slowing at the end of the first quarter and ground to a halt in the second quarter.
We expect that environment to continue throughout probably the rest of this year, though we'd like to see to prove we'd like to be out on on the trade shows and meeting with customers face to face. It's just not a reality right now.
Where we are investing is in R&D and and we are adding resources and adding talent in this space to bring new products to market that was one of our investment.
Since the beginning of the year and it continues to be so I will say, we're not hiring as quick as we had budgeted it's just a little challenging to hire in this environment right now, but we're still adding resources.
Our engineering organization, and I guess, some and add to that just a little bit.
We're investing in R&D for the new products were also investing in R&D for some of the and customer projects that we see out there so to the point about we're seeing Pope and these large and customers. We are actually putting people and resources on these projects to accelerate our ability to meet the end customer requirements and deliver for deliver against that.
Got it.
One other one if I may just wanted to make sure I'm misinterpreting your comments about the fourth quarter potentially exhibiting the normal seasonality that youve experience I mean.
It sounds like you're suggesting.
That the fourth quarter has the potential to be stronger than a third quarter is that what you're saying.
Well, we're well Jim this is Chris So we're obviously seeing.
Some channel inventory burned down in the third quarter, which has got were come through on the other side at the ended the third quarter. So we're seeing an opportunity. There were also seeing an uncertain environment in.
In the retail space in general because they fit.
I haven't been buying that much stuff over the past couple of quarters, So and retailers are attempting to.
Figure out I guess, if thats not quite the rightward, but basically rationalize their inventory the products, they're bringing to market and.
Then you get that basically ran enabled items into their stores. So.
So typically we see fourth quarter for the end prices being seasonally down because the tagging habits in the third quarter I think what we're expecting this time around us we will see a difference and.
Difference will be driven both by that channel inventory declining as well as some rationalization that is happening at the end customers, which is difficult for us to predict right now.
Okay. Thank you.
Thank you Jim.
And this will conclude our question and answer session I'd like to turn the conference back over to Chris You are you for any closing board.
Hey, Thanks. Thank you all very much for joining the call today.
Thank you Andrew left once our and remain safe and well. Thank you again.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.