Q3 2020 Impinj Inc Earnings Call
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And welcome to <unk>.
<unk> third quarter 2020 earnings conference call.
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Thank you operator, good afternoon, and thank you all for joining us to discuss Impinjs third quarter 20 Twond himself.
On today's call Christy Oreo Impinges co founder and CEO will provide a brief overview of our market opportunity and performance.
He Baker Impinges CFO will follow with a detailed review of our third quarter 2020 financial results and fourth quarter 2020 outlook. We will then open the call for questions, Jeff Dossett Impinges Chief revenue Officer is also on the call I will join Chris and carry into Q any session.
Management's prepared remarks, along with trended financial data are available on the Investor Relations section of its website before.
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 expected or potential impact of COVID-19 on our business operating results financial condition or prospects and the expected or potential response of government authorities customers partners and the Companys.
Okay. Thank you.
To the extent, we make such statements that are forward looking within the meaning of the private Securities Litigation Reform Act of 1995.
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 FCC and risk factors in the <unk>.
Our 10-Q, we filed today for more information about these risks, we do not undertake and we disclaim any obligation to update or alter our forward looking statements, whether as a result of new information future events or otherwise, except as required by applicable law.
During today's call all financial numbers, we discussed 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, except for net cash used in operating activities free cash flow is a non-GAAP measure before turning to our results and outlook I would like to note that the company will participate with Roth technology.
Virtual conference on November 12, and the 20 Threerd annual Needham growth Conference on January 13th we look forward to connecting with many of you at these outcomes.
I will now turn the call to Christie Oreo It seemed just co founder and Chief Executive Officer, Chris.
Thank you Alan Thank you all for joining our call I Hope you Andrew left once our remain safe and well.
Third quarter revenue grew sequentially, driven primarily by rebounding retail apparel volumes that drove endpoint IC sales men.
Many of our markets segments remain impacted by October 19, So total revenue remains below third quarter 2019.
Regardless, we remain excited about our opportunities of both endpoints crises and systems as we look forward into 2021.
And when I see revenue increased sequentially in the third quarter aided in part by customer requests to reschedule second quarter 2020 backlog to second half.
Year to date in 200 fee revenue was up 2.6%, Mark, but first quarter strength from market demand and customer expedite requests.
Second quarter weakness due to shutdowns.
Third quarter demand recovery tempered by inventory reduction and I were in rig partners. The letter centrally normalized by quarter end.
Looking to the fourth quarter, we anticipate sequential revenue growth despite typical seasonal declines.
We shipped more than 100 million impinge and 700 and foreign currency in the third quarter and now with.
Multiple inlay partners, receiving approvals from Auburn University testing, where we see our opportunities expanding.
We anticipate more certifications in the fourth quarter, and accelerating and 700 adoption and volume growth.
Third quarter systems revenue declined sequentially with Coca 19 impacting demand in retail automotive and consumer facing use cases, such as travel and sports.
Accounting that reduced demand, our reader and reader IC distributors continued reducing their inventory to match the new demand.
Fulfilling orders, where they could from inventory on hand.
We anticipate further fulfillment from distributor inventory in the fourth quarter of securing continued improvements in sales out to our solution and reseller partners.
Supply chain and logistics remained a bright spot in the quarter.
With revenue increasing sequentially.
Primarily from a shipping additional gateways to the North American supply chain and logistics end user we discussed on prior calls.
We do not expect shipments to that end user in the fourth quarter.
We also generated modest third quarter revenue from shipments of our impinge, our 700 readers into our second large north American supply chain and logistics end user.
And we anticipate modest revenue from that end user again in the fourth quarter.
That opportunity as we said last quarter is large, but the deployment timing and pace remain uncertain.
Looking to the fourth quarter systems revenue will remain constrained as we balanced put us from improving demand and the second North American supply chain and logistics end user beginning its ramp.
Against takes from ongoing channel inventory reductions and the first large north American supply chain and logistics end user continuing its transition to an operational phase.
With our recent announcement of our 700 general availability.
And the new opportunities the our 700 enterprise class capabilities opened in the supply chain.
We remain excited about our systems prospects ahead.
COVID-19 has fundamentally altered end user business operations.
Suppressing demand for fixed readers in the near term, but we believe in gen. During that demand rebound when those businesses have clarity to covert nineteens and.
In some verticals, we already see green shoots of recovery.
Looking first at retail with foot traffic down.
Retailers in the near term are focused on the imperative for omni channel fulfillment user.
Using mostly labor intensive, but quick to deploy handheld readers.
Consequently, we see growing fourth quarter demand for endpoint axes and.
To a lesser extent for redirect fees the.
The latter because retailers have fewer fulfillment centers than they do stores.
Our pipeline of retail fixed reading opportunities remains strong, especially in loss prevention and self checkout.
But omnichannel investments remain Paramount.
We also announced few retailers driving two distinct go forward path to rent base loss prevention and self checkout.
One is entirely rain based.
And uses rain enabled exit gates.
Rain tags and rain self checkout terminals.
The other combines rain and traditional RF eas.
This combination allows retailers to use their legacy Eas exit gates.
With merged rain and RF Eas tags.
And rain self checkout terminals.
Former requires more readers and gateways, whereas the letter promises quicker deployments.
Both affords significant opportunities for us.
In supply chain and logistics, we also see traction and to go forward pass.
One path focuses on identifying tech pellets transitioning through dock doors.
The other focus is on identifying Ted cartons on conveyor belts.
The former drive gateway sales and pellet tags.
Latter drives reader sales and curtain tags.
Those are in our platform sweet spot and both leverage our experience from our North American end user deployments.
Like for retail here again, we have a strong pipeline but.
The deployments have been slowed by COVID-19 impacting our partners installation teams.
End users pacing reader installations, when they are operating at peak volumes or both.
Regardless, what our first large deployment transitioning to its operational phase.
And a second large deployment just starting we are only scratching the surface of the total supply chain and logistics opportunity.
In closing revenue rebounded in the third quarter with underlying strength in our core markets.
But the effects of COVID-19 remain.
Regardless, we remain focused on exiting the other side of COVID-19, a stronger company in a stronger market position than when we entered it.
We also remain focused on the big picture.
On the strong underlying secular trends evidenced by our business strength prior to COVID-19.
And on our opportunity to use rain to deliver that digital transformation, our end users want and need with.
With a strong balance sheet debt.
Game, changing new products and a platform and vision that fits squarely in the center of that digital transformation.
The opportunity in front of us is more compelling than ever.
We will continue focusing on leading apparel retailers.
And on leading supply chain and logistics companies.
Driving operational improvements for them and business opportunities for us.
We will do so even as we keep a close eye on expenses.
Joining a path to adjusted EBITDA breakeven on the other side of profit 19.
These sales and be well.
I will now turn the call over to Kerry for our detailed financial review and fourth quarter outlook Gary.
Thank you, Chris and good afternoon, everyone. Today I will cover the metrics, we typically discuss on our earnings calls and provided financial outlook for the current quarter.
Third quarter revenue was $28.2 million declining, 30.8% year over year, and increasing 6.6% quarter over quarter compared with $40.8 million in third quarter, 2019, and $26.5 million in second quarter 2020.
Third quarter endpoint, IC revenue was $21.6 million declining, 18.1% year over year, and increasing 16.4% quarter over quarter compared with $26.4 million in third quarter, 2019, and $18.5 million in second quarter 2020.
The recovery in retail demand environment drove favorable dynamic in the third quarter with our inlay partners, reducing the inventory has a built in first quarter 2020 and turns orders returning in the latter half of the third quarter.
While our third quarter revenue declined year over year in part due to that channel inventory reduction about our inlay partners. We believe our year to date revenue growth now reflects our 2020 demand environment.
Looking ahead, while fourth quarter endpoint IC revenue is typically lower sequentially fourth quarter 2020 will benefit from a comparison against third quarter 2020, we're in lead partnered with reducing inventory.
Generally we expect 2020 endpoint IC revenue on par with 2018.
Third quarter systems revenue was $6.6 million declining 54.1% year over year against a difficult third quarter 2019 comparison, a $14.4 million and.
Then declining 16.5% quarter over quarter, compared with $7.9 million in second quarter 2020.
Gateway revenue declined year over year, but grew quarter over quarter as the large North American project continues generating modest revenues in the third quarter.
Reader revenue declined year over year and quarter over quarter impacted by demand deployment pace and timing and channel partner inventory dynamics.
The second North American supply chain, and logistics deployment progress with modest financial contribution in the quarter.
Rewrites, new revenue declined year over year and quarter over quarter due to lower demand for handheld readers at retail at a comparison to second quarter were purpose built modest inventory to reduce supply risk.
We expect fourth quarter systems revenue to remain constrained as broad based rebound in demand is offset by channel partner inventory dynamics and by the North American supply chain and logistics cost server moving fully to the operational phase.
Third quarter gross margin was 50.1% compared with 50.2% a year ago and 51.4% last quarter.
On a year over year basis gross margin declined 10 basis points, driven by revenue mix and leverage on lower revenue, partially offset by lower you know charges.
On a quarter over quarter basis gross margin declined 130 basis points driven by revenue mix, partially offset by lower you know charges.
Total third quarter operating expense was $20.4 million compared with $18.4 million in third quarter, 2019, and $18.8 million in second quarter 2020.
Research and development expenses was $9.4 million sales and marketing expense was 5.4 million general and administrative expense was $5.5 million.
Third quarter, adjusted EBITDA was a loss of $6.2 million compared with a profit of $2.1 billion in third quarter, 2019, and a loss of $5.3 million in second quarter 2020.
Third quarter GAAP net loss was $14.3 million.
Third quarter non-GAAP net loss was $6.7 million or 29 cents per share using a weighted average diluted share count of 23.9 million shares.
Turning to the balance sheet.
We ended the third quarter with cash cash equivalents and short term investments of $105.1 million compared with $63.1 million in third quarter, 2019, and $120.9 million in second quarter 2020.
Inventory totaled $38 million up $1.7 million from third quarter, 2019, and increasing 900000 for second quarter 2020.
In the third quarter net cash used in operating activities was $11 million on property and equipment purchases totaled $1.1 million.
Free cash flow was negative $12.1 million.
We have excluded from third quarter net cash used in operating activities and free cash flow the $5.4 million cash outflow associated with the settlement of our shareholder class action lawsuits.
I will now provide an update on a few of our strategic initiatives first the capital investment in our 300 millimeter endpoint IC wafer post processing flow considers this.
This ROI driven projects span multiple years that will increase our operations responsiveness broaden our geographic and partner diversity and improve our inventory turns looking.
Looking ahead capital expenditure will look more like 2018 versus 2019 or the beginning of 2020.
This investment will begin paying dividends and 2022 and overtime will generate positive returns to shareholders.
Second we will maintain adequate supply of 200 millimeter endpoint IC wafers as we stage our transition to the 300 millimeter EMS 700 family.
That 200 millimeter inventory uses of cash in 2020 and will be a source of cash in 2021.
In 2021, we expect our days of inventory to improve.
Third we entered 2020 with ambitious hiring goals to boost our engineering investment and filled most of those open role by the end of first quarter of.
As a consequence, we expect an increase in fourth quarter operating expense and we will grow into that investment in 2021.
Looking forward, we will continue to monitor expenses and remain confident in our plan to return to adjusted EBITDA breakeven on the other side of COVID-19.
Turning to our outlook we.
We expect fourth quarter revenue to be between 26.5 and $28.5 million at 32.6% year over year decline at the midpoint of the range.
We expect adjusted EBITDA to be between a loss of $8.9 million and $7.4 million.
On the bottom line, we expect non-GAAP net loss between $9.3 million of $7.8 million rich.
Reflecting non-GAAP per share earnings of between minus 40, and 34 cents on weighted average diluted share count of 23 to 23.1 billion shares.
In closing I want to thank our impinge team our customers our suppliers and you are doing to our investors for your ongoing support.
I will now turn the call to the operator to open the question and answer session.
Thank you we will now begin the question and answer session.
Good question M- Star then one on one touch home phone.
If you use the speakerphone, please pick up your handset before.
Withdraw your question. Please press Star then too.
At this time, the new Pos momentarily to assemble Tim.
Okay.
My first question comes from Kevin.
With Morgan Stanley. Please go ahead.
Great. Thanks. This is Ted currently sits on the line for Craig Hettenbach Mike.
My question is on 300 millimeter wafers, just curious if you could provide.
An update on your transition there.
The puts and takes around costs and gross margins in your prepared remarks. It sounded like you expected to begin paying dividends in 2022.
So just a little bit more color there.
And your expectations for cost curves and adoption as that ramps.
Hey, Ted. Thanks. This is Chris speaking, thanks for joining us and thanks for your question I.
I'm going to say that as I noted in the script.
That weve already shipped 100 million units of our intend, Jim 700, IC, which is almost 300 millimeter wafers.
We have.
Multiple certifications and approvals coming in from the University of Orange testing lab, and so we look forward to strength and growth heading into fourth quarter, and then entered into a 2021 in that 300 millimeter product line. We've also introduced in key new features in that product. For example went into protected note, which allows us to address key use cases and loss prevention and self checkout.
With seamless returns.
For some of the remainder of the question I'll turn it over to Harry.
A little bit more of the details headsets on them 700, we expect gross margin accretion in we're going to get to a lower cost point was to significant improvements with the on 701st as you noted we've moved from 200 millimeter to 300 millimeter wafer so we get a little more die per wafer.
As a result of that but more importantly, we've also improved the process node, we've moved down Moore's law on this and it was shrunk the size of the dice generated even more died.
Per wafer and that as a result has reduced our costs allowed us to be more aggressive at a price point, while maintaining gross margins and we anticipate that gross margin accretion once we get up to production volumes in a room and more deeper into our payout. So as Chris noted we did about 100 million units in Q3 will be more than that in Q.
Before I would expect gross margin to start improving in 2021 now keep in mind that.
For that improvement we have to increase our mix of the EMS 700, and and when we drew and introduce a new IC. It's typically not a replacement think of it as a layering effect. So as we move through the year, we'll build our mix and our share of the EPS 700, and we'll start seeing that gross margin improvement in our results.
And Ted this is Chris I'll, just add one more thing I just note that.
Because we migrated sales significantly down more slot we.
We have roughly twice as many diaper wafer as our nearest competitor and the same says wait for data. So although the labor costs are a bit higher mix, we migrated down Moore's law depreciation curve is also little bit steeper and and we see opportunities for the future in that process.
Got it. Thank you and then just one more quick follow up if I can.
It also Sam's any capex for 2021, it's going to come up a bit.
Q2 thousand 18.
Levels, just curious if you could maybe provide a little bit more color on the current quarter the pace for 2021 and beyond.
Yes, so in the current quarter, we did 1.1 billion of Capex.
We really hit our pace on the the process flow improvement effort. So I would expect another modest step up in Q4, and then for fiscal year 21 to be pretty consistent with where we were in 2018.
Got it thanks.
Thank you Chad next question.
Your next question comes from Michael Please.
Right.
Canaccord Genuity. Please go ahead.
Great. Thanks for taking my question hope everyone on the call is.
Stay safe and healthy.
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Chris just for you I. Thank you, Mike and I also thank for you.
Yes, thank you very much.
Just first question for me the endpoint IC, they rebounded a bit more than I anticipated for the quarter. So that was great to see and I have to think depend demick has stressed the importance for retailers to have an improving inventory controls and improve contactless checkout procedures and.
While the other is that you guys highlighted that the benefits rain adoption. You can you discuss just kind of your interactions with customers for improving long term pipeline for rain adoption, just just given change in buying patterns because of the pandemic.
Mike. Thanks for your question. This is said chasse and I'll I'll begin to answer that and look to Chris and carry to to add some comments.
You're absolutely right.
If there is a.
Bright spot and COVID-19 is.
And the increasing interest and intense of stationary end customers to invest in.
In their digital transformations and in particular to get increased visibility of all of the things that move through their business.
That enable them to create value. So we're very encouraged.
By the end customer interest in intent to invest in these digital transformations, we see a strengthening in our pipeline as large opportunities in retail and in supply chain and logistics more generally.
So as we know retailers are trying to shift to better serve shifting customer demand and as you noted omnichannel is at the forefront.
And to execute omnichannel effectively retailers need to understand what inventory they have at the specific item level that is a particular garnet in a particular size any color not just in general, but very specifically at an item level and thats where rain contribute.
Significantly to these these.
These initiatives the goal here is to optimize efficiency by Matt chain.
Available inventory wherever it is to that specific customer demand and then to service that or deliver against that demand from the most efficient close this.
Inventory location via in a given store.
In a year.
Distribution center.
Or wherever that inventory navy throughout their supply chain.
So again, we're very.
Encouraged by that.
The interest and intent to gain that visibility across the entire supply chain and Mike. This is Chris I'll add.
Following on the heels of omni channel fulfillment, what we see is retailers looking to modernize our stores Posco energy and supply chain and loss prevention and self checkout, our kind of of the keys, we see there in order to do self checkout you already locked any throughout time to do rent enabled loss prevention, because you can basically be activating the ticket price sales.
And then year reign aggregate due to determine that the text deactivated electronically deactivated. So we see significant interest and as those are long term investments as we highlighted that we see an opportunity there for the future, which is why I highlighted much precedents of checkout opportunity in the script and talk about the two ways that we see returns going forward.
Great. Thanks, Chris and just kind of building that question is weve talked over the years you've talked about.
The industry is one of the investment with a huge customer.
Call. It you save crossing the chasm to drive more growth and it certainly seems like your large north American projects and supply chain logistics, just starting to get to that area billing I guess two questions off that is first in the second.
Second large customer is it.
Almost the same as the one you currently have and there are other ones. Besides that one now lining up.
Turning out rain and then two Dcs any other industries that might be close to quote unquote crossing the chasm for rain adoption.
So we have talked about the first supply chain and logistics opportunity as being primarily a gateway opportunity.
Associated with them was pallets and we've talked about the second supply chain or was just it's opportunity being a little bit different I'm associated with some readers and more about conveyors and so on so there is some difference between them, but they are both significantly focused on the supply chain and logistics opportunity broad language do which is tracking items will be through the supply chain and an EPS.
Since we see those on those opportunities as kind of being bellwethers for the larger industry.
Turning just to the retail environment for a second.
Again, and using that crossing the chasm analogy.
Historically as you know retail outlets open handheld driven inventory accounting and what we now see is this a desire to do consumer.
Consumer self checkout, and then that driving loss prevention and that trend seamless returns as being an opportunity for fixed rate because we just don't do self checkout, using an operator and certainly not loss prevention. So.
So again, we see an opportunity in the future I won't say weve crossed the chasm, yet, but we see an opportunity for some large retailers to get to invest in the loss prevention and self checkout opportunity and in so doing it that was to come to pass we see those opportunities as driving the industry forward.
Beyond handle driven in inventory accounting to this fixed rating and retail stores.
I think the last question for me and I'll pass on line to just on the systems business and it sounds like a lot of activity, but shorter term there is some lumpiness and timing of contracts and the inventory that you guys highlighted is there any other things may be slowing near term system sales just access for testing and Trialing due to Covidien is.
The cases, it's starting to ease at all or is that still a challenge in terms of new customer adoption on some of these systems deals.
Yes go ahead, Jeff Yes, Mike. This is Jeff we do see signs of modest recovery in the near term system pipeline that is as our businesses have begun to adapt and are increasingly able to provide.
As safe return to operations or to work we are seeing the reactivation of end customer deployments that had been initially paused in our second quarter with the onset of the COVID-19 pandemic. We're also seeing.
Our partners increasingly able to reengage with an end customer work environments to undertake a testing of new use cases and new opportunities. So we are seeing the.
And in an up tick in activity and engagement, which is encouraging.
That being said, even when that activity translate into demand that demand is hurt primarily being satisfied with inventory already placed in our systems distributors around the globe.
That will continue into this sector into the fourth quarter excuse me.
We do anticipate that we will exit fourth quarter with healthy inappropriate systems inventories across all systems distributors around the globe.
So looking to 2021, we anticipate our results to better match actual end customer and market demand.
Great Thats helpful. Thanks for taking my questions and congrats on the progress you're making in game 700 granting.
Thank you very much thanks very much Mike.
Our next question comes from.
No no its capital. Please go ahead.
Hey, good afternoon. Thanks for taking my questions. Chris Hope you guys and your team are healthy and sales.
Just going to go much sentiment. Thank you.
Hey, just wanted to quickly follow up on the gross margin front related to achieve it seems like you're back in equilibrium in terms of working inventories through at your customers you got them 700, coming which also typically have the pricing decreases that kick in in January February timeframe is that still on track to Zim 700, offset some of that I know.
It's very small to current today, but the follow up on the Rmbseven hundred front.
And to follow up on some of the certification questions. It sounds like you're slowly moving through that process is that a big hindrance at this point in time in terms of qualifying the product with new customers and whats your broad based on expectation when you're looking at exiting 2021, what percentage of the mix driven a gem seven hundreds.
Yes. This is Chris let me start with a question in terms of thumb in terms of the certifications qualifications and then I'll hand, it over to Jeff to follow up on the over.
Overall gross margin question, so obviously launching new product into a pandemic is not the case.
Let's just say, it's less than ideal and and so on.
The.
And customer certifications and once they didnt sales or the University of Auburn approval and testing have both been delayed by Coca 19, and so although we're.
We are happy with where we are having shipped 100 million units.
The pace not outside of it because the Nike It Hadnt happened, we expect the pace what has been quicker that said when you compare our pace of adoption compared to most of our six what we did many years ago. When we introduced Mazare six we are still moving at a good clip and we expect accelerating adoption now they have us on university of Auburn accruals and other end user approvals except fixed.
Expect accelerating adoption as I said heading into 2021.
I think I would just say that I see it as positive momentum the approvals and qualifications.
We are now moving and so not not viewed to be.
Hindrance or are.
Negative factor whatsoever, I think in terms of the pricing negotiations as you know as is typical we are engaged in our annual pricing negotiations for the year or years ahead in the fourth quarter. We're very early in that process and there is no really no material updates to share at this time.
Got you and if I could just quickly on the systems front it sounds like.
Endpoint IC is your back in equilibrium as we enter 2021, but there are a couple of big dynamics going on this year in terms of the large north American logistics customer completing its deployment moving operational but the second one coming onboard could you could you kind of give us some idea of the magnitude of that and how thats been impacted by the current environment is that going.
Progression as we think about 2021 from a system standpoint does it look more like 2019 or does it look more like 2020 as it relates to the size of the opportunity and kind of I guess coupled with that.
Systems, winning new systems business now.
When you close the business with customers I'm sure. There's a lot of interest given a no touch environment and the benefits of what you can do from an omnichannel standpoint, but is it difficult to just close business and get things across the goal line in this environment. Thanks.
There's a couple of questions in there and I'm going to try and take one or two out of whatever whatever I forget maybe.
As secretary will cover forming so.
We have said that the second North American supply chain and logistics opportunity is large and we and we know thats. Its a true statement when sales quite a large opportunity and we look forward to growing witness supporting that customer to our ability that said, we're just getting going and the pace and.
Timing of the Rollouts remain uncertain and that uncertainty is exacerbated.
Chain reluctance of end customers cut across the board to touch stains on the running full tilt on that I want to break something the difficulty of our partners getting in to actually do work in the facilities at all impacted by corporate banking. So the inherent uncertainty we would have with any large and customer deploying is exacerbated by for the night.
[music].
In terms of closing deals and deal timing like Jeff said, a little a little while ago, we see a growing pipeline of bid opportunities.
We see a growing need for fees and customers to do digital to basically digitally transform their operations.
Yes, same time, those and customers are trying to gauge the endoscope at 19 and determine the pacing of their investments. So like I said in the script that the pace and timing of some of these deployments, it's going to depend on end user visibility into the end of the 19th that's indeed, the case and I don't think we have any better crystal ball than in.
But he also terms with the pace of what work of the 90 is going to go and the consequent dumb pace in which those deployments are going to ramp I'll, just say that what we see now and what we feel now is a growing pipeline of large and customer opportunities.
Great. Thanks, so much about the only thing I would add.
Okay. Thanks, Scott Thanks, Scott Thanks.
Our next question comes from Jim Ricchiuti. Thank you.
Go ahead.
Good afternoon.
Yes.
Comments I think in the in this script is talking about endpoint IC revenues.
Roughly roughly.
System with 2019 levels, So I guess that implies a pretty healthy sequential increase.
In Q4, which we normally don't see and I think you alluded to that so I'm, just trying to get a better sense as to.
Maybe your confidence level in that site.
Dynamic seeing an improvement in Q4, especially given the uncertainty around the holiday season.
Yes. Thank you David This is Gary I. Appreciate the question. So Weve reported last quarter that we felt that we turned the quarter on a bookings volume and we decided that at the time of our earnings calls that our our quarter to date Q3 quarter to date bookings were up 20% versus.
Q2 that pace continued throughout the quarter and even accelerate a little bit as we were moving into Q4 and in a disciplined way that we were able to burn through the channel inventory that we began the quarter with and return on the endpoint IC business returned to kind of normal turns volume so than the norm.
Compare that we would have from a seasonal perspective moving into Q4 really doesn't translate to our revenue because demand was greater than our revenue in Q3. So so we don't necessarily anticipate following exactly along with the normal seasonality in Q4 because of that dynamic and Thats why were able.
Let's say that not only will we hear from an actual perspective year to date, we are up 3% on endpoint IC volumes versus 2019, but we think we'll be at when we complete the year at about parity with 2019 and Jim. This is Chris I'm, just going to add that we're being thoughtful in terms of sub predictions relative to the holiday season, its impact or lack thereof, and so.
And just you know.
We are we're giving you some visibility to how we see our business but.
The couple, making uncertainties large holiday season, whether it materializes or not the answer is there and then we're going to have to wait and see just as York as to how that environment and how the overall economy progresses over the next two months here and the way. We've we've translated that through our outlook for the fourth quarter derivatives is were.
Not assuming we're going to maintain the turn volume that we saw in Q3, so for that uncertainty, we ratcheted down a little bit or become a little more conservative on our terms estimate for Q4.
Got it and.
Just on expenses.
Looking at.
Your R&D levels and sales and marketing how should we be any help in terms of how we might think about that for Q4 is that and should we see a similar pattern with R&D and sales and marketing on a sequential basis.
Yes, so on the our expenses, we expect a step up in Q4.
I mentioned that we had a pretty ambitious hiring plan for the year.
We substantially completed that hiring plan in Q3, so the expenses associated with those hires is not fully reflected in our Q3 number so I would anticipate with a full quarter of those those folks on the team our expenses to naturally grow up and then also looking into into fourth quarter. We've got some non wage.
Spend coming up this greater in Q4 than it is in Q3 as we are testing a couple of new products and getting ready to get those out the door.
Okay. Thank you.
Our next question comes from Charlie Anderson. Please securities. Please go ahead.
Yeah. Good afternoon. Thanks for taking my question I wanted to start with supply chain logistics needs. You mentioned the good pipeline there and I think your largest customer also described the robust pipeline as.
As well so clearly a lot of activity. There you. We've also had the large customer deploy in may.
Starting now so I wonder, Chris just stepping back I am curious as you compare this to enroll payroll a decade or so ago does it feel like we're on the way, we're we're going to be adding new logos and new appointments with every passing year to build future fully crossed over there or is that still a lot of evangelism out there or maybe you could also just remind us on the.
Size of the opportunity relative to apparel over the long term for you and I go below.
Okay, yes, okay. Thanks, Charlie I'll do my best with the question, let me start with the latter part first the size of the total apparel opportunity as we see it in terms of endpoint IC, just roughly $80 billion per year, that's still a number that we're holding with them now thats not the total number of apparel items sold worldwide headset Thats, probably 40% of the total number of apparel items sold worldwide with a number that we.
We think our connectable at least with where.
Where we stand today, especially mostly in Europe, North America and parts of Asia.
And so we still see a good ramp but that opportunity to date has been handheld driven so on sales.
As I mentioned just in prior answer the opportunity to talk to them to deploy loss prevention in self checkout in those use cases, we see it as kind of the future and but that said its very early days and we have not yet crossed the chasm in terms of both loss prevention and self checkout opportunity. So we see an opportunity for continued growth and expansion in the retail space in gamut hanging opportunity.
It's bigger than that it's heading it's getting it's basically transition to retail stores to stores of the future and the visionary retailers who.
COVID-19, as an opportunity to transform themselves become more modern and basically address quickly their end customers needs.
Consumer needs.
We were guardedly optimistic that they will invest and drive these new opportunities in technologies.
So thats sort of the history of where we were at retail.
And has driven inventory counting went for a number of years still growing still a big opportunity ahead, we're probably 15% penetrated and then transition it's even more use cases moving.
Moving over now just to talk about the supply chain and logistics use case. So there has been a lot of supply chain and logistics opportunities that have been small size in the past. We've talked for example, buffer is yet another jusino Trent tracking items to adopt to ours, but it is it is and has been historically these large end customers that have pulled in industry.
In the case of retail it was Macy's.
Macy's and marks and Spencer and decathlon.
In the case of supply chain and logistics, we are optimistic that it will be these large north American end users.
That will pull.
The supply chain and logistics opportunity firmly across the chasm, but it's still early days.
To the extent that they do we see opportunities not just tracking pallets in cases, but up postal items and automotive parts and so many other things.
So, let's just say one of the reasons for our optimism about the future is that we have two very large end users and supply chain and logistics, we're doing important things and we believe or at least hope that they will be a bellwether for other companies to enter into the space and do the same things and do more.
Okay, great and that endeared Leo.
No absolutely so from.
For my follow up I was curious these the hires and engineering that you mentioned you could mostly completed here.
So that's going to cause us to have a boat or maybe if you could articulate.
Most of the.
Capabilities you you brought to the team.
What are some areas, where there's headroom to improve from an engineering standpoint.
Sort of curious what is the strategy behind some of the.
The hiring that you've made there thanks.
So two core focus areas for us in terms of verticals those would be retail and supply chain and logistics to core focus areas for us in terms of our engineering hiring that is silicon and overall silicon development.
And then our solutions development with our partners in those two use cases that we've been setting and supply chain and logistics and retail loss prevention of checkout. So hiring for both of those both of those areas and Thats, our core focus which is why we didnt hiring because we see the opportunities for the future and we believe it makes sense to invest now because we see opportunities.
As we've ramped through him ideally exit soon I hope you motorcycle the 19.
Great. Thank you so much.
Thank you.
The next question comes from please go ahead.
At this point. Please go ahead.
Yeah, Hey, guys I had a couple of questions. So my question is on your commentary about systems, you mentioned systems would be constrained in the fourth quarter.
I guess for clarity purposes does not being it would be around the same level as that you saw in the September quarter or when were talking maybe a small step down and then sort of related to that question and endpoint IC you're on to the other side, but you've been to the inventory and you're actually able to grow I think.
Pharmacy implied that in systems Theres still some of the inventory the distressed shipping autos.
Radio team your distributors are in the amount of excess inventory that's left in the system to the point.
Where you will start mirroring the the real run in demand.
Hi, This is Jeff I'll I'll take a first stab at the answer and I would say that a key point is that we think that we will.
Exit fourth quarter with healthy inappropriate assistants inventory in our distributors around the globe adjusted for the current demand environment.
So it means we're making good progress we get in Threeq, you and we anticipate continuing that progress to work down the inventory to service and satisfy the demand that is reemerging and the modest recovery and then come in to 2021 wed healthy inappropriate systems inventories yes.
Hey, harsh this is kerry thanks for the question if I could add just a little bit to suggest so he has articulated.
The the demand being met with unmatched with channel inventory the other factor to consider when when you're looking at our our systems revenue and what that might be for Q4 is that the north American.
Supply chain logistics customer the first one delivered revenue in Q3 that revenue goes away in Q4 as they move more fully to the operational phase of its deployment. So thats an additional headwind. It is an important factor to consider in the model.
Understood. Thank you for that thanks for that clarity.
And so my second question. So we cover a lot of semiconductor stocks and some of them on in the auto space. The auto guys at least on the semiconductor side.
We're seeing sort of.
A pretty significantly improving alignment I suppose as a lead time doing the cause actually does bill showed the point I'm, making years, the auto sector, which is an important part to these guys potentially down the line appears to account recovering along with retail so when you talk to your customers.
And this is a tough question to ask and for you then sure Lindblad you kind of best Guesstimate estimate you get back to a normal environment.
Hi, This is Jeff what I would say that our solution partners.
Have re and who are active in the automotive sector.
Have reengaged with their end customers.
During the third quarter and as I said in the opening some existing deployments have been reactivated and are now underway again and some additional testing is being done.
A new use cases in automotive so I think your point about automotive.
Our.
Experiencing a modest recovery is translating into our re engagement with our partners in automotive.
It's still hard to call more specifically when that will translate into.
Specific demand.
Sales outside of our distributor inventory, but it is encouraging to see that reengagement.
Understood. Thank you.
This concludes our question and answer session.
I would now like to turn the conference back over to Chris dealing and closing remarks.
I'd like to thank you all for joining the call today.
And as I said in the past two quarters X, we'll say it again I hope you and your loved ones are and remain safe and well. Thank you all very much for joining us today.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.