Q4 2020 Impinj Inc Earnings Call
Good day, and welcome to impinge fourth quarter and full year 2020 earnings conference call and webcast. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask the question you May Press Star then one.
On a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like to turn the conference over to Ellen Davis Investor Relations. Please go ahead.
Thank you operator, good afternoon, and thank you all for joining us to discuss fourth quarter and year end 2020 results on today's call Kristi or you're out of intelligence co founder and CEO, who will provide a brief overview of our market opportunity of performance Cary Baker <unk> CFO will follow with the detailed review of our fourth quarter and year end two.
<unk> thousand 20 of financial results and first quarter 2021 outlook. We will then open the call for questions. Jeff Dossett Impinges see Arrow is also wanted to call and will join Chris the carry in the Q&A session.
Management's prepared remarks, along with trended financial data are available on the Investor Relations section of the Companys 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, the expected or potential responses of government authorities customers.
Partners.
And the company to COVID-19, and the availability production and adoption of our products 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 for more information about these risks, we do not undertake and <unk>.
Presley 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 discuss except for revenue or where we explicitly state otherwise are non-GAAP financial measures.
Lets sheet of 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'd like to note that the company will participate in the Goldman Sachs Technology and the Internet Conference 2021 on February 11th the Morgan Stanley Technology Media and Telecom conference on March <unk> and the virtual 30, <unk> annual Roth Conference on March 16, we look forward to connecting with many of you at these events.
I will now turn the call to Christy Oreo contingents co founder and CEO Chris.
Thank you Evan Thank you all for joining the call.
Our fourth quarter results capped a strong close to in terms of your line here.
Second we exceeded our fourth quarter revenue guidance. Despite the ongoing impact of COVID-19 on our core markets and the C.
The year with two quarters of sequential revenue growth.
That momentum continued into the new year and today, we announced the company milestone.
Our $50 million.
IC.
I think back to the Pinterest early days and our vision of connecting everything reaching a 50 billion unit milestone is an incredible achievement for whichever your pension employee can be proud.
And this is the growth pace.
I would like from 25 million units just three years ago.
So I think for the future and our opportunity to connect trillions of items per year.
Note that we've only just scratched the surface of our amazing opportunity.
Net opportunity is far more incredible than any of our achievements to date tenants there within our grasp.
Thank you cash to realize Inc.
That future starts with the achievements of today of this call I want to highlight how our momentum.
On Ics and systems, Inc.
Record annual endpoint IC revenue healthy.
Healthy supply chain and logistics opportunities.
Marquis retail design win.
I will also highlight why I believe COVID-19 has amplified range value proposition.
<unk> well positioned to capitalize on the opportunity.
Fourth quarter endpoint IC revenue exceeded our expectations when the orders for shipment in the quarter improving significantly more robust and we had originally anticipated.
We're especially pleased to see end point IC revenue returned to year over year growth in the fourth quarter. Despite retail apparel facing continued COVID-19 headwinds.
And then related to store closures of crystallized retailers and brand owners needs for omni channel fulfillment.
For an increasing number of retailers range given the foundation for an effective omni channel solutions.
That dynamic became apparent not all we get our revenue growth rate compared to the overall retail apparel market.
Also in our conversations with partners and end users.
Full year endpoint IC revenue topped $100 million for the first time in our history.
An annual record looking forward.
To see ample growth opportunities for endpoint Ics.
Good day semiconductor foundries are experiencing widespread wafer shortfalls.
We anticipate the shortfalls back in mid 2020.
200 millimeter wafer inventory and the depths of the pandemic.
I'll turn the accelerated our strategic investments.
Our <unk> and 700 endpoint Ics that used 390 of waivers.
Regardless, we enter 2021.
200 millimeter inventory on our balance sheet.
200 millimeter foundry capacity.
Focused on accelerating adoption of 300 millimeter and 700 ice's to maximize our unit output.
The first half of 2021, we are navigating the crossover between our declining 200 millimeter inventory.
Our ecosystems efforts to ramp the 700.
Thats meeting to accelerate that transition.
The second 100, the has the structural advantage of more than twice as many die per wafer as our competitors.
2021 intangible.
By accelerating our capital investment of 300 millimeter wafer post processing technology and capacity.
Goldman producing most of our Ics on 300 millimeter wafers by year end.
Even with that capital investment our cycle times.
We will still exceed the quarter requiring all of it.
Inventory to respond to the dynamic demand changes.
Fourth quarter systems revenue returned to quarter over quarter growth.
And the readers and reader Ics capping of volatile year.
So all of our retail partners and end users navigating store closures and the other COVID-19 related challenges.
Continued improvement in sales out.
<unk> and reseller partners, a lot of our distributors to normalize their inventory positions.
And we exited 2020 with lean channel inventory levels.
Sure.
And supply chain of logistics, our first large north American end user continues transitioning to an operational phase.
The success of prerequisite for further deployments that transition drove an expected quarter over quarter decline in gateway revenue.
Our second large north American supply chain, and logistics and user generated modest reader revenue in the fourth quarter and we expect a similarly modest reader revenue my first quarter 2021.
Net opportunity remains large despite an uncertain deployment pace and timing.
On the retail side, we achieved two milestones.
The first was the significant self checkout deployment by the global brand.
Based in Asia, generating modest fourth quarter revenue of which highlights the leverage kind of our partner network can drive of the.
Compelling solution.
The second of win for Us and the key partner and of marquee account.
As for rain based retail loss prevention, and we received the $6 million prepayment for all of our loss prevention of engine for that opportunity.
We will deliver against that prepayment in second quarter 2021.
I believe the latter win represents the confining opportunity for our platform potentially unlocking of the loss prevention opportunity that decade ago killers identify and their most important use case after inventory visibility.
All of that broadly enables the consumer self checkout.
Consumer self checkout and term price of 100% retail tagging.
Both of these successes are the result of focused engineering and great teamwork with our go to market partners.
We believe that in venting solutions to hard of the compelling and user of problems with our platform.
Our partners well.
Open up many new cross factors foreign pinch in the years to come.
Continuing on the intervention team 2020 was a year in which we delivered against and refined our platform Road map.
On the delivery side, we introduced two groundbreaking new product families.
<unk> hundred endpoint IC and the <unk> 700 reader.
On the refinery side, we formalized our migration away from items.
Our standalone system software.
After successfully reporting hits algorithms onto our readers and gateways.
We advanced that architectural evolution.
Developing of essential software.
Overarching goal of continuously improving time to market for our partners and making our platform so easy to use.
They can seamlessly step and repeat deployments.
Driving the landscape equities reading.
Sure.
We are also extending that software to include the services and enable our partners to deliver compelling experiences for businesses and people.
Okay digital life to everything.
We continue investing across our entire platform over to.
Delivering on that investment again in 2021.
Looking back on 2020, when looking back on 2021, sorry looking back on 2020.
I appreciate it and I'm proud of our team and the result.
And the extraordinary and the uncertain year.
Redefine how we work as the team.
Nurturing and solidifying the caring winning culture.
<unk>.
I'm gratified by the ability to price furniture's adversity of compassion and price.
Two of them.
To give a heartfelt. Thank you for your tremendous effort and inspiration of this past year.
Look forward to our future together.
In closing 2020 months of solid year of driving our bold vision.
The investors through the Covid storm, extending our product leadership and strengthening our team.
Capping another year of investment in our platform and remain confident in our market position and energized by the opportunities ahead.
I will now turn the call over to Kerry for our detailed financial review of first quarter outlook Terry.
Thank you, Chris and good afternoon, everyone as I approach my one year anniversary I want to take a moment to reflect on 2020. The you are clearly the not progressed as we had planned pandemic brought much uncertainty and impacted our trajectory.
Fight the headwinds the pandemic also amplified our value proposition and retail omni channel fulfillment and the supply chain visibility and we exited the exited the year with strong momentum.
Today, I am even more convinced of our ability to grow and scale into a massive opportunity than it was when I joined <unk> a year ago.
Now onto our strong fourth quarter results.
Fourth quarter revenue was $36 4 million of 29, 3% sequentially compared with $28 2 million, Inc. Third quarter of 2020, and down 10, 7% year over year from $40 8 million in fourth quarter 2019.
Fourth quarter endpoint IC revenue was $28 5 million of 32, 1% sequentially compared with $21 6 million in third quarter, 2020, and up 10, 8% year over year from $25 7 million in fourth quarter of 2019.
Our assumptions about the holiday demand and carryover spring apparel inventory proved conservative revenue from terms of orders also significantly outpaced our assumptions entering the quarter.
Year over year revenue growth returns despite continued headwinds facing retail apparel as rate of adoption proliferating looking forward, we expect first quarter 2021 endpoint IC revenue to grow sequentially.
Fourth quarter systems revenue was $7 9 million up 19, 9% sequentially compared with $6 6 million in third quarter, 2020, and down 47, 4% year over year from $15 1 billion for the fourth quarter of 2019.
Systems revenue exceeded our expectations, both reader and reader IC revenue increased sequentially, while gateway revenue declined.
The year over year basis reader IC revenue increased while both the rigor and gateway revenue declines gateway revenue faced a difficult comparison with the first large north American supply chain of logistics project transitioning towards the operational phase.
We expect first quarter 2021, the systems revenue to follow a typical seasonality trends of declined sequentially.
2020 revenue was $138 9 million down nine 1% year over year compared with $152 8 million in 2019, Inc.
The IC revenue grew four 8% year over year, driven by strength in the omni channel fulfillment apparel market share gains by retailers that have deployed when the expansion of existing deployments and find new deployments of the latter including out of notable north American retailer.
2020 systems revenue declined 33, 7% year over year with declines in gateway and reader revenue, partially offset by growth in reader IC revenue.
Fourth quarter gross margin was 54% compared with 51% in third quarter 2020 of 56% in fourth quarter of 2019 the <unk>.
Order over quarter increase was driven by leverage against the indirect costs offset by product mix the.
The year over year decrease was driven by revenue mix, partially offset by lower <unk> charges.
Full year 2020, gross margin was 49% compared with 52% in 2019 with the decline due primarily to revenue mix and to a lesser extent slightly higher charges.
Total fourth quarter operating expense was $21 5 million compared with $12 4 million in third quarter of 2020 of $19 6 million in fourth quarter of 2019.
The sequential increase was primarily due to increased engineering expenses.
Research and development expense was $10 1 million.
Sales and marketing expense was 6 million general and administrative expenses was $5 4 million two.
2020, operating expenses totaled $79 6 million compared with $75 1 million in 2019.
Fourth quarter adjusted EBITDA was the loss of $3 1 million compared with the loss of $6 2 million in third quarter 2020 at a profit of 1 billion, Inc. Fourth quarter 2019.
2020, adjusted EBITDA, while the loss of $11 5 million compared with a profit of $1 6 million in 2019.
Fourth quarter GAAP net loss was $15 7 million fourth quarter non-GAAP net loss was $3 5 million or <unk> 15 per share using a weighted average diluted share count of $23 2 million shares.
2020, GAAP net loss was $51 9 million.
'twenty non-GAAP net loss was $12 8 million or <unk> 56 per share using a weighted average diluted share count of $22 8 million shares.
Turning to the balance sheet.
We ended the fourth quarter with cash cash equivalents and short term investments of $106 1 million compared with $105 1 billion and third quarter of 2020 and $116 $5 million in fourth quarter 2019.
Inventory totaled $36 3 million and $1 7 million from the prior quarter.
Fourth quarter net cash used in operating activities was $3 3 million operating equipment purchases totaled 700000 free cash flow was negative $4 1 million.
For the full year net cash used in operating activities for the 11 five.
Property and equipment purchases totaled $3 1 billion.
Free cash flow was negative $14 6 million other.
As a reminder, we excluded from our full year 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.
Before I turn to our first quarter guidance I want to highlight a few items that were unique to the fourth quarter. I also want to give an update on a few of our strategic initiatives.
First fourth quarter deferred revenue increased $5 9 million sequentially driven by the customer prepayment related to our ongoing development of the retail loss prevention of engine.
We expect to incur incremental non wage engineering operating expenses related to that project and first quarter of 2021.
We expect to substantially shift of products and recognize the associated revenue in second quarter of 2021.
Second the strong endpoint IC bookings that began in the third quarter 2020 accelerated in the fourth quarter, resulting in a record bookings quarter.
Given the ongoing ongoing COVID-19 demand cross currents and the supply constraints impacting the semiconductor industry.
Elevated our practice of setting the backlog and working with partners to verify and customer demand behind every order.
Similar to our fourth quarter guidance, we embedded a lower turns of assumption into our first quarter 2021 revenue guidance net in a typical quarter. However in the first quarter 2021 debt assumption is based on enhanced visibility stemming from our backlog setting and the bookings duration.
The dynamic as well as us navigating the crossover between our declining 200 millimeter inventory and our ecosystems efforts to ramp the 700 may dampen the traditional seasonal endpoint IC revenue growth in the second quarter.
Third we are experiencing long packaging lead times for our high margin reader Ics.
Those long lead times may limit the first quarter 2021 deliveries or.
Our guidance assumes the packaging lead times do not resolve until after the first quarter.
Fourth capital expenditure will increase of 2021 as we accelerate our investments in 300 millimeter endpoint IC wafer post processing flow and capacity. This investment will begin paying dividends of 2022 in the form of shortened product lead times and improved operations flexibility.
Fifth we remain committed to returning to adjusted EBITDA breakeven on the other side of COVID-19, looking ahead as COVID-19 headwinds remain we will balance our desire to press our market advantage against our desire to drive operating leverage.
Turning to our outlook, we expect first quarter revenue to be between 41, and 43 million, a 15, 4% increase quarter over quarter at the midpoint of the range compared with $36 4 million in the fourth quarter 2020.
We expect an adjusted EBITDA loss between $3 million and $1 5 million on the bottom line, we expect a non-GAAP loss between $3 5 million and $2 million, reflecting a non-GAAP loss per share between <unk> and <unk> on a weighted average diluted share count between 'twenty three.
$8 million and $23 9 million shares.
In closing I want to thank our intense team our customers our suppliers and you our investors for your ongoing support.
I'll 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 the question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
The anytime your question has been addressed and you would like to withdraw your question. Please press Star then the two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Craig Hatton back with Morgan Stanley. Please go ahead.
So yes. Thank you and appreciate all the color I guess, just starting per you walked through some of the dynamics around the 200. The 300 millimeter transition and then the other context you can provide in terms of does that help a little bit in Q1, and you mentioned, perhaps dampen the seasonality in Q2, just kind of the.
Quarter to quarter expectations there.
Thank you Kerry yes, okay.
Alright. Thanks for the question. So on the 200 millimeter, we entered the year with strength in bookings on the way the bookings pace accelerated it was I'd say it was mild in the October and then really accelerated in November and December and that pace has continued into the first quarter and as evidenced in our on our strong guide.
For Q1, now what we're seeing with the bookings as customers booking further into the future. So the normal lead times are customer request times I should say have extended beyond what is typical for us and as the result, we anticipate fewer turns in the quarter.
Okay.
For that and then maybe a follow up for Chris. Thank you.
Through the the impact of the pandemic and then particularly the influence on omni channel in terms of some of the things that youre seeing the business and then he kind of pluses and minuses around the retail versus omni channel.
This year.
Yeah, Thanks, Craig so.
No.
As I noted in the prepared remarks, we do see.
And then driving retailers and brand owners.
Towards omni channel fulfillment and we continue to believe that range is a differentiator.
Eric ability to deliver against the Omnichannel needs I will note that.
Okay.
Our endpoint IC revenue from the year was up four 8% the.
The U S census, apparel have U S store receipts down 26% of these of retail store receipts down 26% of 2020 so.
So clearly range is a differentiator for these retailers in terms of their ability to sell and looking forward. We continue to see that differentiation as we talked about the loss prevention of self checkout opportunity.
The benefit of self checkout is it sort of essentially touch free self check out of consumer consumption share and shelves out leading store associates two of them to spend time with either one of the consumer during the shopping experience.
Essentially maintaining the store and so we continue to see range as an accelerant and of the future.
For more efficient stores and again to drive differentiation associated with COVID-19.
So overall.
We believe range will be the Internet is already today, and we will continue to be.
A key aspect of the leading retailers positioning today and in the future.
Got it thank you.
Thank you Craig.
Our next question comes from harsh Kumar with Piper Sandler. Please go ahead.
Yeah, Hey, Thank you, Hey, Chris Carey and everybody else in deep interest in congratulations is of tremendous resolve the shall I have one for you.
The growth in the December quarter that you saw in particular, the an endpoint IC.
Thank you you mentioned you guys are continuing to see that of <unk>.
Just wanted some of your supply chain and margin or is that for me of retail end market I guess all of us in China figure out of there is how sustainable the shape and how does the Joe I get the near term commentary you guys from the spacing lead time longer lead time orders, but this is something that can happen continue to happen for you in the second half of <unk>.
Foreseeable future or is there some sort of other implementation that is going on.
Yes, so harsh.
Difficult.
Let's turn to answer with real certainty.
I will say that.
The holiday season was better for retailers and we had anticipated instead of of strength associated with the holiday season.
There is less carryover in the spring inventory.
So.
So we.
You see some some benefits there as well and of course of the omni channel strength of course, we guide only one quarter out of time and we're looking towards the towards where we are today, where we're going to be in the first quarter and we do see strength right now and it's our hope that that strength continues a lot of it being driven by retail a lot will be dependent on.
COVID-19, the pandemic and how do you guys comes out of the other side of the pandemic as well as the rest of the world.
Okay.
Okay.
Sorry. Please go ahead.
Go ahead.
Okay. So my second question was I think when you were describing your first customer in the supply chain side.
Tom.
Turning towards operational was used.
I'm trying to understand what that means does that mean that that particular customer of the fresh supply chain customer is now getting to a point, where they're very comfortable with the results of the trials that day will conducting and then kind of sort of getting ready to actually implement this process well.
Is this just sort of unknown.
Can you share that you are using as you continue to test the systems.
Yes, I think I think it's going to be helpful to provide some more color around how any of these large customers come alive.
Because the answering the question that will also set the stage for future question is along the same lines associated with other customer deployments.
And the when an end customer rollout. The first thing. They do is they do a pilot of our proof of concept and once you get past that phase and then begin rolling out to in many cases of significant number of stores our operational facilities.
Once they are sufficiently rolled out the pes and run the system side by side with the existing systems. So they rely on the existing systems that the monitor the rain based system.
How it's performing.
And they run it as though it was alive, but it's not like.
After they have some of the Kinks worked out our confidence in the data they're confident that they can.
This can rely on the new system.
And then they go to the cutover non.
Of the time it takes for any particular end customer to get comfortable enough to flip that switch.
It depends on.
The results are getting their level of caution of our aggressiveness apparel of internal needs and.
Again, just kind of kind of the results. We're seeing so when we say transitioning to an operational phase they are in that stage of transitioning over.
You can limit yourself uptime, if they don't go fully live all of them lots of across the entire facility.
<unk> okay.
It continues to work and then the question flip them or are there.
All of our other storage facilities. So so that's where we stand of the.
And the transition of operational phase and of course of success and that transition is a prerequisite for further deployments in further opportunities.
Wonderful very helpful. Congratulations again guys.
Cash.
Yeah.
Our next question comes from Mike <unk> with Canaccord Genuity. Please go ahead.
Great. Thanks for taking my question I hope everybody on the call healthy and well and Chris Congratulations on the $50 billion.
Of the thing I'm sure that was the nice Gong banging celebration of for your company.
What are the.
Thank you, Mike and I Hope you are all well.
Hopefully, they're the symbolic on thank you.
Okay.
Kerry Thanks for the guidance of all the clues on it just just wanted to dig in a little more just sort.
As of I subtract you guys for a long time Q2 has historically been our seasonal improvement quarter.
Excluding last year.
Wanted to kind of dig in a little bit on some of the clues for Q1 and into Q2 or are you just suggesting maybe less the normal seasonality of orders.
This year the bigger dip in Q2, maybe like we saw last year I'm just trying to understand your commentary a little better about the puts and takes I know I don't want to force guidance, but how do you after Q1, but directionally on your bookings as Q2, similar to Q1 or even higher.
Yes, Mike. Thanks for the question, it's too early to forecast Q2, but there are definitely changing dynamics that we wanted to highlight so we have had.
Super seasonality on the endpoint IC in Q4, and then again, we're signaling in Q1 and that's been on the basis of strong bookings of customers booking further out into the future.
And we're not sure that that seasonality because of that level of seasonality cater to hold once we get into Q2.
And combine that with our need to migrate the industry from 200 millimeter to 300 millimeter <unk> 700, and we think the seasonality could be dampened in the second quarter.
At this stage and obviously, we will we'll learn a lot more of it as we move throughout the quarter.
As it relates to endpoint IC on the systems side of the house the.
The the large European retailer, that's deploying the loss prevention, the $6 million prepayment premiums that Chris mentioned.
That will be substantially shipped in Q2. So you will have that incremental revenue on the system side for that deployment, assuming we substantially ship it in the second quarter.
<unk> Q2 revenue, but also benefited Q2 gross margin because of our systems gross margins as you know are higher than our corporate average.
And then finally as you are thinking of of.
Gross margin going from Q1 to Q2 Q1 gross margin will be depressed because we are unable to ship of at least where we're forecasting an inability to ship reader Ics, our highest margin product we.
We expect that to correct.
Back to normal reader IC levels in Q2, so you'll see a little bit of buoyancy from going from Q1 to Q2 on the gross margin side as a result of.
Of that dynamic as well.
Great. Thanks, Thanks for clarifying that and then on the endpoint side with the strong bookings.
Given the supply constraints in your guys' smart choice to build inventory of the wafers do you think you've gained even more share or is this the whole industry kind of come back just curious if your competitors the shift like you've been able to ship.
Please go ahead keep going here.
Yes, we've been seeing strong order momentum at the end of last year at the beginning of this year.
And part of that strength is the result of our <unk> laser.
The electing the book orders further end of the future that the.
There could be driven by a number of factors it could be the supply of <unk>.
The strength of the semiconductor industry it.
It could be a variety of things we're doing our best the service those customers and their demand in the near term and we will continue to evaluate that these changes are temporary or more structural in nature.
From a share perspective, we don't evaluate share until the end of the year when we get the rain alliance data for the preceding year.
Okay last question for me, perhaps yes, Chris despite the challenging macro you've made the decision to really focus and execute on the roadmap and a lot of the interesting new products gained the market in the past year.
How are you thinking now of some of the commentary about balancing investment for the state growth opportunity versus profit and then yes. The second question for you Chris.
And some of the areas of investors should focus on for the next spring pins in terms of what you might be investing in or maybe the new markets. You think the radio cross the chasm like supply chain logistics did in the last two years.
So yeah, Mike I think of it but it take the latter part of the question first and then ask you to remind me the form of part when we get back to it but I just want to add I am sort of parse out.
The the marquee win that we talked about.
The loss prevention and self checkout is an area where.
Youre really focused and I would encourage us to focus on it as well.
I believe the very significant opportunity if I go back in time.
In 2008.
I was part of us.
The team that led.
Some of requirements gathering groups under <unk> APC global that included literally dozens of the largest retailers in the world and.
And we collect of requirements on loss prevention from those retailers and actually quantify the net and a set of requirements that actually led to further requirements gathering efforts. The span two years and there were many retailers and the development with the identified at that time was that loss prevention opportunity.
Enabled self checkout and a self checkout really drove the kind of our future vision of retail in the back then.
And it was their number one ask after inventory visibility and we collected those requirements back then but the.
One of our against it because nobody knew how to solve the problem.
So the pinch rolled out protected mode.
To enable embedded endpoint Ics and garments and still protect consumer privacy that was the first step in our journey to solve that problem.
The second step now is rolling out of loss prevention engine to identify items within the store as well as enable our partners to do the self checkout portion of the solution.
I believe that that opportunity.
It's big for Us from a systems perspective.
To kind of rethink how the stores run and use rain RFID at our systems in the stores and also as I noted in the prepared remarks drives of 100% tagging because you need to get to a 100% tagging if youre going to be doing self checkout based on range.
So thats one core area of work.
I am, particularly focused the company's focused and I think it would be helpful. Just for the foreign investors to focus as well.
So.
After the first part of your question, which I have subsequently forgotten if you could if you could remind me what you ask.
Yeah, just in the pandemic with the business soft the you decided to go all in on the investing for the growth opportunity, which seems to be paying off but there was some commentary in the script about maybe balancing growth and profit. So just wanted to maybe clarify that.
And get your thoughts on that.
Future profitability of how you're going to balance maybe growth in profit.
Yes.
Okay.
Hey, Mike This is Carey.
Prior to the pandemic, we had strung together four quarters in a row of.
The breakeven or better adjusted EBITDA. It is our goal and our commitment to get back to the hat on the other side of COVID-19, we are balancing that desire with the with this massive opportunity in front of us and investing into that and I think you are right I think of the decisions we made to invest into the COVID-19 headwinds have.
<unk> does as well as we enter 2021 and we're going to continue balancing that those two dynamics as we go forward.
And we will of course continue investing across our entire platform. It's the future as I talked about the big opportunity in front of us.
The investing for that future.
Got it that's helpful. Thanks, and congrats again on the good results.
Thank you.
Our next question comes from Jim Ricchiuti with Needham <unk> Company. Please go ahead.
Hi, Thank you good afternoon.
The question just on the IC.
IC constraints.
Wondering.
Yes.
We anticipate.
So the incurring any additional costs as a result of the the supply chain issues.
Whether we're talking about expedited cost share.
What are you hearing wholesale some of your foundry partners with respect to.
The supply and in the case of the <unk> 700 <unk>.
<unk> to maybe accelerate the transition.
Yes, Hey, why don't you take the first part I'll take the second of all right.
Jim Thanks for the question in terms of incremental cost really.
Very small incremental cost as we navigated it yes, we are paying a little bit on expedites here and there.
We have definitely accelerated capital spend to increase capacity.
But we're not we're not seeing any price increases from any of our suppliers at this point like us they seem to be playing the long game on this.
And then Jim kind of second part of the question.
<unk>.
200 millimeter wafer supply is tight and the older process geometries are tight so even if you have an older process geometry in the 300 millimeter wave range. The capacity is still tight. So it is our is our desire of coal actually need to drive into the Amgen of 100, which is in the more advanced process node 300 millimeter wafer.
The same time, the get four times as many die per wafer on us for our M 700, as we did for amounts of our six the wafer.
It goes from 200 to 300 different from 200 millimeter to 300 millimeter F. Squared gives you roughly twice as many die per wafer in the diet is half the size.
The four times as many of die per wafer.
The next set of 100, so we're focused on that at 700 of focused on driving the growth and opportunities for the <unk> 700.
Net at the same time of working with our partners to accelerate their adoption of the.
The answer the 100, it's difficult ramping of new product in the pandemic.
Also difficult ramping of new product that is so advanced and sort of differentiate it is half the size of our prior products of our partners are still getting comfortable with using net assembling it basically bringing it to market. So those two of those two of those two factors the mall.
<unk> launching in the pandemic.
<unk> made the transition the slower than we had originally hoped and at the same type of we need to make the transition which is why we have the commentary about us needing to drive that transition to the <unk> of 100, and we're going to make it happen.
Got it.
Chris I don't recall in past years.
We've seen tightness.
In the IC supplies once it is true to what we still too early.
And the adoption of range, where it had less of an impact.
Previously during the prior cycles, we like others had difficulty getting sufficient number of wafers.
And so yeah, we're not immune to the trends that are going on in the industry.
<unk>.
We are guardedly optimistic that the fact is the fact that range and our products are so widely deployed is so important to the essentially to the global economy. They are used everywhere.
And they're used in tracking.
Personal protective equipment and vaccine distribution and other things.
We're guardedly optimistic and confident that that those facts.
Put us in a good position with respect to asking for additional wafer upside, but as the industry doesn't affect US you know we have to we have to work to get wafers, just like everybody else debt.
Jim living through that that history.
Factored into our decision last year to build 200 millimeter inventory, even as our sales were going down. So we tried to get us in front of it as much as we could if we saw it coming and we.
We thought what we could that day.
Got it.
So let me the last question from me interest I'm wondering if you. If you can characterize just how some of the price negotiations that you normally go through.
How have debt.
The evolved as you went through all of this.
Hey, Jeff can you take that one I'll take that one thanks, Jim This is Jeff.
Alright.
We successfully concluded our pricing negotiations with our inlay partners during the <unk> 2020, and <unk> 21 to get.
Characterize the outcome of our partnering discussions as in line with our expectations.
And so we experienced.
Year over year pricing scenario, which is typical.
Of our past years experiences.
Yeah.
And I don't know if you could just remind us.
If you would be willing to just the type of.
All of us.
Pricing.
The erosion or decline as you normally would see.
Jim of what I would say is that it's typically single low single digits percentage decline in overall average selling price.
And again, our pricing negotiations entering 2021 were in line with our expectations.
Jim from a seasonality perspective, it's that small pressure on the SAP that typically drive endpoint IC revenue lower in the first quarter, we're not experiencing that we're not signaling that for this first quarter because as Jeff said, the ASP price negotiations were where we expected them to land. We're just seeing the increased unit volume.
Enough to offset that in Q1.
Got it debt thats helpful and congratulations thank.
Thank you Jim <unk> Jim.
Our next.
Question comes from Derek Soderberg with <unk> Securities. Please go ahead.
Hi.
Thanks for taking my questions.
I want to start with reader Ics.
You guys of refresh the tag IC and reader products I'm wondering if you could provide an update on the product roadmap there and if theres anything you guys need to add in terms of technologies.
And then I think you have some excess inventory recently and reader Ics.
Brick and mortar retail comes back online more if you can provide an update on inventory levels, what youll see in there.
Okay. Thanks, Derrick this is Chris I'll start the I'll start the answer that I will hand up the carry associated with the inventory question part of the question.
Regarding reader Ics and kind of where we're investing as.
As the market centimeter and leader you can expect us to continually advance our product line.
We're going to introduce new products as they become available and when the time is right. So we havent you can't pre announce anything that we may or may not be doing well no debt.
<unk> spoke in the prepared remarks about.
Extending our software and our conservative that enable our partners, which is kind of driving compelling experiences for businesses and for our people and that statement was really pointed at mentioned of digital I think for every day, our vision of digital twins in the cloud vision of being able to authenticate items as being genuine.
And so that's another area of where I interest should be looking because it's the it's a.
Greenfield opportunity for us for our industry and it really represents the future of what rain offers were not just associated with connecting things.
Things directly from the.
Moving to a reader of cleanly and.
Enabling the backend where the item is connected to <unk>.
The information store about the item and the cloud and the network and.
We can provide some of essential services around that connectivity to drive additional value.
So the second part of I think Eric Thanks for the question in terms of the inventory for reader IC, we are experiencing right now packaging delays for our for our reader Ics So that will impact our Q1 revenue will sell through of the existing inventory. We've got and then and then we will be unable to fulfill orders that we've received.
For reader Ics in the first quarter.
From a sizing perspective, you can think in order of magnitude of maybe north of $1 billion of impact in Q1, and 100 basis points to our gross margin that we expect that to correct in the second quarter and then go back to a more normalized reader IC volume level in the second quarter.
Okay.
Got it thanks for the color there.
And just building off an earlier question on pricing negotiations I was wondering if you could remind us what you've said in the past on the 700 gross margin.
And then I'm wondering if anything had changed there with the pricing negotiations I know you've kind of said sort of in line with your expectations.
And then if you could what's the 700 product mix ship today compared to older tags. Thanks.
Okay. So from a.
On a price negotiation that the 700 adjusted earlier landed about where we wanted are where we expected that did the rest of our price negotiations.
A gross margin perspective, the 700 will be accretive to our overall gross margin.
As we increase the mix of that now the ramp of the seven.
700 was slowed by the pandemic.
We shipped a 100 million 700 units in <unk>.
Q3, we more than doubled that in Q2 or excuse me in Q4, but that even though that sounds like a big number that's a pretty small percentage of of our mix. So it will ramp in Q1 and will ramp again in Q2, and then in the back half of the year as well I would anticipate starting to see some of that gross margin.
Accretion in the back half of the year.
Great. Thanks.
Oh.
Thank you Derek.
Our next question comes from Sushi of Hari with Goldman Sachs. Please go ahead.
Yeah. Thank you so much for taking the question and congrats on the strong results and guidance.
I just had one question on.
How to think about profitability going forward as you guys pointed out.
The expectation right now is to return to EBITDA breakeven post Covid I guess my first question is is that of calendar 'twenty two statement.
Is it more second half 'twenty, one if you can kind of provide a little bit of granularity there that'd be helpful. And then secondly, and probably more importantly, once youre back to breakeven how should we think about the trajectory of their onward.
Should we expect you to sort of hang out around EBITDA breakeven or can we go ahead and extrapolate.
The positive trajectory and expect you to grow EBITDA dollars I guess, it really depends on how you think about.
Profitability versus investing of the business. Thank you.
Such associated this is Chris will carry the thinking of the answers to those questions I'm just going to make a comment as I think about the future.
We're going to come out the other side of Covid I'm still waiting to get my first Covid shock.
And so the obviously the future associated with COVID-19 is hugely uncertain and so it's very difficult for us to predict anything associated with COVID-19, much less predict the future of overall.
So the Covid dynamic creates significant uncertainty that will factor into how we think about the future and how it carries you know thinking about how we're gonna be guiding the business and carry yes. So thanks, Chris and I would just echo that it's I can't put a timing non returning to breakeven.
Just because we don't know how long COVID-19 is going to hang around its certainly going to be share for a good part if not all of of 2021.
As you look at the business, we haven't provided of long term model, yet COVID-19 has delayed that.
As you look at the business, we we did pretty meaningful investment hiring last year and that was substantially completed in Q3 and then we.
We felt the full impact of that in our Q4 opex.
There will be additional investment this year, but not at the scale. It was last year I signaled that for Q1, we have incremental and non wage engineering expense related to the loss prevention when that Chris Chris announced so we will have some non wage expense spike in Q1, and then we'll kind of go back to a more normalized level in the.
Near term.
The levers that we have to play is really our gross margin and specifically it is the <unk> 700 adoption 700 will lead to gross margin accretion and we think of this model over time. This model has leverage in it we're just not in the position yet to say when do you expect that.
Thank you for the color and congrats again.
Sure.
As a reminder, if you of a question. Please press Star then one to be joined the queue. Our next question comes from Scott Searle with Roth Capital. Please go ahead.
Hey, good afternoon. Thanks for taking my questions. Congrats on the nice quarter, guys and I Hope you your family and the teams are safe and sound and doing well.
Thank you Scott I hope the century of as well.
So just to clarify on the <unk> dynamics, it sounds like less than normal seasonality on the IC front, but that's being offset by the Rev. Rec related to this loss revenue opportunity on the system side is that correct and then the magnitude of the deferred revenue I think you said was a little under $6 million does all of that or most.
Of that get recognized in the second quarter or is it split over a couple of quarters. So just kind of help me frame, how youre thinking about where systems goes as we get into the third quarter because it sounds like I see revenue then should start to pick up again in the third quarter with traditional seasonality.
Yeah, Hey, Scott This is Kerry thanks for the question.
On the the loss prevention.
And the loss prevention of engine win I should say, yes that was a 6 million dollar win for that deployment, we expect to substantially shipping in Q2.
So that's kind of what we included in our prepared remarks. It is just given the changing dynamics right now it's too early for me to comment on on Q3, we tried to provide all of the dynamics of where we know of right now that are impacting Q2, because it is different than that in years past.
Got you and just to clarify Carey the loss prevention is there any recurring software or other revenue associated with that once it gets deployed.
No I think of this as in our 700 based win and our loss prevention of algorithms embedded into the into the <unk> 700 solution.
Yes, Scott.
And as I mentioned in some of the remarks, just a little while ago. The M 700 endpoint IC is critical in some of these opportunities and we believe any of them going forward because in protected mode allows you to make a tag invisible at point of sales. So the exit date hasn't seen the tech and so the consumer and it's part of an item item condition of the walk up the store and the gate doesn't see the item.
The same type of it protects the consumer privacy, and thereby allowing a debt and tax. So the first step that we did in loss prevention was to introduce that at 700 with that protected mode and it even as we were developing the loss per mentioned engine and with sort of what we're just saying of is our first significant win built on net loss prevention engine, but it follows on the heels of us introducing and 700 with protected mode.
Okay very helpful. And then maybe Chris the follow up on that front as it relates to the 700, what are you seeing or what are your expectations from a share perspective at least when youre getting into your customers right. The business just gets split between you and NXP in certain cases is the 700 really are you seeing.
Seeing concrete share shifts based on what you are able to show and demonstrate for customers.
Yes, Scott, it's too early to say anything with respect to share and we really don't have good visibility into share of at least type of good visibility of that we can feel confident then until the until we get the results at the end of every year.
We continue to believe that M 700 is a very differentiated product.
The second maybe more Shang you Couldnt microdot Morris of lot with the rain endpoint IC and we did so we shrunk the die by any of them.
The fact of half compared to amounts of our six improve.
The improved the performance rate of speed and added some of these features like protected mode with the ability to add more features in the future because as you migrate down Moore's law of the cost of digital goes down.
It's the fastest.
The decrease in kind of overall silicon real estate. So we can add more of those logical features on the chip. We believe that 700 represents of the future for us and part of the industry and we're going to be driving it and the successors is hearts of again.
Got you and lastly, if I could just to wrap up and maybe a little bit of an unfair question as it relates to the COVID-19 backdrop, and the lack of visibility on that front, but from our system.
The standpoint, where system standpoint.
We've talked out you've cleared inventory out of the channel starting to come back you've got a big when it comes back in the second quarter. When do you think you can get to a sustained level of revenue that you saw with some of the larger deployments in 2019, I guess the long winded way of saying are there some other big wins out there in rfps that you're seeing and then on the IC front.
Endpoint Ics I guess have been growing somewhere in the ballpark of <unk> 25 per cent of year for the past couple of years.
Or take are we.
At the front end now of an inflection are you able to see that or what's the range of outcomes in terms of thinking about how this market is going to grow over the next several years. Thanks.
Yes, So let me let me try with the.
The answer that question with the kind of of general broad brush picture, and then I'm going to let Jeff fill in some of the gaps.
I think about where we are today.
Vast majority of endpoint IC volumes derived from handheld driven retail inventory person carrying the handle the historic day inventory visibility around the <unk> fulfillment center now and of its been handheld side of of driving the endpoint IC volumes significantly we estimate roughly.
Call. It two thirds of the endpoint Ics going of retail investors from panels.
There arent that many use cases that are amenable to handheld rating certainly loss prevention wasn't.
Doors arent conveyor belts arent in the future. We believe the vast majority of endpoint IC volumes can be triggered by <unk>.
We are right now in the process of investing.
In the future.
We've got solid successes and the two of our supply chain and logistics customers now of key win and subtract out the loss prevention and another win and just self checkout.
Major Asian brand.
So we believe that at.
At least we feel.
These wins are indicative of a change in the industry that I only just really needs to happen.
Not to get rid of handheld reading it will continue of course, but basically to driving the future of which is fixed treating to open up all of these other opportunities and that's our vision for the future and we're driving it as hard as we can I can't tell you it's going to happen. This year next year of how fast it is kind of happen and it's something we've been focused on for a long time, and we want and need to make it happen.
Jeff anything you would add.
Yes, I think I would add debt.
Last quarter, we talked about what we saw as the impact of COVID-19 on.
And customer deployments as existing deployment as well as the.
The pace of testing or other.
Proof of concept.
The investments.
And then it had a had an impact on those.
It fits then our partners and customers.
And then pinch have continued to adapt and so we're beginning to see a modest.
The increase in the onsite.
On site deployments and testing and our pipeline of opportunities continues to grow so while COVID-19 impact or headwinds remain we are seeing signals that the adaptation.
That gave us some reason to feel.
The year ahead.
The progress toward.
Post the COVID-19 dynamic in the marketplace.
Okay, great. Thanks, guys congratulations on the quarter.
Thank you Scott.
Our final question will come from Troy Jensen with Lake Street Capital. Please go ahead.
Hey, guys. Thanks for sneaking me in and out of congrats on good results.
Thank you Troy.
Hey, so maybe the follow up on some of the other questions about just the IC growth in Q4 and kind of data for Q1.
How much of that is due to the big logistic customer of the first big logistics customer or is it purely just kind of channel inventory back to normal in retail the true.
A relatively small amount from the first supply chain and logistics customer because as we've noted previously that use cases associated.
With with tracking pallets and so the total number of pallets that attract is a relatively small number.
Compared to the power overall endpoint IC volumes at least for for the these initial opportunities going forward. The number of pallets shoots of worldwide is quite large but within just the first deployment of the first John first large end customer the end.
I see volumes are modest.
Yeah.
This concludes our question and answer session I would like to turn the I'm, sorry, and cloud of the management for any closing remarks.
Okay. Thanks.
Thank you all for joining the call today kind of help you Andrew of loved ones are and remain safe and well. Thank you.
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