Q3 2023 Impinj Inc Earnings Call

Welcome to the <unk>, Inc. Third quarter 2023 to financial results earnings Conference call and webcast all participants will be in listen only mode.

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Note. This event is being recorded.

I would now like to turn the conference over to Mr. Andy Cobb, Vice President Strategic Finance. Please go ahead.

Thank you Jay.

Good afternoon, and thank you all for joining us to discuss <unk>.

Third quarter 2023 result.

On today's call Kristi, Oreo Impinges co founder and CEO will provide a brief overview of our market opportunity and performance.

Baker.

CFO will follow with a detailed review of our third quarter 2023 financial results.

Quarter outlook, we will then open the call for questions.

Jeff Dossett, and just CRO will join us for the Q&A.

You can find management's prepared remarks, plus trended financial data on the company's Investor Relations website.

We will make statements in this call about the financial performance and future expectations that are based on our outlook as of today.

Any such statements are forward looking under the private Securities Litigation Reform Act of 1995, while we believe we have a reasonable basis for making these forward looking statements. Our actual results could differ materially because any such statements are subject to risks and uncertainties that we describe these.

Risks and uncertainties in the annual and quarterly reports, we file with the SEC, we do not undertake and expressly disclaim any obligation to update or alter our forward looking statements, except as required by law.

On today's call all financial metrics, except for revenue or where we explicitly state otherwise are non-GAAP.

Balance sheet and cash flow metrics are GAAP.

Please refer to our earnings release for a reconciliation of non-GAAP financial metrics to the most comparable GAAP metrics.

Before turning to our results and outlook note that we will participate in Baird Global Industrial conference on November 9th in Chicago, We look forward to connecting with many of you. There I will now turn the call over to Chris.

Thank you Andy and thank you all for joining the call.

As I reflect on our results while I'm disappointed that 2023 has been far more challenging than we anticipated entering the year.

I am pleased with our execution this quarter.

We beat our revenue guide midpoint and exceeded our profitability Guy.

Looking forward, we see green shoots in the fourth quarter.

Our full year 2023 endpoint IC volumes to be consistent with our industry's historical 29% unit volume CAGR.

We anticipate a market rebound in 2024 and remain a gross leader despite the difficult macros.

We also continue improving our demand forecasting and inventory management.

To quote Winston Churchill, we are not letting a good crisis go to waste.

Challenging periods have always made us a stronger company and I have no doubt this one will as well.

Focusing first on endpoint Ics third quarter revenues slightly exceeded our expectations, but declined sequentially.

Weakness in the overall retail apparel market and softness in the general merchandise ramps at the large north American retailer eclipsed strong unit volume growth and our second large north American supply chain and logistics customers.

Well I see inventory at many of our inlay partners declined the aggregate decline was less than we had anticipated.

Looking to the fourth quarter Green shoots in retail apparel are driving improving demand at our inlay partners.

While it is too early to call a bottom it appears that at least in North America.

The worst of the retail inventory destocking is behind us.

That said, we expect our inlay partners to continue reducing their IC inventory in the fourth quarter, even as they deliver into that improving retail demand.

Looking into 2024, we see secular growth in both personal tracking and retail.

The letter buoyed by self checkouts, driving 100% tagging and a general merchandise expansion.

Turning to systems third quarter, Rearend Gateway revenue was slightly below our expectations.

Due primarily to macro headwinds slowing partner led deployments.

Our enterprise engagements continue to be a bright spot.

Led by expanding personal tracking at the second supply chain and logistics and user.

Self checkout loss prevention at the visionary European retailer and is successfully concluded self checkout deployment at the Asia based global retailer.

Looking to the fourth quarter, we expect a sequential decline in reader and gateway revenue due to continued weakness in our partner led reader deployment and unfavorable delivery timing to our enterprise end users.

Looking further out we will continue investing in solutions that leverage our entire platform.

Working hand in hand, with lighthouse enterprises to solve their previously unsolvable business problems.

Those efforts paid dividends in 2023, both systems and recurring endpoint IC volumes and.

And we expect that trend to continue in 2024.

I remain confident that our focus on enterprise solutions will yield further dividends in the years ahead.

Third quarter reader IC revenue declined as we expected due primarily to weak macro demand in China, and our partners continuing their transition from our older. Indeed product line to our new <unk> family.

Looking to the fourth quarter, we see similar reader IC revenue to third quarter with China demand remaining soft and our partners focused on selling down there Andy based product inventory before fully ramping sales of <unk> family based designs.

That said, we're pleased with the pace of our <unk> family of design wins, and our traction with emerging opportunities.

Turning to our intellectual property dispute with NXP, we prevailed in Washington, California, and China.

The California Court issued post trial rulings instructing the parties to agree to on a monetary award to impinge.

Holding the jury verdict in our favor on one patent, but denying our request for an injunction.

And ordering a retrial on a second patents validity, while holding its infringement and willfulness verdict in our favor.

We appealed the injunction denial requested an ongoing royalty and are pursuing further damages from Nxp's Dutch SME yet.

The first of three Texas trials involving three and pinch patents versus two patents NXP recently licensed from a third party starts next week.

Overall, we remain confident in our position and anticipate seeing the litigation through to a successful outcome.

In closing despite.

Despite the macro headwinds impacting our fourth quarter outlook we.

We see signs of retail demand improvement expect strong annual endpoint IC unit volume growth and remain optimistic for the future.

As I said earlier, we as a company have been through industry cycles before and have come through each of them stronger.

With excitement for the future, our leading market position and the strength of our platform and strategy.

I have no doubt we will do so again.

Before I turn the call over to Kerry for our financial review and fourth quarter outlook I'd like to again. Thank every member of the pinch team for their constant efforts driving our bold vision.

I feel honored by my incredible good fortune to work with you.

Gary.

Thank you, Chris and good afternoon, everyone on today's call I will review, our third quarter financial results and fourth quarter financial outlook.

Third quarter revenue was $65 million down, 24% sequentially compared with $86 million in second quarter, 2023, and down 5% year over year from $68 3 million in third quarter 2022.

Third quarter endpoint IC revenue was $48 6 million down 25% sequentially compared with $64 9 million in second quarter, 2023, and down 5% year over year from $51 2 million in third quarter 2022.

Looking forward, while we typically see fourth quarter endpoint IC revenue declined sequentially. This year, we expect improving inlay partner demand to drive an increase.

Third quarter systems revenue was $16 4 million down 22% sequentially compared with $21 1 million in second quarter, 2023, and down 4% year over year from $17 1 million in third quarter 2022.

Third quarter systems revenue was slightly below our expectations driven by weakness in our speedway reader business.

Sequential betas basis revenue decreased across all product lines on a year over year basis Gateway revenue increased while reader IC and reader revenue decrease.

Looking ahead, we expect a sequential decline in fourth quarter systems revenue led by weakness in our part were partner led reader business.

Third quarter gross margin was 55% compared with 53, 3% in second quarter, 2023, and 56, 9% in third quarter 2022.

The sequential decrease was driven by lower revenue on fixed costs. The year over year decrease was driven by lower endpoint IC product margins, specifically, a smaller specialty and industrial IC mix and lower systems product margins driven by increased costs looking to the fourth quarter, we expect our gross margin to increase.

Third quarter operating expense was $32 6 million compared with $35 9 million in second quarter, 2023, and $29 million in third quarter 2022.

Effective spend management across all major functions drove the lower than expected operating expense.

Research and development expense was $15 5 million sales and marketing expense was $7 3 million and.

General and administrative expense was $9 7 million, including litigation expense of $3 4 million.

We expect a sequential increase in fourth quarter operating expense due in part to increased litigation spend.

Third quarter, adjusted EBITDA was 300000, compared with $10 million in second quarter of 2023, and $9 8 million in the third quarter 2022.

Delivering positive adjusted EBITDA. Despite the significant revenue headwinds this quarter is a testament to both the strengths of our business model and the execution of our team.

Third quarter GAAP net loss was $15 8 million third quarter non-GAAP net income was 100000 or zero cents per share on a fully diluted basis.

Turning to the balance sheet, we ended the third quarter with cash cash equivalents and investments of $113 2 million compared with $114 9 million in second quarter, 2023, and $201 1 million in third quarter 2022.

Inventory totaled $106 8 million down $5 5 million from the prior quarter.

Third quarter net cash used by operating activities was $1 7 million property and equipment purchases totaled $2 8 million free cash flow was negative $4 5 million.

Before turning to our fourth quarter guidance I want to highlight a few items unique to our results and outlook.

First as Chris mentioned, our partners made progress reducing their endpoint IC inventory in third quarter.

We expect them to continue reducing their endpoint IC inventory in the fourth quarter that reduction will position us well to capitalize on the large number of partner <unk> hundred in late designs currently in certification and to begin ramping the <unk> hundred in 2024.

Second or third quarter inventory decreased with lower end point, IC inventory more than offsetting higher systems inventory.

Looking to the fourth quarter, we anticipate further reducing our overall inventory again with declining end point IC inventory more than offsetting a small increase in systems inventory.

We are confident inventory will normalize as demand recovers.

Finally, we recently launched our first ESG Materiality assessment survey in a cross section of our investors customers and employees on ESG matters that are important to them.

<unk> is strongly committed to ESG at the same time, we view our journey as a partnership with all of our stakeholders to build a strong ESG roadmap for the future.

Turning to our outlook, we expect fourth quarter revenues between 65, 5% and $68 5 million compared with $65 million in third quarter, 2023% to 3% quarter over quarter increase at the midpoint.

We expect adjusted EBITDA between a loss of 900000 and a profit of 700000 on the bottom line. We expect non-GAAP net income between a loss of $1 2 million and a profit of 300000, reflecting non-GAAP fully diluted earnings per share between a loss of <unk> and a profit of <unk>.

In closing I want to thank the <unk> team our customers our suppliers and you 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 to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys is.

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At this time, we will pause momentarily to assemble our roster.

Today's first question comes from harsh Kumar with Piper Sandler. Please go ahead.

Yes.

Chris Scary Anne and the team at <unk>, you guys sound a lot better this time around it looks like.

Progress is in sight.

Quick quite hard.

Thanks, Thanks, guys I had a quick question could you give us I know you guys are working on Destocking. Your inventory at the end My partners and I know you talked about it in the script, but could you give us a sense of how much is left in the system and how much do you think you might have left in the December quarter, how much you want to take out in there.

December quarter in other words, if none of this would happen wherever you real revenues have been in the December quarter.

Hey, harsh thanks for the question. This is Terry I think I'll take that one.

Our progress in burning down channel inventory in Q3 was mix, we have some partners on track or ahead of schedule and some behind in aggregate, though we burned down less than I expected going into the quarter.

Based on our estimate of demand, we will take out more channel inventory in Q4 and anticipate our large partners exited the year reasonably healthy.

Smaller partners, However may take a little more time to get healthy.

We're not given a specific number of weeks of channel inventory because those are based on our estimates of demand and that demand retirement remains very fluid at this point, so but at the end of the day, we're making good progress on reducing channel inventory.

Great. Thank you and it's good to hear you think it will be done by December which was the original plan and then I had a second one your largest one of your largest customers reported this afternoon and they also seem to imply that we're close to bottom in the retail apparel issues and things are actually starting to look up just kind of like you mentioned, but I was curious.

I can get your thoughts on the topic, how believable do you think this is this time around are you seeing an independent validation of this outside of what your partners are telling you and then all of a sudden they seem pretty excited about food as a category as well could you also comment on that and I'll get back in line.

Yes, thanks harsh.

So.

We and our largest customers are seeing roughly the same thing, we obviously talked to our direct and our partners, but we also talk to end users I was just at wireless Iot event in Germany last week met with several of our end users and although.

Although the macro environment is still difficult and as we said in our prepared remarks still too early to call bottom.

We do see.

Do see improving demand out there are direct our end users are starting to signal that they see things picking up a little bit.

Unknown Executive: Welcome to the Impinj third quarter, 2023 Financial Results earnings conference call in 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.

Important data and sales out data at least in the U S is starting to normalize.

And so we're feeling those green shoots, but like we said, it's too early to call bottom I guess I'd like to add that.

North America seems to be well ahead in terms of the correction.

Unknown Executive: After today's presentation, there will be an opportunity to ask questions. Do ask a question you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two.

Europe feels behind and certain.

Certain parts of Asia or mix, obviously, because Asia is large, but China is behind us as well.

No.

Time will tell.

Unknown Executive: Please note, this event is being recorded.

But I'm personally feeling pretty good that that.

Andy Cobb: I would now like to turn the conference over to Mr. Andy Cobb, Vice President Strategic Finance. Please go ahead. Thank you, MJ.

Things are improving out there in the market.

On the food side.

Okay go ahead, I'm, sorry, no no no that was it.

Okay on the fluids side, we do see food as an opportunity there are two aspects to food one is.

Andy Cobb: Good afternoon and thank you all for joining us to discuss Impinj's third quarter, 2023 results.

One is tracking items setup at the pallet carton and case level.

Chris Diorio: On today's call, Chris Diorio, Impinj's co-founder and CEO will provide a brief overview of our market opportunity and performance.

And we have been categorizing those food opportunities in what we call supply chain and logistics, because it's primarily moving to food items around.

Kerry Baker: Kerry Baker, Impinj's CFO, will follow with a detailed review of our third quarter, 2023 financial results and fourth quarter outlook.

There are also food opportunities and direct item tax.

And those opportunities are moving forward.

Unknown Executive: We will then open the call for questions.

Jeff Doff: Jeff Doff at Impinj's CRO will join us for the Q&A.

We have not commented on them directly in our calls because I personally feel it's a little bit premature to be.

Unknown Executive: You can find management prepared remarks plus trended financial data on the company's investor relations website. We will make statements in this call about financial performance and future expectations that are based on our outlook as of today. Any such statements are forward-looking under the Private Security's Litigation Reform Act of 1995. While we believe we have a reasonable basis for making these forward-looking statements our actual results to differ materially, because any such statements are subject to risks and uncertainties.

Citing some of these opportunities when they are just starting to get going but they are certainly out there and as they come forward and can guarantee that some of them are going to be quite large, but our preference is to focus right now on where we actually see the movement, which is on the pallet carton box.

Unknown Executive: We describe these risks and uncertainties in the annual and quarterly reports we file with the SEC. We do not undertake and expressly display any obligation to update or alter our forward-looking statements except as required by law. On today's call, will financial metrics accept for revenue or where we explicitly state otherwise are non-gap? Balance sheet and cash flow metrics are gap. Please refer to our earnings release for a reconciliation of non-gap financial metrics to the most comparable gap metrics.

And kind of keep our powder dry.

On the individual food opportunities, which of course like I said it can be much larger, but I think it's premature.

Thanks, Gerry and Chris Thank you.

Thank you.

Yes.

Okay.

The next question comes from Toshi Hari with Goldman Sachs. Please go ahead.

Hi, good afternoon. Thanks, so much for taking the question.

I wanted to follow up on how to think about and lay partner inventory and I guess your sell in going forward.

Carey I think you mentioned that you expect your large partners to exit the year with a relatively healthy inventory, but perhaps some of your smaller partners.

To have maybe excess inventory at the end of the year.

Did I catch that right first of all and then second of all assuming your large partners exit the year.

A healthy spot and you're selling into I guess sell through starting Q1, how should we think about the sequential than your end point IC business in Q1.

Unknown Executive: Before turning to our results and outlook, note that we will participate in Bears Global Industrial Conference on November 9th in Chicago. We look forward to connecting with many of you there.

And I guess any preliminary thoughts on 2024 for your end point IC business would be super helpful as well.

Chris Diorio: I will now turn the call over to Chris. Thank you, Andy, and thank you all for joining the call. As I reflect on our results, while I'm disappointed that 2023 has been far more challenging than we anticipated entering the year, I am pleased with our execution this quarter. We beat our revenue guide midpoint and exceeded our profitability guide. Looking forward, we see green shoots in the fourth quarter. Expect our full year 2023 end-point IC volumes to be consistent with our industry's historical 29-percent unit volume caterer, anticipate a market rebound at 2024, and remain a growth leader despite the difficult macro.

Yes, thanks to share. This is Kerry so yes, you've got it right. The larger inlay partners, we expect to exit the year reasonably healthy the smaller inlay partners are going to take a little bit more time.

As I think about the first quarter.

We're going to stick to our knitting here and guide just one quarter at a time the market remains very dynamic. We are just now starting to see improvement in endpoint Ics, while our systems will remain soft.

And thats not unlike what we saw as we exited COVID-19 endpoint Ics recovered before systems did but we're still in the early stages of what we hope to be a recovery. So we're not going to lean too far forward on on our guidance for beyond Q4 at this point.

Chris Diorio: Deborah. We also continue improving our demand forecasting and inventory management. To quote Winston Churchill, we are not letting a good crisis go to waste. Challenging periods have always made us a stronger company, and I have no doubt this one will as well. In the general merchandise ramp at the large North American retailer, it clips strong unit volume growth at our second large North American supply chain and logistics customer. And while I see inventory at many of our inlay partners declined, the aggregate decline was less than we had anticipated.

I will point you to my prepared remarks, where we landed about as far as we want to where I said looking into 2024. This is with respect to our endpoint Ics looking into 2024th we see secular growth in both parcel tracking at retail and then sided.

Yes.

Self checkout, driving 100% tagging and expansion in general merchandize. So of course, we anticipate seeing a pick up in retail apparel as well.

Driven by more than just the 100% tagging due to subtract out but.

That is a driver as well and so we are guardedly optimistic for 2024, but I think thats about as far as we want to go right now.

Got it that's very fair and helpful. As my follow up on gross margins you talked about Q4 being up sequentially.

Chris Diorio: Looking to the fourth quarter, green shoots in retail apparel are driving improving demand at our inlay partners. While it is too early to call a bottom, it appears that at least in North America, the worst of the retail inventory destocking is behind us. That said, we expect our inlay partners to continue reducing their IC inventory in the fourth quarter, even as they deliver into that improving retail demand. Looking into 2024, we see secular growth in both porcelain tracking and retail, the letter buoyed by self checkout, thriving 100% tagging and a general merchandise expansion.

I was hoping you can kind of walk through the puts and takes not only for Q4, but also over the next couple of quarters. If you can kind of touch on your expectations for foundry costs or wafer costs.

Youre pricing profile going forward and you talked about an 800.

Coming in starting next year, but how can that help your gross margin profile play over the next couple of quarters. Thank you yeah, Yeah sure. So as I look to start with Q4.

I think gross margin is going to increase we had if you think back to my guidance on Q3 gross margin I signaled that we would be impacted by two things first we'd have lower revenue scale against fixed costs and our operating cost structure and then we had a softer mix of product, particularly reader IC as I look into the queue.

Chris Diorio: Turning to systems, the recorder rear end gateway revenue was slightly below our expectations due primarily to macro headwinds, slowing partner led deployments. Our enterprise engagements continue to be a bright spot led by expanding porcelain tracking at the second supply chain and logistics end user. Self checkout on lost prevention at the visionary European retailer and a successfully concluded self checkout deployment at the Asia-based global retailer. Looking to the fourth quarter, we expect a sequential decline in reader and gateway revenue due to continued weakness in our partner led reader deployments and unfavorable delivery timing to our enterprise end users.

For I think our product mix normalizes, so we get some of that back, but we're still sub scale at a guide the midpoint of $67 million. So that's the dynamic we'll see a little bit of a lift but I don't anticipate us getting back to the 53% that is our targeted level right now as I look into.

2024, I expect the mix of continued to be normal I expect.

Eventually revenue to start growing again as the retail market recovers and as we grow back into the revenue level that we were in the first half of this year.

Chris Diorio: Looking farther out, we will continue investing in solutions that leverage our entire platform, working hand in hand with lighthouse enterprises to solve their previously unsolvable business problems. Those efforts paid dividends in 2023, both into systems and recurring and point of sea volumes, and we expect that trend to continue in 2024. I remain confident that our focus on enterprise solutions will yield further dividends in the years ahead. Third quarter, reader, I see revenue declined as we expected due primarily to weak macro demand in China and our partners continuing their transition from our older indie product line to our new imping E family.

I would expect to get the full realization of scale in our gross margin and that takes us back to that 53% targeted range now on top of that as the MH 100 layers in I expect gross margin to further improve we're at the very early days of the <unk> hundred ramp most.

Our partners are still in the certification of our qualification process. So we're not really shipping hundreds at this point as they make their way through that qualification process will start shipping in and then the demand will start ramping I will keep you up to date on our progress on that ramp.

<unk> says, we're not really shipping and eight hundreds yet it really relative to the overall opportunity in front of us from 800, which is quite large the ramp has started.

Chris Diorio: Looking to the fourth quarter, we see similar reader, I see revenue to third quarter with China demand remaining soft and our partners focused on selling down their indie based product inventory. Before fully ramping sales of E family based designs. That said, we're pleased with the pace of our E family design wins and our traction with emerging opportunities.

We have smaller opportunities out there going now, but our direct partners are waiting for certifications and approvals with neurology approval cycle right now for the most part of the approval cycle right now as those approvals start coming through we expect the ramp to access.

Thank you so much.

Thank you thanks for sure.

Okay.

The next question comes from Jim Ricchiuti with Needham <unk> Company. Please go ahead.

Chris Diorio: Turning to our intellectual property dispute with NXP, we prevailed in Washington, California and China. The California court issued post trial rulings instructing the parties to agree on a monetary award to impinge, upholding the jury verdict in our favor on one patent, but denying our request for an injunction and ordering a retrial on a second patent's validity while upholding its infringement and willfulness verdicts in our favor. We appealed the injunction denial, requested an ongoing royalty and are pursuing further damages from NXP's Dutch affiliate.

Hi, Thank you.

I think earlier.

Your script, you talked about steps you're taking to.

Improve demand forecasting and inventory manager I was just wondering if you could elaborate on that.

I will start with the demand forecasting and I'll, probably let carrie layer in as well.

On the demand forecasting side.

And the market terms.

Earlier this year.

It wasn't just we too.

Or.

We didn't anticipate the magnitude of the decline it was our direct harvest well when I was at this conference just last week I had on many of our partners any partners to service various basically said they didn't see a con.

Chris Diorio: The first of three Texas trials involving three impinge patents versus two patents, NXP recently licensed from a third party, starts next week. Overall, we remain confident in our position and anticipates being the litigation through to a successful outcome.

Hi.

And I am feeling personally we should have seen it coming we should have seen it coming at least better than we did and it's a learning experience for us.

Chris Diorio: In closing, despite the macro headwinds impacting our fourth quarter outlook, we see signs of retail demand improvement, expects strong annual endpoint IC unit volume growth, and remain optimistic for the future. As I said earlier, we as a company have been through industry cycles before and have come through each of them stronger. With excitement for the future, our leading market position and the strength of our platform and strategy, I have no doubt we will do so again.

We're significantly relying on our industry's view, but I want to do now is rely both on our industry's view in a lot more on the macro view.

Leveraging what our enterprise end users are seeing directly.

Trends in the overall market sensitive retail market trends in the supply chain logistics market and take into account at a higher level.

What the macro is doing and use that to kind of set a basis for ourselves to be more forward looking.

Some of what we're doing from a law.

Chris Diorio: Before I turn the call over to Kerry for our financial review and fourth quarter outlook, I'd like to again thank every member of the impinge team for your constant effort driving our bold vision.

Larger macro perspective, I am not saying, we did anything wrong in the past we did everything we could do in terms of engaging with our partners and working with them and understand what they expected their demand to be.

But I want to layer on top of that.

Chris Diorio: I feel honored by my incredible good fortune to work with you.

Overall understanding of the broad market because quite frankly, that's what we're selling into right now we are selling into the retail market.

Kerry Baker: Kerry? Thank you, Chris, and good afternoon, everyone. On today's call, I will review a third quarter financial results and fourth quarter financial outlook.

I don't care you wanted to get points on inventory management, Yes, yes, Joe. This is Terry so on the ends of the channel inventory side, we're doing multiple things, we're increasing the frequency of our channel inventory reporting so we can say closer to.

Kerry Baker: Third quarter revenue was 65 million, down 24% sequentially compared with 86 million and second quarter 2023, and down 5% year over year from 68.3 million and third quarter 2022. Third quarter endpoint IC revenue was 48.6 million, down 25% sequentially compared with 64.9 million and second quarter 2023, and down 5% year over year from 51.2 million and third quarter 2022. Looking forward, while we typically see fourth quarter endpoint IC revenue declines acutally, this year we expect improving inlay partner demand to drive an increase.

Call it sudden swings in the channel inventories, which will help inform demand planning as well. We're also reaching further into our our distribution model. If you will to talk to customers and partners beyond our inlay partners, our direct partners to understand how their demand is trending how their inventory levels are.

All in an effort to better inform how we and our partners run the level of inventory in the channel.

Got it.

Kerry Baker: Third quarter systems revenue was 16.4 million, down 22% sequentially compared with 21.1 million and second quarter 2023, and down 4% year over year from 17.1 million and third quarter 2022. Third quarter systems revenue was slightly below our expectations driven by weakness in our speedway reader business. On a sequential basis, revenue decreased across all product lines. On a year over year basis, gateway revenue increased while reader IC and reader revenue decreased. Looking ahead, we expect a sequential decline in fourth quarter systems revenue led by weakness in our partner led reader business.

My follow up question.

Chris Amazon recently talked about their use of RFID.

For this.

Just walk out technology solution.

Can you comment at all if youre working with them and if you can't.

Talk specifically about it I'd be curious just to get your perspective on their comments about this RFID applications.

Sure.

So Jim to the first part of the question.

Obviously, you can't say anything about about.

Any particular opportunity that has been identified publicly is associated with us and are associated with us in terms of the broader opportunity.

Kerry Baker: Curtis. Third quarter gross margin was 50.5% compared with 53.3% in second quarter 2023 and 56.9% in third quarter 2022. The sequential decrease was driven by lower revenue on fixed costs. The year-over-year decrease was driven by lower end-point IC product margins, specifically a smaller specialty and industrial IC mix, and lower systems product margins driven by increased costs. Looking to the fourth quarter, we expect our gross margin to increase. Third quarter operating expense was 32.6 million compared with 35.9 million in second quarter 2023 and 29 million in third quarter 2022.

I have always firmly believed that the just walk out solution or whatever you want to call it a different opportunities.

We will include both a combination of rain RFID ambition. It just makes logical sense.

If you use rain RFID tag individual items that for for example for our for our meat products or something like that.

With the added cost is because yes, the items cost attached to it to the tax revision system can just tell you what the item is not a toy.

For loss prevention opportunities, we can identify the item being solar installed but can't tell you anything about the person stealing a vision system can tell you is about the person is doing it and not much typically about the item so I see going forward.

Kerry Baker: Effective spend management across all major functions drove the lower than expected operating expense. Research and development expense with 15.5 million, fails in marketing expense was 7.3 million. General and administrative expense was 9.7 million, including litigation expense of 3.4 million. We expect a sequential increase in fourth quarter operating expense due in part to increased litigation spent. Third quarter adjusted EBITDA was 300,000 compared with 10 million in second quarter 2023 and 9.8 million in third quarter 2022.

The opportunity to blend the two technologies together to provide an overall just walk out opportunity, which will include loss prevention as we're driving into.

So without speaking about any one company's particular comments I will say again that I had several meetings last week around this overall opportunity.

Steve.

Tumor checkout and quite frankly to delight consumers in their shopping experience and those conversations all rely on the same thing. It's a combination of rain RFID and vision systems and self checkout to drive an overall positive customer experience.

Kerry Baker: Delivering positive adjusted EBITDA despite the significant revenue headwinds this quarter is a testament to both the strengths of our business model and the execution of our team. Third quarter gap net loss was 15.8 million. Third quarter non-gap net income was 100,000 or 0 cents per share on a fully diluted basis. Turning to the balance sheet, we ended the third quarter with cash, cash equivalents and investments of 113.2 million compared with 114.9 million in second quarter 2023 and 201.1 million in third quarter 2022. Inventory told 106.8 million down 5.5 million from the prior quarter. Third quarter net cash due by operating activities was 1.7 million, property and equipment purchases totaled 2.8 million, free cash flow was negative 4.5 million.

Got it thank you.

Okay. Thank you Jim.

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

Great. Thanks, it's good to hear some of the green shoots.

Comments.

But Chris I'm going to switch gears, a little bit just you mentioned updates with NXP.

Can you help us maybe frame the opportunity there you talked about a potential monetary award is this something maybe you think you could reach a royalty type of agreement with them over time.

No youre trying to go back after the injunction and maybe you could share with us how your customers feel about the potential of and in conjunction with NXP, if youre able to meet demand you shouldnt injunction happen down the road.

Yes, Mike Thank you and.

Kerry Baker: Before turning to our fourth quarter guidance, I want to highlight a few items unique to our results in output. First, as Chris mentioned, our partners made progress reducing their endpoint IC inventory in third quarter. We expect them to continue reducing their endpoint IC inventory in the fourth quarter. That reduction will position us well to capitalize on the large number of partner M800 inlay designs currently in certification and to begin ramping the M800 in 2024.

But a pause here a little bit because of those are difficult questions for me to answer given that we're in the thick of it right now.

I'll say, a few things and then I'll turn it back to you to kind of follow up but I'll answer what I can.

In terms of the Monetary award in California, the jewelry initially awarded us roughly $18 million.

In damages and loss profits.

Judge went back and said you know there are some some foreign sales that should be included in there and instructed the parties to get together and discuss what the actual damages plus products.

Kerry Baker: Second, our third quarter inventory decreased with lower endpoint IC inventory more than offsetting higher systems inventory. Looking to the fourth quarter, we anticipate further reducing our overall inventory, again with declining endpoint IC inventory more than offsetting a small increase in systems inventory. We are confident inventory will normalize as demand recovers.

And that came out to be roughly $13 1 million subject still to ongoing appeals, but that would be the amount in the California case.

Our California case was against NXP USA. It did not include the NXP Dutch affiliate, which whose sales are much larger. So we have filed suit on the same patents against NXP Dutch affiliate, we do no longer we don't need to litigate the patents in that case anymore.

Unknown Executive: Finally, we recently launched our first ESG materiality assessment, surveying a cross section of our investors, customers and employees on ESG matters that are important to them. Impinj is strongly committed to ESG. At the same time, we view our journey as a partnership with all of our stakeholders to build a strong ESG roadmap for the future. Turning to our outlook, we expect fourth quarter revenue between 65.5 and 68.5 million, compared with 65 million in third quarter 2023, a 3% quarter over quarter increase of the midpoint.

Would just be litigating, the damages and loss profits amounts coming to us.

And that patent that that case has not been scheduled yet, but we look forward to it happening hopefully soon and getting awarded significantly additional damages and loss process.

In terms of a settlement with NXT.

I can't really comment on anything at this time like I said, we're going to think of it and anything I say could be construed one way or another for another are damaging.

In terms of.

In terms of the overall market.

We are obviously in discussion with our inlay partners and service bureaus I can't speak for NXP, but I would imagine they are as well.

Unknown Executive: We expect adjusted EBITDA between a loss of 900,000 and a profit of 700,000. On the bottom line, we expect non-gap net income between a loss of 1.2 million and a profit of 300,000, reflecting non-gap fully deluded brains per share between a loss of 4 cents and a profit of 1 cents. In closing, I want to thank the Impinj team, our customers, our suppliers, and you are our investors for your ongoing support.

We obviously want to see the market continue to grow and go forward.

Same time.

I feel it is very important to protect our intellectual property and I will note that in California. One of the patents was found to be willfully infringed.

We're in this delicate situation, where we want to drive the market and at the same time, we launch NXP to respect our intellectual property and we are navigating that dynamic as best we can.

Unknown Executive: 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. To ask a question, you may press star, then one on your touch tone phone. If you're using a speaker phone, please pick up your handsets before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two.

And navigating a resolution as best we can and confident in our case and confident in the eventual outcome.

I'll turn it back to you to see if you have a follow up or there is anything I can answer a little bit more.

But I am not trying to go much further.

That's very helpful to help help.

Help us think about it helped switch gears for my second question.

Unknown Executive: As a courtesy to others, we ask that you limit yourself to one question and one follow up. If you have additional questions, please read to you and we will take as many questions as time allows. At this time, we will pause momentarily to assemble our roster.

Just maybe for carrier just overall team I know were in Q4 now and at the time.

When you start to negotiate pricing and you have new products come in like the 800 any thoughts on.

How we should think about.

Endpoint pricing in 24 versus <unk> 23 or is it too early to tell.

Hey, Mike This is Kevin I can take a shot at that so historically if you go back multiple years, we've seen asps decline annually call. It the low to mid single digit range.

Harsh Kumar: Today's first question comes from Harsh Kumar with Piper Sandler. Please go ahead. Thanks, Chris. I know you guys were working on destalking your inventory at the in-life partners and I know you talked about it in the script. But could you give us a sense of how much is left in the system and how much do you think you might have left in the December quarter, how much you want to take out in the December quarter.

Those declines have been accompanied by wafer cost downs.

How we've been able to maintain and improve gross margin over the years.

Over the last couple of years. However, we've been in an inflationary environment and as a result of our Sps have actually gone up.

We're still in that inflationary environment.

We're not expecting a wafer costs down this year.

As we go into those conversations which are happening.

Harsh Kumar: In other words, if none of this had happened, where would your real revenues have been in the December quarter? Hey, Harsh, thanks for the question. This is Harry. I think I'll take that one. Our progress in burning down channel inventory in Q3 was mixed. We had some partners on track or ahead of schedule and some behind. In aggregate, though, we burned down less than I expected going into the quarter. Based on our estimate of demand, we will take out more channel inventory in Q4 and anticipate our large partners exiting the year reasonably healthy.

Not just happening now their constant dialogue with our with our partners, but as we go into those types of pricing discussion. Our goal remains the same we need to maintain the integrity of our margin model.

Great. That's helpful. Thanks for taking my questions ill pass the line.

Thanks, Mike Thanks, Mike.

Okay.

The next question comes from Scott Searle with Roth and Ken. Please go ahead.

Hey, good afternoon, Thanks for taking my questions and congratulations on a nice job in a tough environment.

Harsh Kumar: Our smaller partners, however, may take a little more time to get healthy. We're not given a specific number of weeks of channel inventory because those are based on our estimates of demand. That demand remains very fluid at this point. But at the end of the day, we're making good progress on reducing channel inventory, in line. Yes, thanks, Harsh. So we and our largest customer are seeing roughly the same thing. We obviously talked to our director and the partners, but we also talked to end users.

Thank you. Thank you Scott.

Hey, guys maybe to start digging.

Digging a little bit on the green shoots starting to clear the decks for 800 adoption I was wondering if you could dive in on that a little bit more some more details in terms of.

What youre seeing in terms of the interest level the timing of the adoption cycle and that's teeing up additional services such as authenticity going forward.

Okay. So I'll start here and I'll, let others jump in so.

In terms of the <unk> hundred itself, there is very high excitement level about that product on the market.

I had multiple of our partners our inlay partners and service we have talked to me about NMC 800 said you guys have created an incredible Jeff.

That's better sensitivity better overall performance.

Better reliability quality and just just that we're really excited about this product it's not that.

We did badly in any of our prior ones that just this one I feel really good about where we are.

And somebody is it's not really that surprising because we did our first chip the MH and 765 nanometer node or stripping that node every time you do something the first time you are cautious. So you don't you don't pull out all stops and we turned at $800 pulled out all the stops our partners see it.

Harsh Kumar: I was just at the wireless IoT event in Germany last week, met with several of our end users. And although the macro environment is still difficult, and as we said in our prepared remarks, still too early to call bottom, we do see improving demand out there. Our end users are starting to similar. They see things picking up a little bit. Import data and sales out data, at least in the US, are starting to normalize.

Harsh Kumar: And so we're feeling those green shoots. But like we said, it's too early to call bottom. I guess I'd like to add that North America seems to be well ahead in terms of the correction. Europe feels behind in certain parts of Asia, or mixed, obviously, because Asia is large, but China is behind as well. So time will tell, but I'm personally feeling pretty good that things are improving out there in the market.

In terms of where we are in the market.

Our leading partners have multiple inlay designs. Those inlay designs are in certification both in the U S and at the University of Auburn at our Arc lab.

<unk> direct end customers and in Europe in the same there is a lot of enthusiasm for that product and.

So the pace of adoption will be paced by how quickly those inlays get through certification and qualification at the end users, but as Kerry noted.

We expect to see a RASK starting significant ramp starting early next year, so a little bit early to size the pace, but I'm guardedly optimistic that <unk> will rapidly become our key volume.

In terms of the authentication opportunity that is R. M 775, which is.

Harsh Kumar: On the food side. Yeah, okay, go ahead, I'm sorry. No, no, that was it. Okay, on the food side, we do see food as an opportunity. There are two aspects to food. One is tracking items at the palette, carton, and case level. And we have been categorizing those food opportunities in what we call supply channel logistics, because it's primarily moving the food items around. There are also food opportunities in direct item tag.

Physically RMB 700 series within authentication engine built in.

We have multiple multiple use cases, right now on tax tracking healthcare and specialty food applications.

We've seeded the market we've shipped a significant number of chips in the market.

That product will go kind of do the typical S curve of adoption, where we see the market opportunities are there and then they get qualified and used in and then it picks up and so we're in that we're in that seeding the market and getting going.

Harsh Kumar: And those opportunities are moving forward. We have not commented on them directly in our calls, because I personally feel it's a little bit premature to be, you know, fighting some of these opportunities when they're just starting to get going, but they are certainly out there. And as they come forward, I can guarantee that some of them are going to be quite large, but our preference is to focus right now on where we actually see the movement, which is on the palette carton at box. And kind of keep our powder dry on the individual food opportunities, which of course, I guess it can be much larger, but I think it's premature. Thanks, Gary and Chris. Thank you.

We also see other opportunities out there in fashion apparel, and footwear and pharmaceutical applications and others. So I am excited for that product.

That said, because it's a completely new offering truly the first general purpose authentication IC.

I think you should expect in.

Super rapid pace of adoption, because we've got to get in front of customers and we are now in our partners are as well, but basically educate them in terms of what this thing isn't what we've done for the market that's going to take a little bit of time.

Just as a fun fact I had.

I had last week, one our newest partner come to me and without citing any of the details im raise the opportunity again as well can you put this chip into currency.

Toshiya Hari: The next question comes from Toshia Hari with Goldman Sachs. Please go ahead. Hi, good afternoon. Thanks so much for taking the question. I wanted to follow up on how to think about, you know, inlay partner inventory and I guess your cell in going forward. Gary, I think you mentioned that you expect your large partners to exit the year with relatively healthy inventory, but perhaps some of your smaller partners to have maybe access inventory at the end of the year.

In order to protect against counterfeit currency and of course that opportunities way out in the future and we're not prepared to do that and the chips has to be made dinner and theres a lot of things you have to do but we've got partners who were thinking at that level.

At the <unk> 75, with its authentication capability is a game changer and Thats, what I really like.

Okay.

Perfect very helpful and as a follow up.

I think you indicated that this year, despite the headwinds youre still anticipating endpoint IC growth in the ballpark of 29% CAGR, which has been the historic range. Yeah. As we look to 2024, you've got some other items that are coming on board a big customer in terms of general merchandise big logistics customers starting to ramp up I'm wonder.

Toshiya Hari: Did I cast that right first of all? And then second of all, assuming your large partners exit the year in a healthy spot and you're selling into, I guess, cell through starting Q1, how should we think about the sequentials in your end point? I see business in Q1. And I guess any preliminary results on 2024 for your end point, I see business would be super helpful as well. Thanks, Toshia. This is Gary. So yes, you've got it right. The larger inlay partners, we expect to exit the year reasonably healthy. The smaller inlay partners are going to take a little bit more time.

If you could kind of give us some some benchmarks in terms of how we should be thinking about 2024.

Is it an inflection year that we start to see this start to accelerate beyond that historic rate.

I'm almost prepared to quote Lincoln.

The excitement for the future through no prediction with respect to adventure.

Toshiya Hari: As I think about the first quarter, you know, we're going to stick to our knitting here and guide just one quarter at a time. The market remains very dynamic. We're just now starting to see improvement in endpoint ICs while our systems are remaining soft. And that's not unlike what we thought as we exit at COVID. The endpoint ICs recovered before systems did, but we're still in the early stages of what we hope to be a recovery.

Okay.

We feel excitement for 2024 as I said in my prepared remarks, but we guide one quarter at a time and I don't want us to get too far ahead of ourselves carrying anything you'd add.

I'd just reiterate.

As Chris said that the opportunities are there for secular growth for additional programs for both along but the market is still pretty dynamic right now.

Toshiya Hari: So we're not going to lean too far forward on our guidance for beyond Q4 of this point. Toshia, I will point you to my prepared remarks for a week, but we've made it about as far as we want to, where I said, looking into 2024, this is with respect to our end point ICs. Looking into 2024, we see secular growth in both partial tracking and retail. And then cited the self-checkout driving 100% tagging and expansion in general merchandise. Of course, we anticipate seeing a pickup retail apparel as well driven by more than just 100% tagging due to self-checkout, but that is a driver as well.

Still seeing the softness in our systems business, while retail started our wall endpoint Ics are starting to recover so just given that dynamic nature, and we're going to hold off on leaning too far into the future at this point.

Toshiya Hari: And so we are guardedly optimistic for 2024, but I think that's about as far as we want to go. I got it. That's very fair and helpful.

And I think Lincoln said with optimistic future, Alex, but I misquoted him a little bit sorry.

That's okay. It sounds like you guys have some excitement and optimism so thank you.

Thank you. Thanks, Thanks Scott.

Okay.

As a reminder to ask a question you May Press Star then one.

The next question is a follow up from harsh Kumar with Piper Sandler. Please go ahead.

Hey, Chris I wanted to go back to the question that was just asked about the the growth for endpoint IC in 2023.

Toshiya Hari: As my follow-up on gross margins, Cary, you talked about Q4 being up sequentially. I was hoping you can kind of walk through the puts and take not only for Q4, but also over the next couple of quarters. If you can kind of touch on your expectations for foundry costs or wafer costs, you're pricing profile going forward and you talked about M800 coming in starting next year, but how can that help your gross margin profile pay over the next couple of quarters?

I think correct me, if I'm wrong, but I heard 29%.

Endpoint IC growth for the business in 2023 is that accurate.

What we said was we expect our endpoint IC volumes to be consistent with our industry's historical unit volume CAGR historical CAGR has been 29% we didn't peg ourselves at 29%. What we basically said is we are implying a range around that number but.

But in the general vicinity of our historical industry unit volume CAGR without citing an accurate number and not to beat within like 1% accuracy or something like that.

Toshiya Hari: Thank you. Yeah, I've got Toshiya. So as I looked at start with Q4, I think gross margin is going to increase. We have, if you think back to my guidance on Q3 gross margin, I signal that we'd be impacted by two things. First, we'd have lower revenue scale against fixed cost in our operating cost structure. And then we had a softer mix of product, particularly reader, I see. As I look into the Q4, I think our product mix normalizes, so we get some of that back, but we're still some scale at a guide midpoint of 67 million. So that's the dynamic.

Okay, but it.

Historical CAGR has exceeded 25%.

If you look back years and years right now it's in the range of 29% depending on what each year brings and.

And so we expect ourselves, we expect our unit volume growth to exceed 25% and be in the general range of the historical unifying care yes.

So as Im looking at my model and the reason why I asked this question was I'm looking at my model for me to be close to that number.

Toshiya Hari: We'll see a little bit of a list, but I don't anticipate us getting back to the 53% that is our targeted level right now. As I look into 2024, I expect the mix to continue to be normal. I expect eventually revenue to start growing again as the retail market recovers. And as we grow back into the revenue level that we were in the first half of this year, I would expect to get the full realization of scale in our gross margin.

29% call it even 27% 20, it implies a pretty significant sequential uptick in the December quarter.

Somewhere in the neighborhood of 30% to 40% sequential uptick is that is that how we should think about.

Your guidance or am I missing something here in the middle.

I think I think something may be be missing in that because it is not that type of a volume increase in the fourth quarter last year last year included a high mix of specialty and industrial Ics, so that impacted revenue, but not the unit volume. So you have to make sure that you've normalized for that.

Chris Diorio: And that takes us back to that 53% targeted range. Now, on top of that, as the M800 layers in, I expect those margins to further improve with a very early days of the M800 ramp. Most of our partners are still in the certification or qualification process, so we're not really shipping M800s at this point. As they make their way through that qualification process, we'll start shipping in and then the demand will start ramping.

And then if.

The commentary we've made throughout this year on unit volume growth. You can you can you can roughly estimate what we're what we're thinking for Q4 unit volumes.

Fair enough.

Alright I'll add.

Okay.

Chris Diorio: I will keep you up to date on our progress on that ramp. When Kerry says we're not really shipping M800s yet, it really relative to the overall opportunity and privacy of M800, which is quite large. The ramp has started, and we have smaller opportunities out there going now, but our direct partners are waiting for certifications and approvals. We're all in the approval cycle right now for the most part of the approval cycle right now, and those approvals start coming through. We expect the ramp to accelerate.

Carey's point is spot on about specialty.

But the one point I want to add is that the fact that we're able to deliver.

Toshiya Hari: Thank you so much. Thank you.

Growth in unit volumes and a significantly down market.

What gives us significant confidence in our long term opportunity.

We're driving we're driving.

Massive improvements at enterprise end users in terms of them being able to track ever adding to manufacture transport and sell.

And even in a down market, we still see growth in that opportunity, we see our large north American supply chain logistics and user continuing to press forward because of the value proposition that rain RFID firms, which is why we are bullish on the long term future.

Unknown Executive: Thanks for sharing.

It's unfortunate we have to go through the pain of this current downturn or down with the retail market. Overall, we remain excited about our long term average.

Jim Rashudi: The next question comes from Jim Rashudi with Needham and Company. Please go ahead. Thank you. Earlier in your script, you talked about steps you're taking to improve demand forecasting and inventory management. I was just wondering if you could elaborate on that. I will start with the demand forecasting, and I'll probably let Kerry layer in as well on the demand forecasting side. The market turned earlier this year. It wasn't just we who were who didn't anticipate the magnitude of the decline.

Understood guys. Thank you for the clarification that wasn't what I had pressed the buttons for to ask but Scott's question with interesting so I jumped on it but.

Yes.

I know you don't want to talk about 2024.

But you are citing startups things green shoots and you are citing some numbers for the industry unit volume.

Jim Rashudi: It was our direct partners. Well, when I was at this conference just last week, I had many of our partners and a partner service for us basically say they didn't see it come. And I'm feeling personally, we should have seen it coming. We should have seen it coming at least better than than than we did.

Your unit volume of 2000 high call It high <unk> maybe.

Maybe you could help us think about.

How we should think about 2024 as a year that's coming off the bottom.

Would you expect yourself to do better than the industry numbers in 2024 is everything rebounds with the growth rate to be in excess and then what's a good growth rate for the systems business and if there is any seasonality that we should think about with your business in 2024.

Chris Diorio: And it's a learning experience for us. We were significantly relying on our industries view. What I want to do now is rely both on our industries view and a lot more on the macro view leveraging what our enterprise and users are saying directly trends in the overall market trends in the retail market trends in the supply chain logistics market and taking the account at a higher level. What the macro is doing and use that to kind of set up basis for ourselves to be more forward looking in terms of what we're doing from a larger macro perspective.

Harsh you fixed the retail market and we will do the Rex.

Okay.

No, but in all seriousness.

We're just coming through.

Very difficult environment.

We said in our prepared remarks, its too early to call a bottom field green shoots.

We really can't estimate the pace of that turnaround is depends on factors that are so much larger than us.

Chris Diorio: I'm not saying we did anything wrong in the past. We did everything we could do in terms of engaging with our partners and working with them and understanding what they expected their demand to be. But I want to layer on top of that overall understanding of the broad market because right from eight, that's what we're selling into right now. We are selling into the repelled macro.

Macro factors in terms of retail in terms of spend in terms of governments to ending Theres just too many variables in there.

What I believe we can say.

Is that.

Okay.

We see unit volume CAGR growth in a difficult market this year.

Kerry Baker: Carrie, you want to make a question inventory management? Yeah, yeah, this is Carrie. So on the end of the channel inventory side, we're doing multiple things. We're increasing the frequency of our channel inventory reporting. So we can stay closer to how it's sudden swings in the channel inventory, which will help inform demand planning as well. We're also going reaching further into our distribution model, if you will, to talk to customers and partners beyond our inlet partners, our direct partners to understand how their demand is trending, how their inventory levels are are all in an effort to better inform how we and our partners run the level of inventory in the channel.

And we fully anticipate.

There will be significant unit volume growth next year.

Magnitude of it exactly what it turns out to be exactly where it's going to be and everything.

It's far too early for us to predict but our industry has grown year over year every year since 2010 in terms of unit volumes and we have no doubt that 2024, we will follow the similar trend I, just cant peg, where it's going to be.

Great.

Thats. It from me question Kerry. Thank you for all the info today.

Thank you harsh.

Okay.

The next question comes from Natalia <unk> with Jefferies. Please go ahead.

Kerry Baker: Got it. My follow up question. Chris Amazon recently talked about their use of RFID for this just walk out technology solution. Can you comment at all if you're working with them? And if you can't talk specifically about it, I'd be curious just to get your perspective on their comments about this RFID application. Jim, to the first part of the question, I obviously can't say anything about any particular opportunity that hasn't been identified publicly as associated with us or associated with us.

Hi, guys. Thanks for taking my question. The first one was just on the logistics and market rate. It sounds like given the retail kind of weak business, where we see a lot of.

Could you guys speak about opportunities beyond this project that youre seeing ramping right now.

How is your engagement.

With me some of the other potential customers there and what is it.

At which point of this current ramp do you think you will see sort of any potential further inflection in demand logistics end market.

Hi, Natalie this is Jeff I think first reiterate what we've said often which is the.

Kerry Baker: In terms of the broader opportunity, I have always firmly believed that the just walk out solution or whatever you want to call it in different opportunities. We'll include both a combination of rain RFID and vision. It just makes logical sense. If you use rain RFID, you can tag individual items, for example, for a meat product or something like that. You know exactly what the items cost is because the items cost is attached to the attack.

Pace and timing of new enterprise deployments is very hard to predict but what I will say is that.

The supply chain and logistics industry is engaged.

And.

Closely monitoring what others in the industry are doing.

That would impact their competitive opportunity in the same marketplace.

Kerry Baker: The vision system can just tell you what the item is not at all, for loss prevention opportunities. We can identify the item being stolen, stolen but can't tell you anything about the person stealing it. The vision system can tell you the fact the person stealing it, they're not much typically about the item. So I see going forward. The opportunity to blend the two technologies together to provide an overall just walk out opportunity, which will include loss prevention as we're driving into.

So I am encouraged by the level of engagement that we have.

With other supply chain and logistics organizations that are considering.

How <unk> platform and rain RFID can help them improve their competitiveness in a difficult market.

This is Chris I'm going to add one or an Italian I'm sorry. This is Chris I'm going to add one thing if you look at our markets our industry's history.

Kerry Baker: So without speaking about any one company's particular comments, I will say again that I have some meetings that last week around this overall opportunity to speed consumer checkout and quite frankly to delight consumers in their shopping experience. And those conversations all rely on the same thing. It's a combination of radar for the end vision systems and self checkout to drive an overall positive customer experience. Thank you. Thank you, Jim.

It's generally been the case that one or a small number of end users have caused the segment to go.

So if I look at retail opportunity it was and Macy's and marks <unk> Spencer into castle and back in the early days if I look at aviation led by Delta Airlines, and then KLM Air France joined in and then I added focus at all member Airlines would follow Court suite now of course, that's been installed by that.

Setback that we had during during Covid time.

It was the same in the automotive space with a small number of automotive companies select for example by upside of that.

Mike Walkley: The next question comes from Mike Walkley with Canacorn Genuity. Please go ahead. Great. Thanks. It's good to hear some of the green shoot comments.

To drive forward and so on.

Our industry tends to get full on a giant end user decides to adopt and basically proves the use case.

Well I can't guarantee that's what's going to happen here again to Jeff's comments, others are watching closely and are engaging and so we're doing everything we can to make this first opportunity successful and then pursue everything else, we can in the supply chain and logistics space.

Chris Diorio: But Chris, I'm going to switch gears a little bit. I just mentioned updates with NXP. Can you help us maybe frame the opportunity there? You talked about a potential monetary award. Is this something maybe you think you could reach a royalty type agreement with them over time. And I know you're trying to go back after the injunction. And maybe you could share with us how your customers feel about the potential of an injunction with NXP if you're able to meet demand. You shouldn't have junction happened down the road. Yeah, Mike. Thank you.

Awesome. Thank you. This is super helpful. And then the second one could you guys provide.

And an update on the <unk> acquisition like how has that been and how are you seeing maybe any kind of integration or revenue potential there.

So the Atlantic integration from both my perspective, and I spent time last week with.

Chris Diorio: And I'm going to pause here a little bit because those are difficult questions for me to answer given that we're in the thick of it right now. I'll say a few things and then I'll turn it back to you to kind of follow up, but I'll answer what I can. In terms of the monetary award in California, the jury initially awarded us roughly $18.1 million in damages and loss profits. The judge went back and said there are some foreign sales that should be included in there and instructed the parties to get together and discuss what the actual damages and loss profits were to be.

Yuka Atlantic CEOC integration is going well teams are working well together.

We started with the financial integration HR integration IP integration, just because of Atlantic was was running just fine before we acquired them and as we go forward, we are going to be significantly focused on improving the quality reliability and performance labels in the market.

Chris Diorio: And that came out to be roughly $13.1 million. Subject about stilt ongoing appeals, but that would be the amount in the California case. Our California case was against NXP USA. It did not include the NXP Dutch affiliate, which who sells are much larger. So we have filed suit on the same patents against NXP Dutch affiliate. We do no longer, we don't need to litigate the patents in that case anymore. We would just be litigating the damages and loss profits amounts coming to us and that patent, that that case has not been scheduled yet, but we look forward to it. I hope happening hopefully soon in getting awarded, but it's significantly additional damages and loss profits.

Easing the design process.

Helping ensure to enterprise end users that the labels that they deploy with the Ics that are in them and a whole set of the deployment of the deployment.

It's sufficiently reliable for them to base their business on it.

So we have very high hopes for the future of close integration between the teams to drive enterprise adoption.

And our solutions focus as a company by adding that quality reliability and perform manufacture ability and performance to the equation that we already were bringing to bear which is the endpoint Ics the reader Ics readers gateways into software. So it is just a piece of the puzzle that we think makes us stronger whole solution.

Chris Diorio: In terms of a settlement with NXP, I can't really comment on anything at this time. Like I said, we're in the thick of it and anything I say could be construed one way or another or another or damage. In terms of, in terms of the overall market, we are obviously in discussion with our in late partners and service bureaus. I can't speak for NXP, but I would imagine they are as well.

And to tell you. This is carry in addition to the strategic benefits that Chris outlined from a financial perspective gross margin accretive as operating margin accretive checking all the boxes for us.

Alright, good team.

Awesome. Thank you.

Thank you Natalia.

Chris Diorio: We obviously want to see the market continue to grow and go forward. At the same time, we feel it is very important to protect our intellectual property and I will note that in California, one of the patents was sound to be both really infringed. So we're in this delicate situation where we want to drive the market. At the same time, we want and it's to respect our intellectual property. We are navigating that dynamic as best we can and navigating a resolution as best we can. And confident in our case, confident in the eventual outcome.

The next question is a follow up from Scott Searle with Roth and Ken. Please go ahead.

Just a quick follow up on <unk> question on the system side Chris.

This business.

It's tended to be a little bit lumpy and depending on where customers or.

It's kind of been a little erratic, sometimes from quarter to quarter, but the general direction seems like it continues to build I was wondering if you could give us some metrics or.

Help us frame a little bit how big the opportunity is today, how does that pipeline look like on the project and the systems front versus maybe where we were at the start of the year or 12 months ago. Thanks.

Mike Walkley: Turn it back to you to see if you have a follow up or this anything I can answer a little bit more, but I'm not trying to go much further. Yeah, that's very helpful help help help us think about it.

Yes, I'm going to start that with an overall strategic perspective, and then then I'll hand off to Jeff in terms of just any comments you want to say on that on the pipeline, but I'd like to start kind of with where we are strategically.

Kerry Baker: I'll switch gears for my second question. Just maybe for Carrier, just the overall team. I know we're in Q4 now and at the time you start to negotiate pricing and you have new products come in like the M800. Any thoughts on, you know, how we should think about endpoint pricing in 24 versus 23 years at two early tell. And Mike, this is Karen. I can take a shot at that. So historically, if you go back multiple years, we've seen ASPs decline annually, call it the load amid single digit range.

As a company are focused on enterprise solutions, enabling enterprise end users the likes of our large north American supply chain and logistics and user to successfully deploy a solution that completely delights them and their customers.

And so our systems business is really the tip of the spear that gets us into those accounts.

It helps us invent solutions to hard business problems as I said in my prepared remarks.

Kerry Baker: Those declines have been accompanied by wait for costouts and that's how we've been able to maintain and improve gross margin over the years. Over the last couple of years, however, we've been in an inflationary environment and as a result, our ASPs have actually gone up. We're still in that inflationary environment as we're not expecting a wafer cost down this year. And as we go into those conversations, which you know are happening, not just happening now, they're constant dialogue with our partners. But as we go into those types of pricing discussion, our goal remains the same. We need to maintain the integrity of a margin model. Great. That's helpful. I take my questions out past the line.

And to rise.

That use case drive the solution to that problem, which drives that use case, and then slow our learnings down to a reader Ics overtime.

Mike Walkley: Thanks Mike.

Such that we can enable broad market adoption of that particular solution and use case and then step onto the next.

So as you think about what we're doing with the readers and gateways. The focus is on enterprise solutions.

We typically don't give pipeline numbers in terms of where we are and things like that but I'll, let Jeff say, maybe a few words on kind of the overall systems business opportunity. Thanks, Chris I would start with.

That there are systems pipeline remains strong.

To Chris' point, our strategy of engaging with visionary lighthouse enterprises to solve previously unsolved problems is reflected increasingly in our systems pipeline that is the proportion of our overall pipeline that is represented by the.

Scott Searle: The next question comes from Scott Seryl with Roth MKM. Please go ahead. Good afternoon. Thanks for taking my questions and congratulations on a nice job in a tough environment. Thank you. Thank you Scott.

Scott Searle: Hey guys, maybe to start, you know, digging a little bit on the green shoots, starting to clear the decks for M800 adoption. I was wondering if you could dive in on that a little bit more, some more details in terms of what you're seeing in terms of the interest level, the timing of the adoption cycle. And that's team up additional services, such as authenticity going forward. Okay.

These large enterprise engagement opportunities is increasing it is strong.

I would say that.

Broader.

Pipeline broader reader and shape Champ reader and Gateway channel pipeline reflects some of the impact of the macroeconomic that is it is not growing currently at the same rate as the large enterprise engagements in our pipeline.

Chris Diorio: So I'll start here and I'll let others jump in. So in terms of the M800 itself, there is very high excitement level about that product market. I had multiple of our partners, direct partner partners and service, we just talked about M800 and said you guys have created an incredible trip. It has better sensitivity, better overall performance, better reliability, quality, just just that we're really excited about this product. It's not that what we did badly in any of our prior ones.

Thank you Ken.

Can't predict when but I think some time in 2024.

And then overall macroeconomic conditions improve we will see a return to the.

Growth in the broader channel partner led reader and gateway pipeline.

Great. Thank you.

Thanks, Scott Thanks, Scott.

Chris Diorio: It's just this one I feel really good about where we are and in some ways it's not really that surprising because we did our first chip, the M700 in a 65 nanometer note first chip in that note. Every time you do something the first time you're cautious, so you don't pull out all the stops. And we turned M800 and we pulled out all the stops. Our partners see it. In terms of where we are in the market, our leading partners have multiple inlay designs, those inlay designs are in certification, both in the U.S, and at the University of Auburn, at their arc lab, at direct end customers and in Europe in the same.

Yeah.

This concludes our question and answer session I would now like to turn the conference back over to co founder and CEO, Chris Diorio for any closing remarks.

Thank you Amjad.

I'd like to thank you all for joining the call today I Hope you and your loved ones are and remain safe and well and thank you for joining our call bye bye.

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

Chris Diorio: There is a lot of enthusiasm for that product, and so the pace of adoption will be paced by how quickly those inlay's get through certification and qualification at the end users, but if Cary noted, we expect to see a ramp starting, you know, significant ramp starting early next year. It's a little bit early to cite the pace, but I'm guarded the optimistic that M800 will rapidly become our key value.

Okay.

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Yes.

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Chris Diorio: In terms of the authentication opportunity, that is our M775, which is basically our M700 series with an authentication engine built in. We have multiple, multiple use cases right now on tax tracking healthcare and specialty food applications. We've seated the market, we've shipped a significant number of chips in the market. That product will go kind of through the typical S curve of adoption where we see the market. The opportunities are there, and then they get qualified and used in and then it picks up.

Hum.

[music].

Chris Diorio: And so we're in that, we're in that seating, the market, and getting going. We also see other opportunities out there in fashion, apparel and footwear and pharmaceutical applications and other. So I am excited for that product. That said, because it's a completely new offering, really the first general purpose authentication I see. I don't think you should expect it in, you know, a super rapid pace of adoption, because we've got to get in front of customers. And we are now on our partners as well, but basically educate them in terms of what this thing is and what we've done for the market. That's going to take a little bit of time.

Chris Diorio: Just as a fun fact, I had, I had the last week, one, a newest partner come to me and I put out sighting any of the details. I'm raised the opportunity again, as well. Can you put this chip into currency? You know, to protect against counterfeit currency, and of course that opportunity is way out of the future, and we're not prepared to do that. And, you know, the chips has to be made thinner and more, you know, there's a lot of things you have to do. But we've got partners who are thinking at that level that the M775, with this authentication capability, is a game changer. And that's what I really like. Perfect, very helpful.

Scott Searle: And as a follow-up, I think you indicated that this year, despite the headwinds, you're still anticipating end point. I see growth in the ballpark of 29 percent, gagger, which has been in the historic range. Yeah, as we looked at 2024, you've got some other items that are coming on board, big customer in terms of general merchandise, big logistics customer starting to ramp up. I'm wondering if you could kind of give us some bench marks in terms of how we should be thinking about 2024. Is it an inflection year that we start to see to start to accelerate beyond that historic rate?

Chris Diorio: Thanks. I'm almost prepared to quote Lincoln. You know, with excitement for the future, with no prediction, with respect to a adventure. You know, we feel excitement for 2024. So I said in my prepared remarks, but we guide one quarter at a time. And I don't want us to get too far ahead of ourselves. Carrying anything you'd add. I just reiterated that. You know, as Chris said, that the opportunities are there for secular growth, for additional programs for low-long.

Chris Diorio: But the market is still pretty dynamic right now. We're still seeing the softest and our systems business while retail started, or while employees are starting to recover. So just given that dynamic nature, we're going to hold off on leading too far to the future, at this point. And I think Lincoln said with optimism, the future, not exactly, but I miscloded him a little bit. Sorry. That's okay.

Scott Searle: Sounds like you guys have some excitement and optimism. So thank you. Thank you. Thanks. God.

Unknown Executive: As a reminder to ask a question, you may press star than one.

Harsh Kumar: The next question is a follow up from Harsh Kumar with Piper Sandler. Please go ahead. Yeah, Chris, I wanted to go back to the question that was just asked about the growth for endpoint IC in 2023. I think it's correct me if I'm wrong, but I heard 29% endpoint IC growth for the business in 2023. Is that accurate? What we said was we expect our endpoint IC volumes to be consistent with our industry's historical unit volume kicker.

Harsh Kumar: The historical kicker has been 29%. We didn't take ourselves at 29%. What we basically said is we're applying a range around that number, but in the general vicinity of our historical industry unit volume kicker without citing an accurate number and not to be within like 1% accuracy or something like that. Okay, but that historical kicker has exceeded 25%. You know, if you look back years and years, right now it's in the range of 29%.

Harsh Kumar: Depending on what each year brings. And so we expect ourselves, we expect our unit volume growth to see 25% and the in the general range of the historical unit volume kicker. So as I'm looking at my model and the reason I asked this question was I'm looking at my model for me to be close to that number of 29% call it even 27 or 28 implies a pretty significant sequential uptake in the December quarter.

Harsh Kumar: You know, somewhere in the neighborhood of 30 to 40% sequential uptake. Is that is that how we should think about your guidance or am I missing something here in the middle. I think I think something may be missing in that because it's not that type of a volume increase in the fourth quarter last year. Last year included a high mix of specialty industrial I see so that impacted revenue, but not the unit volumes.

Harsh Kumar: So you have to make sure that you normalize for that. And then if the commentary we've made throughout this year on unit volume growth, you can you can roughly estimate what we're what we're thinking for few for a unit volumes. I'll add. Terry's point is thought on about specialty, but the one point I want to add is that the fact that we're able to deliver growth in unit volumes in a significantly down market.

Harsh Kumar: Is what gives us significant confidence in our long term opportunity. We're driving inter we're driving massive improvements at enterprise end users in terms of them being able to track every item in manufacturer transport and so. And even in a down market, we still see growth in that opportunity. We see our large North American supply channel logistics end user continuing to press forward because of the value proposition that ran our defense, which is why we're bullish on the long term future.

Harsh Kumar: We have to go through the pain of this current downturn. We're down with the retail market overall. We remain excited about our long-term offer. I'm just stood guys. Thanks for the clarification. That wasn't what I had pressed the buttons for to ask, but such question was interesting. So I jumped on it, but I know you don't want to talk about 2024, but you are citing sort of things green chewed. And you are citing some numbers for the industry, you know, volume of, you know, your unit volume of 20 high call it high 20s.

Harsh Kumar: Maybe you could help us think about how we should think about 2024 as a year that's coming off the bottom. Would you expect yourself to do better than the industry numbers in 2024 as everything rebounds with the growth rates being accessed. And then what's a good growth rate for the systems business. And if there's any seasonality that we should think about. How would your business in 2024? You know, Harsh, you fix the retail market and we'll do the rest.

Harsh Kumar: No, but in all seriousness, we're just coming through a very difficult environment where we said in our prepared remarks, it's too early to call a bottom field green shoots. We really can't estimate the pace of that turnaround. It's depends on factors that are so much larger than us macro factors in terms of retail, in terms of spend, in terms of governments. And there's just too many variables in there. What I believe we can say is that we see unit volume kick or growth in a difficult market this year.

Harsh Kumar: And we fully anticipate there will be significant unit volume growth next year magnitude of it exactly what it turns out to be exactly what's going to be in everything. It's far too early for us to predict. But our industry has grown year over year every year since 2010 in terms of unit volumes. And we have no doubt that 2024 will follow the similar trend. I just can't peg where it's going to be. Great. That's it for me, Christian. Thank you for all the input today. Thank you, Harsh.

Natalia Winkler: The next question comes from Natalia Winkler with Jeffries. Please go ahead. Hi guys, thank you for taking my question. So the first one was just on the logistics and market. It sounds like giving the retail kind of weak. This is where we see a lot of, you know, the spotlight. So could you guys speak about, you know, the opportunities beyond this project that you're seeing ramping right now? How is your engagement with maybe some of the other potential customers there?

Jeff Doff: And what is, you know, is like, at which point of this current ramp do you think you will see sort of any potential further inflection in demand in that logistics and market? Hi, Natalie. This is Jeff. I think I first reiterate what we've set off in which is, you know, the pace and timing of new enterprise deployments is very hard to predict. But what I will say is that the supply chain and logistics industry is engaged and closely monitoring what others in the industry are doing, that would impact their competitive opportunity in the same marketplace.

Jeff Doff: So I'm encouraged by the level of engagement that we have with other supply chain and logistics organizations that are considering how impinged platform and rain RFID can help them improve their competitiveness in a difficult market. Chris, I'm going to add one thing. If you look at our industry's history, it's generally been the case that one or a small number of end users have caused a segment to go. So if I look at retail opportunity, it was Macy's and Mark's and Spencer and DeCafelon back in the early days.

Jeff Doff: If I look at aviation led by Delta Airlines and then KLM Air France joined in and then I added that all number of airlines will follow court suit. Now of course that's been installed by the setback that we have during COVID time. It was the same in the automotive space with a small number of automotive companies, like for example by Volkswagen, to drive forward. And so the industry tends to get pulled when a giant end user decides to adopt and basically proves the use case.

Jeff Doff: And so I can't guarantee that's what's going to happen here again to Jeff's comments. Others are watching closely and are engaging. And so we're doing everything we can to make this first opportunity successful. And then to pursue everything else we can in the supply chain or logistics space.

Chris Diorio: Awesome. Thank you.

Natalia Winkler: This is super helpful.

Chris Diorio: And then the second one, could you guys provide an update on the voyantica acquisition, like how has that been and how are you seeing maybe any kind of integration or revenue potential there? So the voyantica integration from both my perspective and I spent time last week with Nuca, the voyantica CEO of the integration is going well, teams are working well together. We started with the financial integration HR integration IP integration just because the land it was running just fine before we acquired them.

Chris Diorio: And as we go forward we are going to be significantly focused on improving the quality of the product. The quality reliability and performance of labels in the market using the design process and helping ensure to enterprise and users that the labels that they deploy with the ICs that are in them. And the whole set of the deployment of the deployment is sufficiently reliable for them to base their business on it. And so we have very high hopes for the future of close integration between the teams to drive enterprise adoption and our solutions focus as a company by adding that quality reliability and performance to the equation that we already were bringing to bear, which is the end point I see is the reader I see is the readers gateways and a software.

Chris Diorio: So it's just a piece of the puzzle that we think makes a stronger whole solution. And the time this is carried in addition to the strategic benefits that Christus outlined from a financial perspective, it's gross margin accretive, it's operating margin accretive, it's checking all the boxes for us. They are a good team.

Kerry Baker: Awesome.

Natalia Winkler: Thank you. Thank you, Natalia.

Scott Searle: The next question is a follow-up from Scott Searle with Roth and KM. Please go ahead. Just to quickly follow up on Harsh's question on the system side, Chris, you know, this business, if it tends to be a little bit lumpy and depending on where customers are, it's kind of been a little erratic sometimes from quarter to quarter, but the general direction seems like it continues to build. I was wondering if you could give us some metrics or help us frame a little bit, you know, how big the opportunity is today? How does that pipeline look like on the project and the systems front versus maybe where we were at the start of the year or 12 months ago? Thanks.

Chris Diorio: Yeah, I'm going to start that with an overall strategic perspective and then I'll hand off to Jeff in terms of just any comments you want to say on the pipeline, but I'd like to start kind of with where we are strategically. Here's a company that are focused on enterprise solutions, enabling enterprise end users to relax of our large North American supply chain and logistics end user to successfully deploy a solution that completely delights them and their customers.

Chris Diorio: And our systems business is really the tip of the spear that gets us into those accounts helps us invent solutions to hard business problems as I said in my prepared remarks and drive that use case, drive the solution to that problem which drives the use case. And then flow our learnings down to our reader ICs over time, such that we can enable broad market adoption of that particular solution in use case and then step onto the next one. So as you think about what we're doing with readers and gateways, the focus is on enterprise solutions.

Jeff Doff: Well, you typically don't give that pipeline numbers in terms of where we are and things like that, but I'll let Jeff say maybe a few words on kind of the overall systems business and opportunity. Now, thanks, Chris. I'd start with that their systems pipeline remains strong to Chris's point, our strategy of engaging with visionary lighthouse enterprises to solve previously unsolved problems is reflected increasingly in our systems pipeline. That is the proportion of our overall pipeline that is represented by these large enterprise engagement opportunities is increasing.

Jeff Doff: It is strong. I would say that the broader pipeline broader reader and chat reader and gateway channel pipeline reflects some of the impact of the macro economic that is it is not growing currently at the same rate as the large enterprise engagements in our pipeline. I think can predict when, but I think sometime in 2024, when overall macro economic conditions improve, we'll see a return to the growth in the broader channel partner led reader and gateway pipeline. Thank you. Thanks, Scott.

Unknown Executive: This concludes our question and answer session.

Chris Diorio: I would like to turn the conference back over to co-founder and CEO Chris Diorio for any closing remarks. Thank you, MJ. I'd like to thank you all for joining the call today.

Unknown Executive: I hope you and your loved ones are and remain safe and well and thank you for joining our call. Bye bye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. [inaudible]