Q1 2024 Impinj Inc Earnings Call
Operator: Hello and welcome to the Impinj first quarter 2024 financial results conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your touchtone phone, and to withdraw your question, please press star, then 2. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Andy Cobb, Vice President of Strategic Finance. Please go ahead.
Hello, and welcome to the impending first quarter 'twenty 'twenty four financial results conference call and website webcast.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two please.
Please 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.
Andy Cobb: Good afternoon, and thank you all for joining us to discuss Impinj's first quarter 2024 results. On today's call, Chris Diorio, Impinj's co-founder and CEO, will provide a brief overview of our market opportunity and performance. Cary Baker, Impinj's CFO, will follow with a detailed review of our first quarter 2024 financial results and second quarter. We will then open the call for questions. Jeff Dossett, Impinj's CRO, will join us for the Q&A.
Andy Cobb: Thank you Jack.
Andy Cobb: Good afternoon, and thank you all for joining us to discuss infringes first quarter 2024 results on today's call Kristi, Oreo and Pinterest co founder and CEO will provide a brief overview of our market opportunity and performance.
Andy Cobb: Cary Baker contingent CFO will follow with a detailed review of our first quarter 2024 financial results and second quarter outlook.
Speaker Change: We will then open the call for questions.
Speaker Change: Jeff Dossett Impinges C. R. L will join us for the Q&A.
Andy Cobb: 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 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. Whereas we believe we have a reasonable basis for making these forward-looking statements, our actual results could differ materially because such statements are subject to risks and uncertainty.
Speaker Change: You can find management's prepared remarks, plus trended financial data on the company's Investor Relations website.
Speaker Change: We will make statements in this call about the financial performance and future expectations that are based on our outlook as of today.
Such statements are forward looking under the private Securities Litigation Reform Act of 1995, whereas 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.
Andy Cobb: We describe these risks and uncertainties in the annual and quarterly reports we file with the FCC. 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.
We describe these risks and uncertainties in the annual and quarterly reports, we file with the FTC, we do not undertake and expressly disclaim any obligation to update or alter our forward looking statements, except as required by law entre.
Speaker Change: 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.
Speaker Change: Please refer to our earnings release for a reconciliation of non-GAAP financial metrics to the most comparable GAAP metrics.
Andy Cobb: Before turning to our results and outlook, note that we will participate in Baird's Global Consumer Technology and Services Conference on June 4th in New York. We look forward to connecting with many of you there. I will now turn the call over to Andy. Thank you, Andy.
Speaker Change: Before turning to our results and outlook note that we will participate in Baird's global consumer technology and services conference on June 4th in New York, We look forward to connecting with many of you there.
Speaker Change: I'll now turn the call over to Chris.
Chris: Thank you Andy and thank you all for joining the call.
Chris Diorio: Thank you, Andy, and thank you all for joining the call. 2024 started strong, and the momentum we saw exiting 2023 continued through the first quarter, with revenue and profitability exceeding both our fourth quarter results and first quarter guidance. Our strategic focus on silicon and enterprise solutions helps create that momentum while paving the way for multi-year growth, while our recent reorganization and legal settlement paved the way for growing profitability. Turning first to silicon, Green shooting five-sided the last two quarters continued sprouting.
Chris: 124 started strong.
Momentum we saw exiting 2023 continued through the first quarter.
Chris: Revenue and profitability exceeding both our fourth quarter results and first quarter guidance.
Our strategic focus silicon and integrated solutions help create that momentum.
Chris: Having to wait for a multiyear growth tailwind.
Chris: Our recent reorganization and legal settlement.
Chris: Wafer growing profitability.
Chris: Turning first to silicon.
Chris: The Green shoots I cited the last few quarters continues Friday.
Chris Diorio: First quarter NIC revenue exceeded our expectations, driven by improving demand in both retail apparel and general merchandise. Looking forward, we expect second quarter to again deliver solid F1IC product revenue growth. We also expect Impinj M800 volumes to double in the second quarter as our production ramp picks up, albeit still a small portion of our Endpoint SE volumes overall, redirect, We expect e-family shipments to accelerate in the second quarter as we near the end of our prior generation product shipments, buoyed by a healthy number of design wins and burgeoning opportunities, the visionary European retailers ongoing rollout of our self-checkout and loss prevention solution is performing nicely.
Chris: First quarter endpoint IC revenue exceeded our expectations driven.
Chris: Driven by improving demand in both retail apparel and general merchandise as well as the long tail of other applications.
Chris: Forward, we expect second quarter to again deliver solid endpoint IC product revenue.
Chris: We also expect an 800 volumes to double in the second quarter.
Speaker Change: To wrap things up.
Speaker Change: It's still a small portion of our endpoint IC volumes overall.
Speaker Change: Ah redirect these we expect key foundry shipments to accelerate in the second quarter as we near the end of our our prior generation product shipment.
Speaker Change: Buoyed by healthy number of design wins and burgeoning opportunity.
Speaker Change: Turning to solutions, the visionary European retailers ongoing rollout of our self checkout and loss prevention solutions is performing nicely.
Chris Diorio: In fact, we're allowed to add additional brands at that customer to drive modest gateway demand through at least the end of 2020. Tagging around, which replaces existing hard tags with embedded tags that use our protected mode for consumer privacy, is also on track, driving growing and point activity on General Merchandise. The large North American retailers' rain tag usage has accelerated, driven by additional products being tagged and new product ordering. We anticipate steady growth in general merchandise tagging for the remainder of the year.
Speaker Change: We expect rollout to additional brands with that customer to drive modest gateway demand through at least the end of 2024.
We're tagging ramp.
Speaker Change: Which replaces existing harte hanks with embedded tax that use our protected mode for consumer privacy.
Speaker Change: Also on track.
Speaker Change: Having growing endpoint IC boxes.
General merchandise.
Speaker Change: North American retailers rain tag usage is accelerating.
Speaker Change: Driven by additional products being tagged and new product order.
Speaker Change: We anticipate steady growth in general merchandise tagging for the remainder of the year.
Chris Diorio: Finally, in supply chain and logistics, we expect the second large North American supply chain and logistics end user to increase their label consumption in 2025. Taken together, our enterprise solutions efforts are paying clear dividends in Endpoint IT. I'd like to now touch on two solution growth opportunities, the digital product passport and food. On DPP, I recently spent a week in the EU, speaking with partners and end-users on how we together advance RAINN as the technology of choice for textile PPP. Brains has the best apparel penetration.
Speaker Change: Finally, I'd like logistics, we expect the second large north American supply chain and logistics and user 23, Sir naval consumption in 2024.
Speaker Change: Taken together.
Speaker Change: Our enterprise solution that works are continue paying clear dividends and endpoint IC volumes.
Yeah.
Speaker Change: I'd like to now touch on two solutions growth opportunities.
Speaker Change: Digital product passport.
Speaker Change: Sure.
On DPP I recently spent a week in EU speaking with partners and end users.
Speaker Change: Together advanced reign, as the technology of choice, where textile PPP.
Speaker Change: Brian has the apparel penetration.
Chris Diorio: The TPP also requires consumer engagement. I see DPP making the strongest case today for putting rain reading into the hands of consumers, and large enterprises are making that need known. On food, command is growing at a faster pace than I had expected. Several service food chains are talking openly about using RAINN for inventory, shelf life, and fresh food.
The TPB also requires consumer engagement.
Speaker Change: IC ETP, making the strongest case to date.
Speaker Change: We're putting rain reading into the hands of consumers.
Speaker Change: Large enterprises are making that meeting.
Speaker Change: Our food.
Speaker Change: And it's growing at a faster pace than I had expected.
Speaker Change: With several quick service food chain talking openly about using rain for inventory shelf life and freshness.
Chris Diorio: The overall food opportunity is so large that any adoption can drive meaningful end-point IT volumes. On the intellectual property front, in March, we successfully settled our patent dispute with NFB, including a multi-year litigation during which Impinj prevailed in multiple jury trials. As Cary will detail shortly, NXP agreed to pay Impinj an upfront amount and yearly license fee in exchange for a broad patent cross-license. The settlement increases our cash reserves and competitiveness, freezes management bandwidth, and removes uncertainty from the industry overall.
Speaker Change: The overall food opportunity is so large that any adoption could drive meaningful endpoint IC.
On the intellectual property, Brian in March we successfully settled our patent dispute with NFC.
Speaker Change: Adding a multiyear litigation during which in turn should prevail and multiple jury trials.
Speaker Change: As Gary will detail shortly NXP agreed to pay in cash in upfront amount and yearly licensee in exchange for a broad patent cross license.
Speaker Change: Settlement increases our cash reserves and competitiveness freeze.
Reis management bandwidth.
Speaker Change: The uncertainty from the industry overall.
Chris Diorio: We are happy to put this dispute behind us. The Rain pioneer and innovator. We remain vigilant and committed to safeguarding our patented invention, as well as identifying additional licensing opportunities. You've delivered a very strong first quarter in every respect, financial, organizational, and market leadership. We see continued strength in looking into the second quarter. Looking further out, we see growing opportunities to drive recurring licensing and services revenue by monetizing our IP platform and cloud service.
While we are happy to put this dispute behind us.
Speaker Change: The rain pioneer and innovator.
Speaker Change: Remain vigilant and committed to safeguarding our patented inventions.
Speaker Change: As well as identifying additional licensing opportunities.
Speaker Change: Closing with.
Speaker Change: We delivered a very strong first quarter in every respect financial organizational and market leadership.
Speaker Change: We see continued strength looking into the second quarter.
Speaker Change: Looking further out we see.
Speaker Change: Growing opportunities to drive recurring licensing and services revenue.
Speaker Change: Monetizing our IP platform and cloud services.
Chris Diorio: We continue driving our bold vision to connect every item in our everyday world. www.TheBusinessProfessor.com, or turn the call over to Cary for our financial review and second quarter outlook. I'd like to again thank every member of the Impinj team for your constant effort in driving our goals. As always, I feel honored by my incredible good fortune to work with you. Thank you, Chris.
Speaker Change: We continue driving our bold vision to connect every item in our everyday world.
Speaker Change: Confidence in our market position.
Speaker Change: So on the opportunities ahead.
Speaker Change: Before I turn the call over to Kerry for our financial review and second quarter outlook.
Kerry: I'd like to again, thank every member of the team.
Kerry: Constant efforts driving our bold vision.
Speaker Change: As always I feel honored by my incredible good fortune to work with you.
Speaker Change: Alright.
Kerry: Thank you, Chris and good afternoon, everyone on today's call I will review, our first quarter financial results and second quarter financial outlook.
Cary L. Baker: Thank you, Chris, and good On today's call, I will review our first quarter financial results and second quarter financial outlook, percent sequentially compared with 70.7 million in the fourth quarter, and down 11% year-over-year from 86 million in the first. First quarter, N.I.C.
Chris: First quarter revenue was $76 8 million up 9% sequentially compared with $70 7 million from fourth quarter, 2023, and down 11% year over year from $86 million in first quarter 2023.
Cary L. Baker: revenue was $61.5 million, 14% sequentially compared with 53.9 million in fourth quarter 2023 and down 8% year-over-year from 67 million in first quarter 2023. First quarter N.I.C.
First quarter endpoint IC revenue was $61 5 million up 14% sequentially compared with $53 9 billion and fourth quarter, 2023, and down 8% year over year from $67 million in the first quarter 2023.
Chris: First quarter endpoint IC revenue exceeded our expectations led by retail looking forward, we expect second quarter endpoint IC product revenue to increase sequentially again led by retail.
Cary L. Baker: revenue exceeded our expectations, led by retail. Looking forward, we expect second quarter N.I.C. Product revenue is expected to increase sequentially, again led by retail. First quarter systems revenue was $15.3 million, down 9% sequentially compared with $16.8 million in fourth quarter 2023, and down 19% year-over-year from $18.8 million in first quarter 2023. First quarter systems revenue was below our expectations, primarily due to lower channel reader sales. Looking ahead, we expect a sequential decrease in second quarter systems revenue, with increasing channel reader sales more than offset by declining project-based gateway sales. First quarter gross margin was 51.5% compared with 50.9% in fourth quarter 2023 and 52.4% in first quarter 2020. The sequential increase was driven by a mix within N.29.
Chris: First quarter systems revenue was $15 3 million down 9% sequentially compared with $16 8 billion and fourth quarter of 2023 and down 19% year over year from $18 8 billion in the first quarter of 2023 first quarter systems revenue was below our expectations, primarily due to lower channel reader sales.
Chris: Looking ahead, we expect a sequential decrease in second quarter systems revenue was increasing channel reader sales more than offset by declining project based gateway sales.
Chris: First quarter gross margin was 51, 5% compared with 59% in fourth quarter 2023, and 52, 4% in first quarter of 2023.
Chris: Sequential increase was driven by mix one endpoint Ics.
Cary L. Baker: The year-over-year decrease was driven primarily by lower revenue on fixed costs, partially offset by higher systems product margins. Looking to the second quarter, we expect gross margin to increase. Total first quarter operating expense was $32.9 million, compared with $33 million in the fourth quarter 2023 and $36.4 million in the first quarter 2023. Operating expense was lower than we anticipated due to strong spend management across all major functions as well as lower litigation costs.
Chris: The year over year decrease was driven primarily by lower revenue on fixed cost, partially offset by higher systems product margins looking to the second quarter, we expect gross margin to increase.
Chris: Total first quarter operating expense was $32 nine compared with $33 million in fourth quarter, 2023, and $36 4 million in first quarter 2023.
Chris: Operating expense was lower than we anticipated due to strong expense management across all major functions as well as lower litigation costs.
Cary L. Baker: Research and development expense was $16.5 million, sales and marketing expense was $7.7 million, and general and administrative expense was $8.7 million, including litigation expense of $1.3 million. We expect a slight sequential decrease in second quarter operating expense as litigation expense declines to immaterial levels, more than offsetting investment in our base spend. First quarter adjusted EBITDA was $6.7 million, compared with $3 million in Q4 2023 and $8.6 million in Q1 2023. First quarter adjusted EBITDA margin was 8.7%.
Chris: Research and development expense was $16 5 million sales and marketing expense was $7 7 million general and administrative expense was $8 $7 million, including litigation expense of $1 3 million.
Chris: We expect a slight sequential decrease in second quarter operating expense ex litigation expense declines to immaterial levels more than offsetting investments in our base.
Chris: First quarter, adjusted EBITDA was $6 7 million compared with $3 million in fourth quarter, 2023, and $8 6 million in the first quarter of 2023.
Chris: First quarter adjusted EBITDA margin was eight 7%.
Cary L. Baker: First Quarter Gap Net Income was $33.3 million, and First Quarter Non-Gap Net Income was $6.2 million, for $0.21 per share on a fully diluted basis. Turning to the balance sheet, we ended the first quarter with cash, cash equivalents, and investments of $174.1 million, compared with $113.2 million in the fourth quarter 2023 and $164.7 million in the first quarter 2023. Inventory totaled $87.8 million, down $9.4 million from the prior quarter. First quarter net cash provided by operating activities was $60.1 million, and property equipment purchases totaled $6.2 million.
Chris: First quarter GAAP net income was $33 3 million first quarter non-GAAP net income was $6 2 million or 21 seven per share on a fully diluted basis.
Chris: Turning to the balance sheet, we ended the first quarter with cash cash equivalents and investments of $174 1 million compared with $113 2 million in fourth quarter of 2023, and $164 7 million in first quarter of 2023.
Chris: Inventory totaled $87 8 million down $9 4 million from the prior quarter.
Chris: First quarter net cash provided by operating activities was $60 1 billion property and equipment purchases totaled $6 2 million, excluding the $45 million income from the litigation settlement free cash flow was $8 9 million.
Cary L. Baker: Excluding the $45 million income from the litigation settlement, free cash flow was $8.9 million. Before turning to our guidance, I want to highlight a few items unique to our results and outcomes. First, NXP paid us a one-time $45 million litigation settlement payment in the first quarter. We recorded that $45 million in our first quarter GAAP financial statements as other income in our income statement and as cash on our balance sheet. Next, NXP will pay an annual license fee each April for up to 10 years unless they design out RIPs and exercise an early termination right.
Speaker Change: Before turning to our guidance I want to highlight a few items related to our results and outlook.
Speaker Change: First NXP paid us a one time 45 billion litigation settlement payments in the first quarter, we recorded that $45 million in our first quarter GAAP financial statements as other income in our income statement and Thats cash on our balance sheet.
Speaker Change: Next NXP will pay us an annual license fee each April for up to 10 years, unless they designed our R&D team and exercise an early termination right.
Cary L. Baker: Earlier this month, we received the first $15 million, covering the period from April 1, 2024 to March 31, 2025. We will recognize the full value of that payment as second quarter endpoint IC revenue, which is reflected in our second quarter guidance at nearly 100% gross margin. Going forward, the payments will increase annually by a modest fixed rate for as long as the agreement is in effect.
Earlier. This month, we received a first 15 billion covering the period from April one 2024 to March 31 2025.
Speaker Change: We will recognize the full value of that payment as second quarter endpoint IC revenue, which is reflected in our second quarter guidance at nearly 100% gross margin.
Going forward the payments will increase annually by a modest fixed rate for as long as the agreement is in effect.
Speaker Change: As a reminder for calculating our quarterly diluted earnings per share.
Cary L. Baker: As a reminder, we're calculating our quarterly diluted earnings per share. When quarterly non-GAAP net income exceeds $12 million, you should add the $2.6 million shares underlying our convertible debt to our diluted weighted average shares, and you should remove the corresponding $1.2 million of interest expense from our net income. Finally, the first half of 2024 marks a turning point in our operating margin profile. We added high-margin licensing revenue and reduced operating expense by removing litigation spend and reorganizing our reader and gateway channel business.
Speaker Change: Quarterly non-GAAP net income increased 12 million you should add the $2 6 million shares underlying our convertible debt into our diluted weighted average shares intercept the corresponding $1 $2 billion of interest expense from our net income.
Speaker Change: First half 2024 marks a turning point in our operating margin profile.
Speaker Change: It's high margin licensing revenue and reduced operating expense by removing litigation spend and reorganizing our reader and gateway channel business.
Speaker Change: You can see in our second quarter guidance those actions drive substantial earnings per share accretion.
Speaker Change: They will also drive significant free cash flow. Furthermore, these margin improvements accrue before we have 800 drives additional leverage.
Turning to our outlook, we expect second quarter revenue between 96, and $99 million compared with $76 8 million in first quarter of 2024% to 27% quarter over quarter increase up to the mid points, including the licensing payments.
Cary L. Baker: As you can see in our second quarter guidance, those actions drive substantial earnings per share accretion, and they will also drive significant free cash flow. Furthermore, these margin improvements accrue before the M800 drives additional leverage. Turning to our outlook, we expect second quarter revenue between $96 and $99 million, compared with $76.8 million in first quarter 2024, a 27% quarter-over-quarter increase at the midpoint, including the licensing payment, and a 7% quarter-over-quarter increase at the midpoint, excluding. We expect adjusted EBITDA between $23.9 and $25.4 million
Speaker Change: 7% quarter over quarter increase at the midpoint excluding it.
Speaker Change: We expect adjusted EBITDA between $23 nine at $25 4 million on the bottom line. We expect non-GAAP net income for 2021, 7% $23 2 million, reflecting non-GAAP fully diluted earnings per share between 70 to 70.
Speaker Change: <unk> 77.
In closing I want to thank the pinch team our customers our suppliers and you our investors for your ongoing support.
Speaker Change: I will now turn the call to the operator to open the question and answer session.
Speaker Change: Thank you very much we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Cary L. Baker: On the bottom line, we expect non-GAAP net income between $21.7 and $23.2 million, reflecting non-GAAP fully diluted earnings per share between $0.72 and $0.77. In closing, I want to thank the Impinj team, our customers, our suppliers, and you, our investors, for your ongoing support. I will now turn the call over to the operator to open the question and answer session. MJ?
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: As a courtesy to others, we ask that you limit yourself to one question and one follow up if you have additional questions. Please re queue and we will take as many questions as time allows at.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Today's first question comes from harsh Kumar with Piper Sandler. Please go ahead.
Operator: Thank you very
Operator: Thank you very much. We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been answered and you would like to withdraw your question, please press star then 2. As a courtesy to others, we ask that you limit yourself to one question and one follow-up. If you have any questions,
Harsh V. Kumar: Yeah, Hey, first of all guys. Congratulations the settlement of the litigation and then also just the tone in the business, Chris one a big different six months can make.
Harsh V. Kumar: Alright.
Harsh V. Kumar: There's a lot of interesting stuff in your comments I wanted to start with general merchandise I wanted to start with the large north American retailer that you highlighted in your comments.
Harsh V. Kumar: Wanted to ask you. How this is going you obviously you talked about some pick up there maybe you could just provide us some additional color and then what is the.
Harsh V. Kumar: Yeah, hey, first of all, guys, huge congratulations on the settlement of the litigation and then also just the turn in the business. Chris, what a big difference six months can make. There's a lot of interesting stuff in there.
Harsh V. Kumar: Implication of this implementation succeeding as there is this like a big thing that the entire retail industry is waiting for does this has huge implications for adoption for the rest of the retail and then I've got a follow up.
Harsh V. Kumar: I appreciate it I'm going to let Jeff lead in here, because he's very close to the customer side, obviously and so Jeff. Thank you for your question harsh.
Chris Diorio: I appreciate it. I'm going to let Jeff lead in here because... Thank you for your question, Harsh.
Jeffrey Dossett: Our tagging ecosystem partners who serve this large North American retailer's tagging needs have signaled steady gains in the tagging of additional general merchandise categories, as well as a modest uptick in overall consumer demand. Some of the general merchandise categories are progressing more quickly than others, but we are optimistic that progress will continue in the year ahead. And so although we don't have firm data to date, it's my expectation that this customer is a bellwether for many other large customers and for our industry overall, as it has proven historically, and I, either side is going, you know, everything they do going forward, I would put into, they set the benchmark for other companies to follow.
Jeffrey Dossett: Our tagging ecosystem partners, who serve this large north American retailers tagging needs.
Jeffrey Dossett: Signal steady gains in the tagging of additional general merchandise categories.
Jeffrey Dossett: As well as a modest uptake in overall consumer demand.
Jeffrey Dossett: Some of the general merchandise categories are progressing more quickly than others.
Jeffrey Dossett: We are optimistic that progress will continue in the year ahead.
Jeffrey Dossett: And a heartfelt.
Jeffrey Dossett: Historically that end user.
Jeffrey Dossett: Has significantly lead our industry and others have followed their moves of course, there was a setback during the years from 2008 2013 basically into 2019 associated with the rapid litigation, that's all behind Us now.
Jeffrey Dossett: And so we don't have a firm data to date, it's my expectation that this customer being a bellwether for many other large customers and for our industry overall has proven historically.
<unk> got everything they do going forward.
Chris Diorio: Very well. Chris, and then for my follow-up, guys, I wanted to ask about logistics. Again, the second customer that is ramping, do you think you're in a position to be able to say that this customer will grow with you every quarter steadily for the rest of the year? And when do you think you might reach the point where you are sort of call 100% penetrated at this customer in tagging?
Jeffrey Dossett: They set the benchmark for other companies to follow up.
Jeffrey Dossett: Well good question and then for my follow up guys I wanted to ask about logistics again, the second customer that is ramping.
Jeffrey Dossett: Do you think you are in a position to be able to say that this customer will grow.
Jeffrey Dossett: Do you every quarter steadily for the rest of the year.
Jeffrey Dossett: And when do you think you might reach the point, where you are sort of call it 100% penetrated discretionary tagging.
Chris Diorio: So I'm going to I'm going to start here, and I'm going to let Jeff jump in, you know, our scaling guide one quarter at a time. And with any large deployment, there are always teething issues as we go along. We work with the customer, and our partners work with the customer to get through those teething issues. So there's always a little bit of ups and downs along the way, so it's difficult for me to say that in any given quarter, things are going to be consistently up.
Jeffrey Dossett: No.
Speaker Change: Start here and I'm going to let Jeff jump in Hartford, We only guide one quarter at a time.
Jeffrey Dossett: And with any any of these large deployments there are always teething issues as we go off.
Jeffrey Dossett: Work with the customer at a furnace work with customer to get through those teething issues. So there is always a little bit up in balances along the way.
Jeffrey Dossett: Considerable for me to say that at any given quarter things are going to be consistently what we do see is strength of that customer commitment.
Chris Diorio: What we do see is the strength of that customer, a real commitment to go forward and to digitize the entirety of their operations, and a commitment to not only bag all the items they transport and move but also substantively change how they run their business. And so we see multiple opportunities with this customer, and then hopefully, with them again, it's about whether for the overall good
Jeffrey Dossett: Real commitment.
Jeffrey Dossett: To go forward again to digitize the entirety of their operations.
Jeffrey Dossett: And our commitment to.
Jeffrey Dossett: Tangled items they transport.
I would also say is substantively change how they run their business and so we see multiple opportunities with this customer and then hopefully, but then again, it's a bellwether for the overall supply chain logistics industry and others will follow.
Operator: Very nice. I'll get back to you in London. Thank you.
Speaker Change: Fair enough I'll get back in London. Thank you.
Chris Diorio: Thanks Arsh. Thanks Arsh.
Speaker Change: Thanks harsh.
Operator: Thank you. The next question comes from Jim Ricchiuti with Needham & Company. Please go ahead.
Speaker Change: Thank you. The next question comes from Jim Ricchiuti with Needham <unk> Company. Please go ahead.
Jim Ricchiuti: I think just maybe on that second logistics customer, as you know, I'm sure they discussed moving into the Stage 2 implementation where, presumably, it sounds like they're going to be putting readers, RFID readers, in the hands of their drivers, and I assume that's going to help your reader IC business. But Chris, maybe as we think about their deployment, it's moving now into their vehicles, what is the significance of this, or is this all On the left, they're down on the left.
Hi, Thanks, just maybe on that second logistics customers.
Jim Ricchiuti: No I'm sure.
Jim Ricchiuti: They discussed moving into this phase two implementation, where presumably it sounds like theyre going to be putting readers RFID readers in the hands of their drivers.
Jim Ricchiuti: I assume that's going to help your reader IC business, but Chris maybe as we think about their deployment is moving now into their vehicles. What is the significance of this or is this all part of their Grand plan that you guys were always kind of.
Jim Ricchiuti: Whereof.
Jeffrey Dossett: I'm going to let Jeff take the lead here and then I'll circle back on the next. I think first, Jim, I want to reiterate that we prefer to have our existing and potential customers speak about their own programs and deployments. But what I will say is that I think we have platform opportunities with this particular customer going forward and, importantly, multiple silicon touch points in those opportunities.
Speaker Change: And then let Jeff take the lead here and then I'll circle back on that impact.
First Jim I have one.
Jeffrey Dossett: To reiterate that we prefer to have.
Our existing and perspective customers speak to their own.
Jeffrey Dossett: Programs and deployment, but what I will say is that I think we have.
Jeffrey Dossett: Platform opportunities.
Jeffrey Dossett: This particular customer going forward and importantly, multiple silicon cache points in those opportunities.
Chris Diorio: and thank you. A follow-up question, Chris. I want to go back to your comment about food applications and moving faster than you expected. You know, how should we think about this? When could this potentially be a... Yeah, perhaps a more meaningful incremental driver for the endpoint IC business. I mean, it's I'm sure dwarfs, yeah, everything else dwarfs this, but you seem pretty excited about what you're seeing, and Jim. If you look back in time, what I've said is that the food opportunity is so large.
Speaker Change: Okay got it.
Speaker Change: Thank you I'll follow up question, Chris I wanted to go back to your comment about.
Speaker Change: The food applications and moving faster than you expected.
Speaker Change: How should we think about this when could this potentially be a.
Chris: Yes, perhaps a more meaningful incremental driver for the endpoint IC business I mean, it's I'm sure dwarfs everything else dwarfs. This but you seem pretty excited about what you ship.
Speaker Change: Yeah, Jim so.
Speaker Change: If you look back in time, what I've said is that.
Speaker Change: Food opportunity is so large that it's hard to see it moving really quickly and.
Chris Diorio: I am Jim, and if you look back in time, what I said is that food opportunity is so large that it's hard to see it moving really quickly, but we're at what I'm actually near, and what I'm feeling is that it's moving a bit faster than I had expected. And when we see some of the fast food chains talking openly about inventory shelf life and freshness, and we see other opportunities out there on the market, on the food front, we start bringing in food opportunities.
Speaker Change: But we're absolutely I'm actually here without feeling is that it's moving.
Speaker Change: Faster than expected and when we see.
Speaker Change: Hum.
Speaker Change: Fast food chains talking ultimately about about inventory.
Speaker Change: Inventory shelf life freshness, and we see other opportunities out there in the market.
Speaker Change: These are our partners, bringing us into opportunities overall.
Chris Diorio: Overall, for me, it's a little bit of a surprise. It's just got a quick pace to it, and I wasn't expecting it. Now, part of the reason may be that with retail adopting range so successfully, technology has proven to be a disapproval, and it kind of paved the way. But I still thought things were going to take a little longer. So I'm rather excited by the good opportunities and where they are right now. And as we learn more going forward, we'll bring other opportunities and insights to your attention.
Speaker Change: EMEA, it's a little bit of a surprise, it's just got a quick pace to it.
Speaker Change: I wasn't expecting that now part of the reasons it may be that with retail adopting brand so successfully.
Speaker Change: Allergies pros use cases.
Speaker Change: Paved the way.
But I still thought things were going to take a little longer so I'd rather excited about all the time.
Speaker Change: Ladies and where they are right now and as we learn more going forward.
Speaker Change: We will bring other opportunities and insights to your attention.
Got it thanks, congrats on the quarter.
Operator: Thanks, and congrats on the quarter.
Speaker Change: Thank you. Thank you.
Speaker Change: And the settlement.
Chris Diorio: and The Settlement. Thank you very much.
Thank you very much.
Operator: Thank you. The next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.
Speaker Change: Thank you. The next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.
Thomas Michael Walkley: Great, thanks. Yeah, my congratulations on everything too. I guess, Chris, just on strong intellectual property and your comments about protecting it, you know, what has been the kind of feedback from the Reign RFI? from the RFID industry post your settlement with NXP, and are there additional opportunities to license your technology? I'm going to start with the latter part of the question.
Thomas Michael Walkley: Alright. Thanks.
Thomas Michael Walkley: My congrats on everything to I guess, Chris just just on the the strong intellectual property and your comments about protecting it.
Thomas Michael Walkley: It has been kind of the feedback from the rain RFID RFID.
Outside the industry post year settlement with NXP and <unk> and are there additional opportunities to license your technology.
Chris Diorio: I'm going to start with the latter part of the question. First, Mike, and there are additional opportunities out there for licensing overall. So there are opportunities on our IP front, on the cloud services front, and for our platform overall. We've got, we just got a lot of strengths and capabilities in the things that we're doing.
Speaker Change: I'm going to start with the latter part of the question first Mike and and there are additional opportunities out there for licensing overall, so those opportunities on our IP products and cloud.
Speaker Change: Cloud services partner for our platform overall.
Speaker Change: We've got we just got it.
Speaker Change: A lot of strength the capabilities and the things that we're doing.
Chris Diorio: Furthermore, we see opportunities to integrate with our partners and make more partners out in the market and try additional licensing opportunities that generate recurring revenue. So on that front, we feel good, which is why I cited it in the prepared remarks, although obviously, we didn't give any further details because we can't really cite anything until we have any further details, and licensing is core to our strategy going forward. In terms of the industry reaction to selling with NXP, the industry was, for the most part, relieved.
Speaker Change: Furthermore, we see opportunities to integrate with our partners.
Speaker Change: Make more partners out of the market.
Speaker Change: Additional licensing opportunities that generate recurring right. So on that front and we feel good which is why I cited in our prepared remarks on the obviously, we didn't give any further detail because you can't really say anything until we got here.
Speaker Change: With you guys.
Speaker Change: Yeah.
Speaker Change: And licensee is core to our strategy going forward.
In terms of how the industry reaction to vaccinate.
Speaker Change: Thanks Pete.
Speaker Change: Yes.
Speaker Change: The industry less for the most part relieved.
Chris Diorio: There was a cloud of uncertainty hanging over the fact that there was litigation ongoing between the two largest end-point IC suppliers, and the fact that that overhang to the industry is removed, I think that it will help the industry continue to move forward, and it takes away any concerns or any concerns about potential impediments going forward.
Speaker Change: There was.
Speaker Change: The uncertainty hanging over the fact that there was that litigation ongoing between the two largest NYSE suppliers and the fact that that.
That overhang to the industry's removed.
Speaker Change: Im guardedly things.
Speaker Change: Even as we continue to move forward and it takes away any concerns raised concerns about potential impairment going forward.
Speaker Change: I talked about it frankly very excited the details of the settlement we built.
Speaker Change: The outcome is good for us.
Speaker Change: Good for the industry overall.
Thomas Michael Walkley: Great. And for my follow-up, you know, Cary, just on gross margins, you know, obviously, next quarter will be a high gross margin quarter with a licensing payment. But as we kind of back that out and think about gross margin trends for the rest of the business with M800 ramping and potentially a stronger mix of systems later in the year, how should we just think about gross margin trends for the business? Get out.
Speaker Change: Great.
Speaker Change: My follow up Gary.
Speaker Change: Just on gross margins, obviously, you get next.
Gary: Next quarter will be a high gross margin quarter with.
Gary: Licensing payment, but yes, we kind of back that out and think about gross margin trends for the rest of the business with an 800 ramping and potentially a stronger mix of systems later in the year, how should we just think about gross margin trends for the business.
Cary L. Baker: Thanks for the question. I think, you know, as you know, looking at the second quarter, we expect gross margins to increase with a strong benefit from license revenue. If you were to remove that, we're modeling gross margins at the product level to be about a flat quarter of a quarter. And currently, we're running below our target at the 53-54% range for a few reasons. First, we remain a little subscale but are closing that gap quickly.
Gary: Yes.
Speaker Change: Excellent question I think.
Speaker Change: As you go and look at the second quarter, we expect gross margins to increase with a strong benefit from the license revenue.
Speaker Change: If you remove that we're modeling gross margins at a product level to be about flat quarter over quarter.
Speaker Change: Currently we're running below our targeted 53% to 54% range for a first for a few reasons.
Speaker Change: First we remain a little soft scale, but are closing that gap quickly and then second as has been the case historically the systems business recovery typically lags the endpoint Ics recovery.
Cary L. Baker: And second, as has been the case historically, the system's business recovery typically lags the endpoint IC's recovery. This has caused our Endpoint IC revenue to grow as a percent of our total revenue. Endpoint IC carries a gross margin that's slightly lower than our corporate average. And then, finally, our lower margin 200mm volume running skews were slightly higher as a percent of revenue in 2Q and will likely be so again in Q3.
Speaker Change: This was caused our endpoint IC revenue to grow as a percent of our total revenue I. Just wanted I think carries a gross margin that's slightly lower than our corporate average.
Speaker Change: And then finally.
Speaker Change: Or what are lower margin 200 millimeter volume running skus are slightly higher as a percent of revenue into Q and will likely be so again in Q3.
Cary L. Baker: That product line is two generations old at this point, and we're moving it before the M800 range. We'll know more about the pace of the M800 ramp in the next quarter or so, but the second quarter volumes remain small from a mixed perspective, and it will really not have any visible impact on our growth. So overall, though, we remain confident in the post-margin targets that we outlined at our end.
Speaker Change: That product line is two generations old at this point and we're moving it before that every hundred ramps well know more about that pace of the 800 ramp in the next quarter or so but the second quarter volumes remained small from a mix perspective.
And we're really not have any visible impact to our gross margin.
So overall, though we remain confident in the gross margin targets that we outlined.
Operator: That's very helpful. Thank you very much.
Speaker Change: At our Investor day.
Speaker Change: Okay. That's very helpful. Thank you very much.
Operator: Thank you. The next question comes from Christopher Rolland with Susquehanna. Please go ahead.
Speaker Change: Thank you. The next question comes from Christopher Rolland with Susquehanna. Please go ahead.
Christopher Rolland: Hey, thanks for the question. The digital product passport, I think you talked about it regarding textiles as well. Can you tell us a little bit more about that, the applications, maybe the economics associated with it, and how big do you think it can ultimately be?
Hey, Thanks for the question.
Christopher Rolland: The digital product passport I think you talked to it regarding textiles as well can you tell us a little bit more about that the applications, maybe the economics associated with it and how big do you think it can ultimately be.
Chris Diorio: So, Chris, the application really is the EU has passed a set of regulations that basically require traceability of textile items from cradle to grave, from point of manufacturing all the way through shipment, sale, consumer use, and recycling. Those regulations really begin kicking in at 2027, the ability for and items to progress, for the consumer to make an informed choice around item sustainability, and a form showing about the product and the buying, and in doing so, provide the data about the item to the consumers and, like I said, recycling at end of life. So the key here for us is that I believe DPP will drive significant opportunities for consumer engagement. Now, Rainarpati is not a shoo-in for DPP because there are other data carriers.
Christopher Rolland: So.
Christopher Rolland: Chris.
Christopher Rolland: The application really is the EU has passed et cetera passed regulations that basically required traceability of textile items.
Christopher Rolland: We are incredibly grateful for their manufacturing all the wafer shipment sale consumer use and recycling.
Christopher Rolland: Those regulations are really be begin kicking in in 2027.
Christopher Rolland: And full lifecycle for stability and seeing if he wants to give consumers.
Christopher Rolland: Ability to and items.
Christopher Rolland: So the consumer to make an informed choice about sustainability.
Christopher Rolland: And it forms a product to buy.
Christopher Rolland: And in doing so provides the data about the attitude of consumers and then like I said recycling at end of life.
Christopher Rolland: So the key here for US is that I believe <unk> will drive significant opportunities for consumer engagement now rain RFID is not a shoe in for DTC because there are other data carrier.
Chris Diorio: What we, our partners, and our enterprise end-users want is for the tech that is already on retail apparel items and more and more embedded in the items to be a data carrier for BP. In order to get there, we need consumers to be able to read those items, which is the impetus for putting readers into mobile phones. And I personally think that brain reading in mobile phones opens up a world of opportunities and actually is a new and transformative use case for mobile phone suppliers.
Christopher Rolland: What we are partners.
Christopher Rolland: Perfect end users want is to make the tax that already honest retail apparel items and more and more embedded in the items via data carrier who DTP.
Christopher Rolland: In order to get there, we get consumers to be able to read those items, which is the impetus for Frank readers in the mobile phone and I personally think that rain reading in mobile phones opens up a wealth of opportunities and actually.
Christopher Rolland: Your line transform a use case for the mobile phone suppliers. So.
Chris Diorio: So I am hopeful, but I can't go beyond hopeful. I'm hopeful that this increased pressure or increased impetus for putting brain reading in mobile phones will maybe put us over the edge, over the top in terms of getting readers in phones, which would open up a world of opportunities beyond these. So that really is the core focus. The tech's already going on the items. We need to get consumers able to read them, and when they can, it opens up a whole new set of opportunities post point of sale.
Christopher Rolland: I am hopeful, but I can't go beyond hopeful I'm hopeful that this increased pressure or increased incidence refrain rain breeding and local funds, maybe will put us over the edge or at the top in terms of getting our readers and thoughts which would open up a wealth of.
Christopher Rolland: Opportunities beyond BCP so.
Christopher Rolland: So that really is that is the crux of the tanks already going on as we need to get consumers being able to read them and when they can.
Christopher Rolland: That's a whole new set of opportunities post point of sale.
Christopher Rolland: Uh... that's uh... that's very interesting. Just a quick follow-up there. Would you be selling ICs into the mobile market for that, or could they use some sort of, you know, existing function there? And then, just uh... housekeeping on the licensing. Is there a volume component to royalties for future payments, and how dependent on volumes are those payments?
Speaker Change: That's that's very interesting just a quick follow up there.
Speaker Change: Would you be selling Ics into the mobile market for that or could they use some sort of you know existing function. There and then just.
Speaker Change: A housekeeping on the licensing is there a volume component to royalties for future payments and how dependent on volumes or are those payments.
Chris Diorio: I'm taking the latter question first; the payments are a fixed amount increasing by a modest amount each year. So, and as we've said, we've addressed the elections. Going to the former, it's too early to say whether there's an opportunity for us in silicon in mobile phones or not. But putting that aside for a minute.
Speaker Change: So.
Speaker Change: Taking the latter question first and it's a fixed amount increasing NAV by a modest modest Matthew here.
Speaker Change: And as we've said with regards to the license agreement.
Speaker Change: Going to the former it's too early to say, whether there is an opportunity for us in silicon in the mobile phones or not but.
Speaker Change: Putting that aside for a minute.
Chris Diorio: If you think of our platform that has the Endpoint ICs and Reader ICs, we're pushing more into some of the services around it. We already have enterprise-level engagements. We see a large opportunity for our platform, www.kenhub.com, for retailers and phone providers and manufacturers to be part of the overall solution.
Speaker Change: If you think of our platform that has the endpoint Ics.
Speaker Change: Your Ics, we're pushing more into some of the services around it.
Speaker Change: We already are enterprise level engagements, we see a large opportunity for our platform.
Speaker Change: Whether or not it actually our silicon it adds up and that falls first of all if I get silicon installs, but even if we know we're going to be pushing forward with opportunities that leverage our platform and the benefits our platform brings and we want to be there side by side with that.
Speaker Change: Retailers and small providers and manufacturers.
Operator: Thank you. The next question comes from Scott Searle with Roth MKM. Please go ahead.
Speaker Change: The part of the overall solution.
Speaker Change: Thanks, Chris.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from Scott Searle with Roth.
Scott Wallace Searle: Hey, good afternoon. Thanks for taking the questions. Nice to see the continued recovery in the core business and the outlook of those key customers, maybe quickly on that front on the retail apparel front. It sounds like that drove the upside for endpoint ICs in the first quarter and boosted the outlook of the upside into the second quarter as well. Of course, is the retail apparel market now normalized as we get to the second quarter? Are we still recovering and working through some inlay inventory in there, or these new design wins and wrap up in unit volumes, etc.?
Scott Wallace Searle: Please go ahead.
Scott Wallace Searle: Good afternoon. Thanks for taking my questions nice to see the continued recovery in the core business and the outlook of those key customers.
Scott Wallace Searle: Maybe quickly on that front on the retail apparel front it sounds like that drove the upside for endpoint Ics in the first quarter and driving the outlook of the upside into the second quarter as well Chris is.
Scott Wallace Searle: Is the retail apparel market now normalized as we get to the second quarter or are we still recovering and working through some inventory and there are these new design wins and ramp up in unit volumes et cetera.
Chris Diorio: I'm going to start by saying thank you, and then I'm going to hand off to
Chris: I'm going to start by saying, Thank you and then I'm going to hand off to do that because I think Jeff will provide some commentary there Jeff.
Jeffrey Dossett: I'm going to start by saying thank you, and then I'm going to hand off to Jeff because I think Jeff can provide some commentary there. Well, we are seeing some restocking taking place in both apparel and footwear and general merchandise to better match an uptick in consumer demand. Whether or not that trend continues, it's too early to call, and probably not for us to call that. But overall, the partners who engage with those retailers signal some strength into the second quarter and optimism, cautious optimism for the second half, but are awaiting more confirmation of the sustainability of that uptick in demand and setting up a layer a little bit more on here.
Jeffrey Dossett: Well, we are seeing some relief.
Jeffrey Dossett: Restocking taking place.
Jeffrey Dossett: In.
Jeffrey Dossett: But apparel.
Jeffrey Dossett: Footwear and general merchandise.
Jeffrey Dossett: Better matched to.
Jeff Dossett: Uptick in consumer demand.
Jeff Dossett: Whether or not that trend continues its too early to call and probably not for us to call that.
Jeff Dossett: But overall the partners, who engage with those retailers.
Jeff Dossett: Signal some strength into the second quarter and often made some cautious optimism for the second half, but are waiting more confirmation of the sustainability of that uptick in demand.
Jeff Dossett: And then on there a little bit more on here so let's see.
Jeffrey Dossett: So we see multiple drivers as we look out. We see embedded tagging, which replaces part tags with soft labels and starts activity with soft labels on them, care ones, general merchandise, Jeff just highlighted the retail we buy know what driving solutions in the market and our strength, all four of those, for those factors. We believe our children are driving around.
Jeff Dossett: We see multiple drivers as we look out we see embedded tagging.
Jeff Dossett: Replaces our cashless salt labels.
Jeff Dossett: Sorry, Gary the software itself. So we see some tailwind from that data tagging, obviously general merchandise were already talked about that going forward until we see Carolyn for general merchandise.
Jeff Dossett: Just highlighting a revised.
Jeff Dossett: And then a reference around solutions and driving solutions in the market our strength in those solutions.
Jeff Dossett: Counts all four of those.
Jeff Dossett: Those factors are.
Jeff Dossett: We believe our categories that are driving our implant device.
Chris Diorio: Gotcha. And if I could follow up on the DPP front, Chris, there's a huge opportunity there. I'm wondering if you could walk us through what the process and some of the milestones that will look like over the next couple years. You talk a lot about retail apparel, the trades' ability to engage consumers on that front, but I thought we were going to see tires and batteries kind of starting first, some of those recyclable items more so than we think about textiles.
Got you and if I could follow up on the DPP front, Chris It's a huge opportunity there I'm wondering if you could walk us through.
Chris: What's the process in some of the milestones that will look like over the next couple of years, you're talking a lot about retail apparel, the traceability to engage consumers on that front, but I thought we were going to see tires and batteries kind of starting for some of those.
Recyclable items more so than we think about textiles is that changed in terms of the implementation of different product categories or is it just because the retail apparel is just such a large unit opportunity and drives incremental feature sets.
Chris Diorio: Is that changing in terms of the implementation of different product categories, or is it just because retail apparel is just such a large unit opportunity and drives incremental feature sets from Impinj? Thanks.
Chris: From an pitch thanks.
Scott Wallace Searle: Yeah, so from my understanding of where DPP is today, and not only are the regulations kind of being ironed out, but the implications are being ironed out... Batteries are going first, from my understanding, but also from my understanding that a strict out of the gate DPP carrier for those batteries is a QR code.
Speaker Change: Yeah. So from my understanding of our DPP is today.
Pitch: Not only the regulations has kind of been ironed out what the most agents being ironed out.
Speaker Change: Excuse me.
Batteries are going first for my understanding.
Also my understanding that.
Speaker Change: The out the gate.
Speaker Change: The carrier for those batteries QR codes.
Chris Diorio: Textiles is the next one to come along. It's a much bigger category, and the data carrier is not decided yet. So, it could be multiple things.
Speaker Change: Textile is the next one to come along and it's a much bigger category.
Speaker Change: And the data carrier is not decided yet.
Speaker Change: So it could be multiple things could be it could be rain RFID.
Chris Diorio: It could be RAN RFID, it could be QR codes, it could be NFC RFID, it could be a bunch of different things. And it's not a side of the interfactory committee's working on figuring out what the data carriers are. RAN RFID is a big benefit that, you know, item visibility is great. It's already on the apparel items. That's great. It's being embedded into the access tags. That
Speaker Change: Marcos you could be NFC RFID is a bunch of different things and it's not side interceptors committees working on figuring out what the data carriers are.
Speaker Change: RFID is a big benefit that visibility I think it's really great.
Speaker Change: Already on apparel items, thats, great being embedded into the <unk> that's great.
Chris Diorio: But we're not in mobile phones. So that's why I highlighted the opportunity in mobile phones and that there are now large enterprises in Europe that are pushing and letting their needs be known that we need brain readers and mobile phones. And so whether that push will be enough is to be determined. But it's the first time we've really had a real surge, from the leaders in the market, from the enterprises in the market, saying we need this capability. And so I think that your first, your first indicator will be the next. I'll have one to two years whether or not right is classified as a data carrier for DPP.
Speaker Change: But we're not in all of US. So that's why I highlighted the opportunity in the mobile phones and that there are now large enterprises in Europe that are pushing and letting our need be known that we need rain readers in mobile phones, and so whether that push will be enough to be determined.
Speaker Change: But it's the first time, we've really had a real push.
Speaker Change: From the leaders in the market from the enterprise and the market is saying we need this capability and.
Speaker Change: And so I think that your first your first indicator will be over the next.
Speaker Change: I'll add one to two years whether.
Speaker Change: Classified as a data carrier for DVT, and we hope to make it so.
Speaker Change: Great. Thank you.
Operator: Thank you. The next question is a follow-up with Harsh Kumar from Piper Sandler. Please go ahead. Yeah, hey guys, uh...
Thank you.
Speaker Change: Thank you. The next question is a follow up with harsh Kumar from Piper Sandler. Please go ahead.
Harsh V. Kumar: Hey, guys.
Harsh V. Kumar: Yeah, hey guys. So a lot of us are probably going to be struggling with this as we model. So I thought I would just ask this openly. What should the expected OpEx level be going forward? In other words, I know you were spending four, four and a half million dollars in legal fees. Is that a fair number for us to take out? And then I'll just ask the second one that's on my mind too.
Harsh V. Kumar: So a lot of us are going to probably we struggling but this doesn't mean model. So I thought I would just ask this ultimately what should be the expected opex level going forward in other words I know you were spending for $5 million in legal is that.
Harsh V. Kumar: A fair number for us to take out and then I'll just ask the second one that's on my mind to do you want us to model.
Harsh V. Kumar: Do you want us to model the next year's payment in some manner as it'll come to in the second quarter of 2025, or do you think it's just appropriate to see what that number is and that it could change dramatically? I would love some thoughts on this.
Harsh V. Kumar: The next year's payment in some manner as it will come through in the second quarter of 2025.
Harsh V. Kumar: Do you think it's just appropriate to see what that number is and that it could change dramatically just obvious love some thoughts on this.
Cary L. Baker: Our Q2 OPEX, or what we've embedded in our Q2 guide, is pretty clean. There is immaterial litigation spend, and the business is normalizing following the reorganization that occurred in Q1. As I look to the second half, I would assume modest growth. We're going to continue investing in this business and in front of this opportunity, but you've got a pretty good picture of our OPEX right now.
Harsh V. Kumar: Yeah, Hey, harsh this is kerry so from an opex perspective or.
Kerry: Our Q2 Opex so what we've embedded in our Q2 guide is pretty clean there is immaterial litigation spend and the business is normalizing following the reorganization that occurred in Q1 as I look to the second half I would assume modest growth, we're going to continue investing in this business and in front of this opportunity.
Kerry: <unk> got a pretty good picture.
Kerry: Of our Opex right now.
Cary L. Baker: And then What about the expected payment next year? All right, good question.
Kerry: Okay.
Speaker Change: And then what about the.
Speaker Change: The expected payment next year.
Speaker Change: Hi. Good question is that one is it's early there is an ability for NXP to design out but that is not easily done.
Cary L. Baker: Good question. That one is, it's early.
Cary L. Baker: There is an ability for NXP to design this out, but that is not something that's easily done. So I don't expect a huge increase in that payment, but I think it is fair to model that at this point, and we'll keep you up to date on where that might grow.
I don't expect a huge increase in that payment, but I think it is fair to model that at this point and we'll keep you up to date on where that micro.
Speaker Change: Of course, thank you.
Operator: Thank you. The next question is a follow-up from Jim Ricchiuti with Needham and Company. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question is a follow up from Jim Ricchiuti with Needham <unk> Company. Please go ahead.
Jim Ricchiuti: with the litigation uncertainty behind you and the growing cash position, what I'm wondering is whether you guys have periodically looked at M&A as a means of accelerating parts of the business, growth in parts of the business. So you know, the way I think acquisition sounds like it's it was a nice acquisition for you, small, but I think it provides some benefits. I'm wondering if we might see a pickup at all or if you're looking at opportunities that might accelerate the growth in some of the newer markets.
Jim Ricchiuti: Yes with the lid.
Jim Ricchiuti: Litigation uncertainty behind you.
Jim Ricchiuti: And.
Jim Ricchiuti: Growing cash position.
Jim Ricchiuti: What I'm wondering is you guys have.
Jim Ricchiuti: Periodically looked at.
Jim Ricchiuti: M&A as a means of accelerating.
Jim Ricchiuti: Parts of the business growth in parts of the business.
Jim Ricchiuti: The way I think acquisition it sounds like it was a nice acquisition for us small, but but I think provide some benefits I'm wondering if we might see.
Jim Ricchiuti: Pick up at all or if you are looking at opportunities that might accelerate.
Jim Ricchiuti: And some of the newer markets.
Chris Diorio: Yeah, Jim, I'll do my best to answer that. And, obviously, I can't speak to any particular opportunities or anything that might be coming our way. Atlantic was an opportunity for us because what they offered was well-aligned with our platform. Essentially, they're at the front end of the inlay manufacturing process for inlay testing, quality assurance, and, you know, some data services around the inlays, which, of course, these are RICs that leverage RICs for the inlay.
Speaker Change: Yeah, Jim I'll do my best to answer that.
Obviously, I can't speak to any particular opportunities or anything that might be coming our way.
Speaker Change: Granted it was an opportunity for us because.
Jim Ricchiuti: Let's say you offered was well aligned with our platform essentially they're at the front end.
Jim Ricchiuti: Your tax rate, where in late testing quality assurance and <unk>.
Jim Ricchiuti: And you know some data services around the inlays with of course, these are seasoned leverage or at least for the internet. So it was a natural addition to our platform that I think will stand us in good stead going forward.
Chris Diorio: So it was a natural addition to our platform that I think will stand us in good stead going forward. We are always open to other areas that strengthen and augment our platform. And if someone were to come along, we'd be interested. And we keep our eyes open all the time.
Jim Ricchiuti: We're always open to other areas that strengthen and augment our platform.
What's to come along we would be interested.
Jim Ricchiuti: And we keep our eyes open on all the time I don't think the additional cash is going to kind of say organically, it's going to make it.
Chris Diorio: I don't think the additional cash is going to say, oh, it's going to make a huge difference either way. It's really identifying an opportunity that makes sense for us. You know, the additional cash is nice because it's easier for us to finance it, but the key thing is that when we see an opportunity that's good for us, we'll pursue it, and absent that, we won't.
Jim Ricchiuti: Huge difference either way its really identifying an opportunity that makes sense for us as a company. The additional cash is nice because it's easier for us to finance it but the key thing is we see an opportunity. It's good for US we will pursue it and absent that we love.
Cary L. Baker: And one final question, if I may, Cary, I think you alluded to the M800 volume still being relatively small, but is there any way, I think you touched on this at the investor day, but has your thinking around the impact on gross margins as that scales changed at all, and maybe you could just remind us of the impact as it becomes a bigger part of the overall volume. Thanks, Jim. So the answer is
Speaker Change: Okay and one final question if I may just carry I think you alluded to the <unk> hundred volumes still being relatively small but.
Speaker Change: Is there any way you can.
Speaker Change: I think you touched on this at the Investor day, but.
Speaker Change: Has your thinking around the impact on gross margins as that scale does that has that changed at all and maybe you could just remind us of the impact.
Speaker Change: As it becomes a bigger part of the overall volume.
Speaker Change: Thanks, Jim So do you have any 100 <unk>.
Cary L. Baker: Thanks Jim. So the M800 benefits from a lower cost base. And that lower cost basis will translate into approximately 300 basis points of gross margin accretion as the M800 ramps and becomes a volume runner in our business. Now, an endpoint IC ramp, when we typically launch a new IC, takes multiple years to achieve, call it volume running status. We're certainly pleased with where we are, and as Chris alluded to in his prepared remarks, the M800 is ramping into Q2, but the volumes are still small, and the impact on gross margin is not visible at this point.
Speaker Change: It fits from a lower cost.
Jim Ricchiuti: And that lower cost basis will translate into approximately 300 basis points of gross margin accretion.
Speaker Change: Ramp so it becomes the volumes that are in our business now and endpoint IC ramp when we typically launch a new IC takes multiple years to achieve call it volume running status.
Speaker Change: We're certainly pleased with where we are as Chris alluded to in his prepared remarks were 800 is ramping into Q2, but the volumes are still small and the impact on gross margin is not visible at this point, where the early days of the ramp is really too hard to project a precise timing of that ramp.
Cary L. Baker: We're in the early days of the ramp, so it's really too hard to project a precise timing for that ramp, but we're encouraged with where we are, and we'll keep you up to date as we progress on that ramp and throughout this year. Okay, thanks a lot.
Speaker Change: We're encouraged with where we are and we'll keep you up to date as we progress in that ramp and throughout this year.
Speaker Change: Okay. Thanks, a lot.
Speaker Change: Thank you.
Speaker Change: Thank you.
Operator: Thank you. As a reminder, if you have a question, you may press star then 1. If there are no further questions, this concludes our question and answer session. I would like to turn the conference back over to co-founder and CEO, Chris Diorio, for any closing remarks.
Speaker Change: A reminder, if you have a question you May press Star then one.
Speaker Change: Sure.
Speaker Change: Seeing no further questions. This concludes our question and answer session I would like to turn the conference back over to co founder and CEO, Chris Diorio for any closing remarks.
Chris Diorio: Thank you, MJ. Thank you very much. And I'd like to thank all who were on the call today for joining us. Thank you for your ongoing support. Bye bye. The conference has now concluded.
Chris Diorio: Thank you okay. Thank you very much and I'd like to thank all who are on the call today for joining us. Thank you for your ongoing support and bye.
Chris Diorio: Bye bye.
Chris Diorio: Yes.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.
Speaker Change: Okay.
Speaker Change: [music].
Operator: BF-WATCH TV 2021