Impinj, Inc. (PI) Earnings Call Transcript & Summary

Good morning, everyone. Thank you very much for joining us for Annual Technology and Internet Conference. I'm Quinn Lewis. I cover semiconductors and semi capital equipment here at Goldman Sachs. We're very excited and honored to have the team from Impinj here today. We have Chris Diorio, CEO; and Cary Baker, CFO. This fireside chat will be about 40 minutes long. I'll kick it off with a list of questions, but we'll definitely take questions from the audience as well. For those that have questions, please send them through the webcast. And so with that, I'd like to get started. Chris, Cary, thank you very much for joining us today.

Thank you, Quinn.

I guess -- yes, I think before we dive into more specific questions, I guess, I just wanted to give you the opportunity to speak to the quarter you reported last night. You obviously pronounced some pretty massive revenue upside and are guiding to what looks to be quite a strong first quarter as well. So recap with us now for some additional context, what are some of the main drivers of that upside that you saw? What are some of the main highlights in the quarter? And how are you thinking about the near to medium-term?

So this is Chris. I want to start by thanking you, Quinn, and thanks all to who are on the call for joining us. Cary, would you like to kick off the start to the answers to that question?

Yes, sure. From a endpoint IC perspective, we entered the quarter with a couple unknowns in front of us that impacted our Q4 guide. First is we didn't know what the holiday season was going to look like this year with the pandemic. And then second, we didn't know what happened to the spring inventory that was tagged and on a shelf when COVID hit in kind of the March, April time frame. And both of those unknowns forced us to take a little bit of a conservative approach to our turns assumption. And then what we found out as we moved through the quarter, particularly through November and December, that both of those assumptions did prove conservative. We saw a stronger-than-expected holiday sales. We saw stronger turns associated with the spring inventory. And that's really what drove the endpoint IC beat versus our guidance in Q4. We also saw strength in our system size, particularly from our readers and our reader ICs. And from an overarching perspective, our bookings pace had been accelerating since Q3 and then to October, and then it just really hit a different year in November. And we saw customers booking further into the future. So a different dynamic than we're used to. Typically, we have about a 7-week customer request time. Now they're booking further into the future. And that pace that we saw in November and December continued through Q1 -- or through January, which helped give us a strong -- confidence in a strong guide for the March quarter as well. In terms of other financial highlights, we had a marquee win with an R700 base loss prevention engine. We received a customer prepayment of $6 million for that in the December quarter. Now we have additional development work to do on that, that will be completed in the March quarter, and then we expect to substantially ship that product for that initial deployment in the June quarter. Chris?

And I'll just follow-up a little bit with how we're thinking about the near and medium-term trends for our business. In the near term, we're very much focused on a transition to our new endpoint IC, the Impinj M700, which is half the size of any of our competitors' ICs, which means we get twice as many die per wafer on the same size wafer, and has advanced features, significantly moved down Moore's law and higher performance. And that transition to that Impinj M700, especially at a time when wafer supply is short, gives us the ability to deliver more ICs per wafer, ability to ramp into the opportunity. So we're focused on that M700 transition and significantly transitioning away from our older products, which are on 200-millimeter wafers to a new product on 300-millimeter wafers. We're also going to be focused on delivering to that loss prevention opportunity that Cary highlighted. In the medium term, our real focus is to invest in our platform. RAIN RFID has been significantly driven by retail and in retail by handheld reader driven inventory visibility. Store employees going to stores or into fulfillment centers, reading items with handheld readers up to 200 items per second, scanning the handheld around, but reading the items to get visibility into inventory. If you read an item, you know you have it and you can ship it omnichannel from a fulfillment center or from a store or buy online, pick up in store, you know you've got it. What we see as the future is fixed reading opportunities where the readers are more part of the infrastructure. And that loss prevention opportunity is one of the early wins in this area, where we are looking to deploy readers at the store exits and for self-checkout to drive the next-generation of not only fixed reading, but drive additional tagging because to do self-checkout in the store, you need to have all the items tagged, but also really to drive the future. As you think about our other opportunities, for example, in supply chain and logistics, handhelds don't work in dock doors, they don't work on conveyor belts. You need fixed readers to drive those opportunities. So we're really focused on that fixed reading portion of our platform, which will, in turn, drive those endpoint IC volumes.

Got it. So that's a lot of super helpful context. And I want to unpack some of the things that you touched on there. But I guess, to start zooming way out, Chris, I wanted to open the floor for you to, I guess, outline the Impinj story. We might have some investors on the line who are new to the company. And so when you think about RAIN RFID and Impinj as real leader in the space, how do you think about long-term drivers of adoption? What brought us to where the industry is today because it's certainly been a long road and at a high level, where do you see Impinj taking the industry over the next 5, 7, call it, 10 years?

Sure. Thanks, Quinn. Impinj's mission is to connect everything, literally connect everything, connect all parcels that are being shipped, connect all airline baggage, connect all retail apparel, connect things. We do so by delivering a miniature radio chip smaller than a grain of sand that our partners attach to small antennas, half the size of your pinky, that can go into or onto an item. That radio chip absorbs its energy from the radio waves. It's battery free. It's free to blow it up to 1,000 items per second without line of sight. We sell billions and billions of those radio chips. We just announced yesterday that we've reached a milestone having shipped 50 billion, which means we enable connectivity for 50 billion everyday items. We also sell readerships and readers to read those items. Gateways, which are readers with electrically steer beam antennas, no moving parts, but electrically phased dry texture beam and kind of software -- essential software that runs on our readers who get used to pull it all together. So that's what we, as a company sell. But our true vision is to extend the reach of the Internet by a factor of 1,000 to every item that people manufacture, transport, sell and use and to create a digital twin of that item in the cloud where people have information about items already, but our vision is to link the wireless connectivity to that item as a pointer, where the current owner of the item, whether it's a manufacturer, the shipper, the seller or a person can actually get information at that item. So we're looking to, like I said, extend the reach of the Internet by a factor of 1,000. We're selling billions and billions of items today. We're looking to trillions per year in the future. And truly giving digital life to everyday items. So we're the only company in our space that has a platform. We have competitors at layers of our platform, but we're the only company that sells tag chips, reader chips, readers, gateways and the whole pieces to pull it together. We go-to-market through partners, and we look to our partners, and we have many, many hundreds of partners to deliver these solutions out to end customers.

Got it. So I guess, turning back to, I guess, the near-term [ deems ] here. While your business was hit pretty hard by the pandemic last year, it seems like on the flip side here, COVID has actually really accelerated interest in your technology and RAIN more broadly. So I guess walk us through your most recent conversations with current customers and end users and potential customers and end users alike in terms of how the pandemic has really changed the way they're thinking about and approaching RAIN adoption and ultimately implementation.

Sure. I guess, I'd like to say that pandemic-related store closures on the retail side really crystallized retailers and brand owners' needs for omnichannel fulfillment. They need to be able to ship from the store. They need to be able to ship from a fulfillment center. They need visibility into what they've got in order to sell effectively. And the products we deliver, RAIN RFID, where RAIN stands for radio identification. RAIN RFID is really the foundation of that effective omnichannel solution. If you know what you've got, you can sell it and you can ship it from anywhere. I want an item and I go online and find it and a retailer has got it somewhere in Iowa because they know they -- and I live in Seattle. They know they've seen it. They can ship it to me with confidence. And so the pandemic really crystallized that need. The future is really rethinking retail as brick-and-mortar stores reopen. So our win that Cary mentioned in loss prevention and self-checkout being the first really significant, really major deployment of loss prevention at self-checkout. Using RAIN RFID, not using the old loss prevention tags, but using RAIN RFID, enables to touch free retail. Consumer self-checkout, which we believe is -- will really transition how people think about going into stores. There's also opportunities, major opportunities in supply chain logistics to track packages moving, parcels moving and in postal, just think of the shipment volumes that have arisen as a consequence of COVID-19. We have major opportunities for our products and platform and Industry 4.0, automotive, and automotive assembly lines tracking parts for just-in-time inventory to manufacture cars, health care, tracking PPE and vaccines, food traceability, literally everything. We can connect anything.

Got it. That's super interesting. I guess, on the retail side, you've got a couple of new great wins with retailers. And historically, retailers have made up about half of your total revenue. And I think last night, you said it's currently 2/3 of your endpoint IC business. So retailer has also kind of been a legacy market for RAIN RFID in some ways. It's been many years since retailers first adopted RAIN in stores, but the market still remains in kind of the early stage of adoption. I think you said 15-ish percent today. So what are the key drivers for adoption? And what are your key areas of focus for driving incremental adoption and even a faster pace from here in retail?

Sure. Thanks, Quinn. So today, it's omnichannel fulfillment significantly. It's a retailer's ability to ship from store, ship from fulfillment center as we already highlighted. Next, it's the transition of -- to stores of the future as stores reopen. And there, again, that's that loss prevention at self-checkout. In order truly to enable self-checkout, you need loss prevention, getting customers into a store, letting them quickly find the items they need, that they want because the store knows where the items are in the store. So see us know where the items are because they've done an inventory for the items in the store, letting a consumer do self-checkout and move through the store quickly and get out of the store quickly and yet protect against loss. And seamless on self-checkout. You think about when you go into grocery stores today, it's painful, at least it's painful for me scanning every single item. But we're not talking about that here. We're talking about, you take your items that you want to buy, you drop them on the counter, instantly on the screen, pops up, what you're buying. You hit pay, you pay with your credit card, you walk out. And I'll tell you right now, I've already done this exact thing several times myself. In Japan, in GU and UNIQLO stores, there are self-checkout terminals. And I've done it, Go into a store, pick up an item, drop it on the table, instantly reads. You don't have to scan it or do anything. It's just -- because the readability of RAIN RFID is not line of sight. You just pay, you tap your Suica card and you walk out of the store. Same thing in France, in Decathlon, sporting goods stores, self-checkout, and it works seamlessly. So we're looking at that loss prevention capability and everything that's self-checkout, and that's a big win for the future. Then further out, we are significantly looking at brand protection. You've got a chip that goes into or onto an item. You can put a cryptographic capability on that chip and a secret key, and thereby enable cryptographic authentication of the chip and to the extent the chip's embedded in the item, cryptographic authentication of the item to put a dent in counterfeiting. So that's how we see the future on the retail side. Obviously, we go after other markets, supply chain and logistics, aviation, automotive, and pharmaceuticals, health care and many others. But in retail, which it has been the leading market segment for RAIN RFID, that's how we see in the future.

Got it. That's super interesting. I guess, to dive into one of the other end markets that you're mainly exposed to supply chain and logistics. You've got 2 large customers that you've spoken to on that side of the business. And they kind of represent 2 quite different iterations of how your technology can be used in the market. One is pallet level tagging, one is parcel level tagging. So I guess, walk us through the opportunity set at those customers, where they stand today? And what are the, I guess, main upside drivers that you see at those accounts over the near to medium-term?

Sure. So we've used supply chain and logistics as a very major opportunity for RAIN RFID. Rough numbers, as you think of all pallets, cases, boxes, parcels, letters that are shipped, the total number of connectable items is roughly an order of magnitude larger than it is for just retail apparel. So a huge opportunity for endpoint ICs and our 2 initial wins, one with a very large North American supply chain and logistics customer that's looking to track pallets and large items that move through distribution centers and another one to -- looking to use our readers to track individual parcels on conveyor belts. And those 2 opportunities, we are optimistic will pull the supply chain and logistics industry across the veritable chasm, basically get the industry to move forward and that we'll see more wins in that space. Even today, as you look at the supply chain and logistics opportunity, there are other wins that we've talked about out there, for example, Universal Postal Union, rolling out our readers to track postal items starting -- they're going country by country, starting in Brazil. And other postal wins and opportunities. So there's a lot of traction in tracking items moving through the supply chain to provide visibility to those items. And with supply chain and logistics volumes way up, we see that opportunity really right now. There's just -- the opportunity spans literally every item that's shipped. Think about dock doors for items that are going into automotive manufacturing centers, manufacturing facilities to track the items that are arriving there, like I said, just in time to build a car. So there's not just the opportunities we've already mentioned. The 2 large wins and the Universal Postal Union, but many others around shipping items moving through the supply chain.

Got it. That's super interesting. I guess another one of your end markets that you've spoken to, which might not be a major driver today, but it's certainly kind of a long-term focus in terms of driving that trillion-dollar unit opportunity is food and grocery. So I guess, pivoting a little bit to that side of the market. And I think to loop in a question that we got from a client is when you've spoken about the end market in the past, it appears to be really the largest driver of that long-term opportunity in terms of volumes for RAIN over the long term. What I guess I want to know is, what are your latest perspectives on that opportunity? And what do you see as the major phases if we think about incremental gains in that market for adoption over the medium to long-term?

Okay. Yes. Thank you. So think about food. Tracking food items, literally from farm to table. It's the biggest opportunity there is. The number of food items that are moved and sold is many, many trillions per year. So it's the biggest opportunity out there, which means it's going to take time to penetrate that one. So we are still very early days on the food opportunity. We're excited about it. The announcement a couple of years ago by METI in Japan, just about the opportunity in convenience stores in Japan, 100 billion items per year. It gives you kind of an idea of the scale of the opportunity. That said, food needs a very low-cost point for the IC on the item. You really need to embed the IC into the packaging in order to really be effective in order to drive the cost down. And there needs to be the infrastructure to track all those food items. There are many companies, including us, focused on building it and we're working on it hard. And recent FDA efforts on food traceability, the need for food traceability, for safety recall purposes, visibility into the -- into whether an item's organic or not. All those reasons for traceability are there. And so we see it coming. But I just -- I really want to say that the price targets and the need to integrate the tags means the opportunity will expand for many years. The early traction today on certain food items, meat products, in some cases, wines. I know, for example, in the Nordics, some companies are using RAIN RFID in our products to discriminate farmed salmon from wild salmon after they're caught, tracking out the boxes, tracking food traceability for certain items that are susceptible to E. coli. That's happening today. We're going to see, I believe, traceability start at the carton and case level and then move more and more to the individual item. So I guess, I'll just close that one by saying the opportunity is out there. We're excited about it. It's gigantic and at least for us right now, we are initially focused on driving that supply chain and logistics opportunity in addition to retail because we believe supply chain and logistics will be the first insertion point, a real big insertion point for that food traceability opportunity.

Got it. That's all super interesting. I could ask you about all those end markets for a lot more time. But I guess, to pivot now into your systems business, the segment specifically, I wanted to ask on the go-to-market strategy and what it looks like today. You've spoken to at the top of the session, you're seeing traction being able to ride your full portfolio of solutions to customers. You're looking for sort of a one-stop shop when it comes to RAIN. I guess, what has traction looks like on that front? What are some of the customer engagements that you're benefiting from, given that strategy? And then what are some of the advantages when it comes to actually deploying and implementing RAIN when you're able to offer that full suite of solutions?

So we are significantly focused, as I said just a little while ago, on that fixed reading opportunity. Retail was the first early adopter in our industry because it was fairly easy to take a handheld barcode scanner. Add RAIN RFID reading capability to it, have an employee go out into a store and quickly even in a large store in a matter of hours, inventory the entire store. So that was the start for RAIN RFID. Really the big start. But our focus today is on that fixed reading. To enable to have readers as part of the infrastructure. Initially, at store exits, self-checkout terminals and conveyor belts. Think of the future, where the readers are literally just embedded in the shelves and know what items are in the store. And have continuous visibility to those items where I think embedded into assembly lines. That's the future. Our focus is on fixed reading. And our real focus there is on us helping top-tier partners enable whole products to sell to enterprise end customers. We are -- we as a company, are a small company. We can't deliver into all these large opportunities. We're just too small. And even if we were gigantic, we still couldn't do it. The opportunity is too large, sort of like saying, well, 1 company deliver the entire Internet. It doesn't work that way. So we need to and are engaging significantly with top-tier partners to drive those whole products that enterprise end customers can buy and standing up enterprise solution like the ones we've mentioned in supply chain logistics and retail loss prevention at self-checkout. To that end, we believe our platform is our differentiator. In fact we're the only company in the space with a platform, and we're tying the pieces together so that those pieces can enable a whole product. And turning back for a second to the Impinj M700, as we migrated down Moore's law, which many people said it wasn't possible. "These chips are already too small, you can't migrate down Moore's law and make it even smaller." But we did it. And in so doing, we can add logical functionalities to those chips and run those logical functionalities through our platform to enable advanced capabilities that end customers need. And so I want to give a very specific example there. We talk about loss prevention in self-checkout now. But what we did first was maybe 1.5 years ago, we announced something called Protected Mode in our M700. And Protected Mode allows a retailer to turn a tag invisible at point-of-sale with a pin. You can bring the tag back up, but it's got an 8-character pin. Point of sale, you turn the tag invisible. What does that do? It enables consumer privacy, the tag's invisible, nobody can read it after they buy the item. And for loss prevention, the loss prevention gate doesn't see the item leaving the store. Adding that logical functionality to our M700 allowed us to go to end customers and say, "Hey, now we can do loss prevention at self-checkout because we've got this capability in our endpoint ICs." And next up, you can think about, okay, well pack these. Chris just mentioned, doing a cryptographic anticounterfeiting. We can roll that capability up to our platform. And we can put it in the endpoint IC because we migrated down Moore's law. So it's really that -- those -- the benefits that we put in the endpoint ICs that can flow through our platform, and our platform is our differentiator that enabled us full suite of solutions, and we're going to market through top-tier partners. That's really the essence of our strategy.

Got it. So I guess, on the competitive front in systems as well, and I wanted to follow-up on some of the things you mentioned on M700, too. But I guess, first, on systems, it's pretty well understood who you're competing with. On the endpoint IC side of the business, but in systems, it's a little bit more fragmented. And I guess, to tie another question from the audience. Two questions to that end, #1, what is the nature of the competitive environment today? Where are you kind of facing the most challenges? And #2, how are some of your new products like the R700 positioned to address those? And how does your offering compare to the competition more broadly?