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

All right. Great. Well, thanks, everyone, for joining. Today, we have the CEO and CFO of Impinj, Chris Diorio and Cary Baker. So look forward to a good conversation here, and thanks again, everyone, for joining. Maybe what we could do is just start really high level. Impinj has been around for a bit. Maybe we could just give, for those in the audience who are less familiar with the story, a little bit of background on the company, how you started it and how we got to where we are today.

I'm happy to. Thank you. So yes, Impinj has been around for a while. We IPO-ed in 2016, but going back before that, we, as a company, started with the technology for low-power wireless radios. And then we had this vision, could we connect essentially every item in your everyday world? And that's the vision we've been pursuing ever since the first year or 2 founding of the company. So for those of you who don't know the story, start by thinking of us as delivering a wireless 2D barcode in that a 2D barcode carries unique identifying information about an item. And then expand from there and say, "What is that where 2D barcode was?" Readable at up to 1,000 items per second without line of sight at 30-foot range without a battery. It could be inserted into kind of the same size label and without any other visible battery, any elements than a 2D barcode, and a wireless radio that absorbs its operating energy from radio waves gets interrogated by a reader, a 1-watt reader at 30-foot range, and can provide back this unique identifier for the item. That is the essence of what we do. And then you can expand it even further and say, "Well, if you've got this wireless chip that goes on an item, what else can you do with it?" The answer is you can think about, well, maybe hiding or exposing the item to protect consumer privacy, maybe enabling the item -- the IC for an item's entire life for the circular economy for sustainability. Think about maybe putting a little cryptographic engine on it and a key to be able to authenticate an item as being genuine, all things you can't do with a barcode. And so that is truly what we do as a company. We deliver ability to identify, locate and authenticate everyday items. We deliver endpoint ICs that go on little miniature antennas about the size of the end of my pinky that can go into or onto everyday items. We deliver reader ICs that go in readers to actually interrogate and read those items at up to, like I said, 30-foot range. We deliver finished readers that are full finished product that actually do that reading for partners who don't want to take our reader IC and build a reader. And we deliver gateways, which are readers with electrically steered beam antennas to focus around and see where an item is and get information about it. And then finally, we deliver software algorithms and capabilities to enable self-checkout and loss prevention or identify items moving down conveyor belts or moving through dock doors. And so our vision is to connect everyday item in your everyday world. We've connected more than 60 billion items to date, and we're just getting started.

Got it. That's great. So 60 billion items, that's a big number, right? And you talk about this boundless opportunity to connect, boundless opportunity for IoT. So where are we on that curve? And we can talk about specific markets in a minute, but just kind of at a high level, where do you think we are on that adoption curve toward where you see this going in the future?

Very early days. We're still at the beginning. Still right at the beginning. We have significant penetration in retail, led by retail apparel, now expanding beyond retail apparel to retail items. Significant opportunities and penetration growth in supply chain and logistics, automotive, industrial and manufacturing, health care, growth in many verticals. But if you look at the total number of connectable items per year, just think about it, just think about not just all retail apparel items, all retail items. Think about all pharmaceuticals, all biospecimens, all blood draws, everything in hospitals. All automotive parts, all aviation parts, all airline luggage, all tires, all batteries, everything that goes in a car. Think about every item of commerce, everything that's shipped through a supply chain. Think about all food items. We can connect all food items. I mean fundamentally, there's no limitation. We can connect to lemon. Total number of connectable items per year is measured in the trillions if not 10 trillion per year. And so when we say we delivered more than 60 billion to date, think about 10 trillion items per year. We're just getting going. And we provide the ICs that go on the items. And for the most part, those ICs are consumable. When you fly, and there's one of our ICs in a bag tag that allows an airline to track your baggage, at the end of your flight, you throw the bag tag away. The next time you flag again, a new bag tag. So we actually deliver consumable [ silicone ] in the form of the endpoint ICs. So it's not just a 10 trillion item opportunity, it's trillions of items per year fundamentally. So -- but to get back to your question, we're right at the beginning of a truly exciting opportunity to extend the reach of the Internet by a factor of 1,000 to everything.

Got it. And retail, retail is a big focus, naturally. And then I think a lot of people think of apparel. Apparel is a natural thing that comes to mind, given traditionally, there's been barcode, so it's easy to think of that. But Walmart just had a pretty big announcement that they were going to go broader. How do you -- maybe just talk a little bit about some of the other applications just to provide some color around how big this can be.

So our industry got kicked off with retail apparel. That was the first use case because apparel items are -- actually, they expire, if you think about it, they're seasonal. Inventory visibility in typical retail stores has historically been poor, around 65% inventory visibility. By putting one of our ICs with the little antenna either in the price label or sewn into the item, you can take that inventory visibility with just somebody going around with a handheld reader once a week and drive that visibility up to more than 95%. And a little bit of work, you can get well above 95%, up into 98%, 99%. That allows companies to deliver omnichannel fulfillment, which was a big step and accelerated dramatically by COVID-19, reduce overstocks, understocks. You look at when Macy's announced years ago that they took on $1 billion out of inventory. So just the retail apparel opportunity was significant. But we've always known that the retail opportunities was much bigger. It extends to health and beauty, cosmetics, accessories, jewelry and things like that. You can think of all home furnishings, think of linens and bedding. You can think of furniture. You can think of nursery, plants, opportunity there. I mean heaven knows plants don't last that long. You can think of all the automotive parts, batteries, car tires, electronics, toys. The expansion opportunity even within just the retail space is gigantic.

Got it. And then so we're kind of early days of the adoption. What's the primary pushback? Is it cost? Is it the time it takes to deploy across an organization? What are some of the primary pushbacks?

So yes, thanks for the question. So we see very strong demand right now, like I said, across multiple verticals. And we've said on our 3 last earnings calls that our demand exceeds our endpoint IC supply by more than 50% in each of those quarters. I would -- I want -- the word pushback is a little bit hard for me because it's not really a pushback that we see. People recognize the opportunity and customers recognize the opportunity. So I would say the primary difficulty in adoption, in new verticals, in new opportunities is in the time and the effort to transform a company's operations. So think about it. We're building on barcodes. You had SKUs or you had a SKU that said red shirts of a certain type. Now you're actually going to transform your operations to have visibility to each individual item uniquely from time of manufacturing, shipped through the supply chain through your entire store to point of sale. That requires building out your ERP system, putting readers and -- across those particular choke points, building out your entire infrastructure. And so the transition that an organization needs to go through, an enterprise needs to go through, it's fairly significant as they transform their operations towards kind of old-school stuff that they did towards digitizing and virtualizing their operations. And so that transition takes every company time and it's always difficult in any new vertical for the first company to take the first step. Think Delta Airlines. They had to deploy more than 10,000 read points across 344 airports and facilities. They had to create a bag tag. They had to get FAA approval. It's always difficult to get going. Once the tipping point happens, then other companies jump in, and we're seeing that adoption now across multiple verticals. And then COVID-19 did a lot to accelerate our opportunity. Again, emphasis on digitalization, virtualization, supply chain visibility, omnichannel fulfillment.

Got it. Yes, it seems to be there's a lot of inertia once someone gets going on it, right? I think the UPS announcement is a good one, right? I mean they're talking about on every package, 20 million or so packages, right? Are you seeing that -- I mean, presumably, there are -- you're deep with other clients in the same verticals, right? I mean other logistics companies were mapping out a similar road map. Is that how it's -- how you're thinking...

There is a broad-based opportunity in supply chain and logistics. If you listen to the UPS announcement, they talked about eliminating 20 million manual scans per day across literally billions of packages being shipped. And so the supply chain and logistics opportunity is real. It's there. Actually, the retailers have been doing some of that supply chain stuff even up to now. But the advent of really -- the pressure in supply chain and logistics right now where all the supply chain and logistics companies are effectively running at above holiday season volumes throughout the whole year really accentuates the opportunity from using RAIN RFID, tagging all the items, tracking, getting better visibility, automating your shipments, improving the flexibility and efficiency of the labor force, it's all significantly positive. So we, as a company, have prioritized retail because retail was a very early adopter and supply chain and logistics as our 2 core focus areas because we see those 2 areas as leading adoption and being the leading opportunities for us.

Got it. And so you take -- Impinj takes a bit of a different approach, right? You have a full platform solution. Can you just talk about the vision there and how that positions you relative to some of the others competing against you?

Sure. Happy to. Thanks for the question. So like I said, Impinj does the endpoint ICs, the reader ICs, the readers, the gateways on the software. We're the only company with a stack that spans the entire platform. And our focus is on delivering whole products with top-tier partners that enterprises can deploy. We have competitors at different layers of our stack that deliver either just the endpoint ICs, for example, or maybe the readers. But we're focused on delivering those whole products with those top-tier partners. So our top-tier partners can step and repeat to multiple end customers in a vertical and where our end users, our enterprise end users, rely on us to deliver to them the value and -- the value proposition that they expect from a solution. And we believe that by delivering that whole solution, we will become -- we will be the preferred partner for that enterprise for a long period of time.

Got it. And so where -- R&D is kind of averaging 10 million to 12 million a quarter. Maybe this is a combo for Cary as well. So 10 million to 12 million a quarter of R&D. So where are you investing for the future? How are you building out the platform? And what do you see as kind of a steady-state R&D type?

Yes. Cary?

So we're investing across our product lines. In the last 18 to 24 months, we've launched products that put us in the lead or expanded our lead across all 3 main product categories. So we will continue investing in engineering to drive that to maintain and expand those leads. We will also be investing in accelerating our cadence of new product launches. We want to be much faster than we've been historically. And the way you'll see that play out in the market is opening up new verticals, opening up new customers, solving new use cases. And the way it will play in our financials outside of the top line, particularly as it relates to our endpoint IC business, is we've had the -- with the introduction of the M700 and the structural advantages that we've had there, we've been able to drive nice lift in our gross margin, probably 250 to 300 basis points of lift on a normalized basis. And admittedly, we haven't been normal for the last year because of a variety of reasons. But we've been able to achieve that with just our first 2 M700 chips. There is much more innovation to come on the M700 platform, both in smaller die sizes, SKUs that attack different verticals or different use cases that can drive a premium in the market. You'll see that innovation continue to drive the accretion in gross margin. So all of that derives from our engineering team and the investment -- continued investment we put there.

Got it. That's great. I want to come back to the gross margin. But maybe first, you mentioned opening up new verticals. Clearly, still a lot of opportunity in retail and logistics, but what are some of the more exciting, call it, near- to medium-term opportunities in terms of markets and applications?

I can't -- it's hard to say because there's so many opportunities out there right now. I'd say COVID-19 has pointed to health care as a significant opportunity. We knew that already, but actually kind of really driving health care adoption. I'd say that aviation, obviously, went through a significant downturn due to COVID-19. Delta had obviously rolled out the Track My Bags app. IATA, the International Air Transport Association, announced that all the member airlines would move forward with a Delta-like solution, but of course, then COVID-19 hit and everything got pushed back. With travel picking back up again, we're guardedly optimistic that some of those opportunities will continue -- will materialize again. We see significant opportunities in the automotive space. It's kind of across the board. So I know I'm not giving a direct answer like point to one or point to another, just the opportunities are so broad-based. I think I'd like to answer that question, if you don't mind, by talking about one of the things that happened last year, which is perhaps my most favorite thing from last year, which wasn't generally recognized. And that is AmerisourceBergen, which is one of the leading pharmaceutical providers and a leading generic pharmaceutical provider, announced in fourth quarter of last year, they were adopting a new numbering system promoted by [indiscernible]. And that based on that numbering system, they would be exposing to any of their users, without NDA, information about the pharmaceutical product from the number and the tag, exposing that information to a person. To my knowledge, that announcement is the first time an end user has come out and said, "We will directly engage people about their connected items." I believe that, that announcement will be a big deal going -- in the future when we look back and we'll say, "That was a big deal because this is a company that, at least I believe, has recognized the value of engaging individual people about their connected items." In this case, the drug code associated with it, the medicine interactions, everything else you can get about that medicine by getting the number and going to the AmerisourceBergen website. Now of course, right now, most people don't have readers available to them, so can't get the information directly. But it paints a picture of the future. Once you can get that reader, as a person, you can get information about that item, and I hope many more items in the future because my vision is that people, you and me, get the benefit of connected items, whether it's being able to instantly know information about every item in your refrigerator or be able to bring my clothes to the dry cleaners and they don't have to write in the hand with a Sharpie that is -- a number on it, the IC is just part of the item. Or a gazillion other things. I can know that parts are designed for my car because it got the IC and I can just check it. I mean connecting every item has a lot of immense value to people. So I'm super excited about that AmerisourceBergen announcement. So thank you, AmerisourceBergen.

Yes. That's great. Okay. Cary, maybe circling back to the gross margin. You clearly -- it seems to be a positive mix shift, right? There's a couple of different levers that have been pulled. You exited around 58% for the fourth quarter. What are you -- kind of what are some of the key drivers? Maybe just a little bit more color on that. And then where do you see steady state?

Yes. So there was 3 drivers of an outsized gross margin quarter for us, 2 of which were transitory, one, the other is sustainable. So on the transitory side, we sold fully reserved inventory that we had written off a couple of years ago that in a supply-constrained environment suddenly had a new life. And then we had a benefit from an outsized specialty and industrial SKU mix. SKUs, endpoint IC SKUs that drive a higher ASP and a higher margin in the market. And every once in a while, we'll have that type of mix. In total, between those 2 items, there was probably 500 to 600 basis points of transitory benefit in the quarter. The remaining benefit -- and I say the remaining benefit relative to our historical corporate gross margin average, which has been about 50%. The remaining benefit is attributed to the M700. The M700 comes with structural advantages. First, we moved from 200-millimeter to 300-millimeter wafers, which gives us a little bit of an advantage. And then the second is we took a pretty good step down Moore's law, which allowed us to shrink the size of the die, driving further benefit. We've leveraged that benefit in 2 ways. One is we've been aggressive on ASPs to drive adoption. But two is we had -- we plan to drive accretion to gross margin. Throughout 2021, the M700 mix increased steadily, particularly in the back half of the year. And in Q4, it became our volume runner. So that incremental 200 to 300 basis points that we saw in Q4, after you strip away the transitory item, was the benefit of the M700, and we see that as a sustainable benefit. As I look forward, Q1 will still have -- it will be a weaker but still an outsized benefit from specialty and industrial SKUs, and then in Q2 will normalize. And I see us in that 52.5% to 53% range based on the current mix of M700. And that current mix is really driven by supply at this point. As I look even further into the future, that's where the additional innovation on the M700 platform comes into play, and I see us driving accretion beyond that. But it's been an incredibly nuanced story, but that's kind of the way to think through gross margin in the near term and as they look forward.

Got it. And then, Chris, maybe for you. There's been a meaningful refresh in the management team and the Board. Maybe just provide a little bit of color on that, who you've added and some of the expertise that they can bring.

Yes. So we've recently added to our Board, Steve Sanghi and Meera Rao most recently. Before that, Umesh Padval. All of them come with significant semiconductor experience, significant background in -- significant operations experience and understanding how to kind of grow and scale semiconductor companies and kind of semiconductor operations. But not just that, beyond that in terms of really how to think about how to grow and scale a company that is delivering systems and ICs and growing the market. We have some of our prior Board members who are -- who gradually have been stepping down. Some of them were previously our venture capital investors, and they served with us for many, many years, Tom Alberg and Clint Bybee, who we thank significantly. And more recently, Peter van Oppen and Theresa Wise had announced that they've been on the Board for an extended period of time, and it was time for them to move off. We've been incredibly thankful for their support as well. So there have been some transitions there. But I see us kind of building and growing our Board going forward. I'm truly excited about the opportunity for the Board to really help leverage the company going forward. On the management side, we most recently added Hussein Mecklai and -- as EVP of Engineering, just promoted him to COO. So he's got operations under him now as well in addition to engineering. And just added on the HR side and the people side of the company. So we continue to grow and scale our company, adding really good people kind of really just across the board, and I am absolutely thrilled. I mean I can't tell you how thrilled with the incredible talent.

I can see how.

You can see it in my face, right? And I can tell you, I'm just going to -- a little personal thing. I just went on a trip, I went to Antarctica, no connectivity for essentially 2 weeks, and I didn't have a worry at all.

That's great. And I bet your bags were safe, too, right? It's had a tag.

Terrible things happened when I was gone, of course. We're -- I am incredibly sad and horrified by what's going on in Ukraine. We, as a company, are doing our little part. We've cut off shipments of our products to Ukraine, any direct business where all of our partners were acquiring, of course, that they comply with any and all export restrictions. We're encouraging them as well not to do any business with Russia or Belarus. And we, as a company, are doing a donation match with our employees, which for the size of our company, we're looking to donate $200,000, but that's among just a small number, a couple of hundred employees. So we're trying to do a significant donation to Ukraine, and we will continue doing our part as a company to help out where we can, help the Ukrainian people in their time of need.

That's great. So we got 5 minutes or so, maybe we open it up questions.

Yes, just be curious, the evangelization process. I mean it seems like this is a very good value proposition for your customers. But you have to have a bunch of salespeople calling on Delta Airlines, calling on Macy's to enable this. Or how are you sort of getting this out -- getting the word out to those customers about this stuff?

Yes. Thanks for the question. So we sell through partners. We do not sell direct or very, very rarely sell direct. Our goal as a company is to have partners that can deliver into retail and supply chain and logistics and automotive and industrial and manufacturing and health care because we as a company -- no company could deliver into the scale of our opportunity into all those verticals. So we work with our partner channel. We have hundreds of partners across multiple different verticals. We train them. We work with them. They teach us about the needs in the market. We deliver products. We work closely with them. And they deliver the story and evangelize the opportunity to the end customers. So that is the primary way that we help drive in the market. But I'll also add that the primary way that true evangelization happens is from the end customers themselves. And then customer -- maybe a part of a company will adopt the solution, and it works well and they evangelize it to the rest of the company or they come out and make a statement that they've reduced inventory, taking $1 billion out of Macy's, taking $1 billion out of inventory, or improves the supply chain and logistic efficiencies or getting 99.9% shipment visibility. It's those statements from the end -- the enterprise end customers directly that are the strongest testament to what we're able to deliver. Delta Airlines coming out and saying they reduced the number of lost bags by -- they cut it in half. And [indiscernible] Track my Bags. I mean people are happy, right? My bag made it on the airplane despite the fact that I don't check bag. Many other people do, and they're happy, and you can see it. And so I actually -- I get a smile on my face. We're delivering real value to people. Thanks.

What competing technologies do you sell against? What -- who out there is saying don't use RFID, use this or that other solution?

So there is really no other competing technology to RAIN RFID in terms of delivering readability without line of sight, 1,000 items per second, 10-meter range. There's just -- there's nothing out there. So companies either stick with their existing solutions using systems, vision systems to read barcodes. In some cases, they might be able to use some battery technology for very high-valued items or maybe WiFi or something. But there really isn't any other technology of which I am aware that delivers the capabilities we deliver to market. So really, if you want to say the question [indiscernible] impediment to adoption. It's really the fact that what we're doing is transforming how enterprises run their businesses, how transforming -- how they track with the manufacturer, transport and sell. And those transformations fundamentally take time. But the choice is either stick with what you got or go forward. And Cary, you had 1 or 2 statistics on the retail market. Maybe you can say those?

Yes. So in the U.S. retail complex, Accenture put out a report last year, 93% of U.S. retailers are at or past the proof-of-concept pilot stage or into adoption. And if you take a step back and globally after COVID-19, the value of RAIN was really driven home by COVID. If you didn't have it and you were a retailer, a brick-and-mortar retailer, you weren't able to transition to omnichannel fulfillment because you didn't have the inventory visibility sufficient to operate an omnichannel solution. So that same Accenture report cites that globally, the number of retailers that have adopted, so past proof-of-concept and pilots that have adopted RAIN since COVID, has more than doubled. So just the growth is accelerating at this point. COVID was an accelerating factor for it.

[indiscernible], do you have a question?

Yes. So definitely can appreciate the enthusiasm for all the use cases, but it kind of makes me think about from your customers' perspective, what are the transition costs as they think about upgrading to this technology. And further down the line, assuming that there are cost recuperations, can you give us some visibility to the time line for that?

So I think, as Cary mentioned, COVID-19 and the transitions we're seeing now are proving the ROI. So the transition costs are the cost that the company has got to incur to transform their operations. In general, for a completely new vertical or a new company, the time to do -- actually, to do that and do the development, for us to work with them and create the use case, like think for -- we're going to do loss prevention and self-checkout. We actually have to make that loss prevention solution work. So the time frame to do those things is typically measured 1, 2, 3 years. The step and repeat after that is typically much faster. So we're inventing as we go, to Jacob's question, about continuing to invest in engineering. We've got immense opportunities in front of us. And we are investing not just in the direct engineering to make new products, but okay, we're going to sell this problem, we're going to solve the conveyor problem. We're going to make it so that even if you have multiple conveyors side by side, we'll tell you what item is moving down, what conveyor and where it's being routed to. Loss prevention and self-checkout, it wouldn't sound that hard. So if you've got 10,000 tags around, you've got to find the one that's leaving the store being stolen [indiscernible] a couple of hundred milliseconds. So these are problems to take real engineering effort. To the extent we can deliver the solutions, we work with the end customer to deliver. Once we've proven it out, then we can step and repeat across the market. So first time frame typically takes a while. First one takes a while. But once we've proven it, we go and we move -- we let our partners go, drive, rinse and repeat out into the market and we move on to the next one to sell the next use case. So expect us to continue doing that and in so doing, selling our entire platform. Thanks.

So the question, I don't have to protect that well, but is there any limitations on being able to use it on perishable goods? I think of the grocery market as a very similar issues to the retail apparel market in terms of knowing their visibility of inventory. Is there any technological issues or reasons why you won't be able to use that on perishable goods?

There's no fundamental limitation. We do have a difficulty reading directly on metal cans. So there's work that's gone on. To provide a little bit of a space from the antenna to a metal can or in some sense, even in some cases, to use metal can as sexually an antenna accentuator. There's work to be done there. But I would say the primary challenge in rolling out food broadly is that margins tend to be fairly thin. So the price -- the cost target we need to get to for grocers broadly to adopt is fairly aggressive. If you use METI -- the Ministry of Economy Trade and Industry in Japan came out with a study a couple of years ago and actually pushed forward an initiative, they're still pushing it, to connect -- or tag and connect all the items in Japanese convenience stores, average selling price of about JPY 100, a little over $1. And their analysis showed that if we could get to an incremental cost of $0.01 a little over JPY 1, for adding the digital identifier to the item, it made sense to connect every item in every Japanese convenience store across Japan, 100 billion items per year. They then doubled down on that strategy and said, if we could do the same thing in pharmaceuticals or companies that provide over-the-counter drugs and things like that, there's another 30 billion items per year, essentially at the same price point. So the opportunity is there. I do believe that grocery will probably -- or actually, we're seeing it rolling out now initially in the supply chain, pallets and cases of perishable goods. Think about it as meat products and lettuces and things like that, vegetable products starting at the pallet and case. And then we'll see what transpires after that. There have been pilots on individual meat packages because there's a value proposition there, obviously, for expiration dates, spoilage and freshness and safety and also the sale. So we are seeing food moving today. It's such a gigantic opportunity. That one is going to take more time than the others, but it is the end goal, the ultimate end goal because the volumes are so large. Thanks.

Great. Well, thanks, everyone, for the time. That brings us to the end of the session today. But thanks, everyone. Have a great conference.

Okay. Thank you.

Thank you.