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

Great. Thanks, everyone, for joining. I'm David O'Connor from the semiconductor team at Piper. It's 25 minutes. So anyone who wants to jump in with a question, please just raise your hand.

With that, I'm delighted to welcome Cary Baker, CFO of Impinj to us this morning. Internet of Everything, RFID leader. Cary, what's the big picture here on RFID and on Impinj?

Yes. So our opportunity starts everywhere you see a barcode. And you might ask, why are you revolutionizing the barcode? Barcodes are free to add, but barcodes are expensive to read. You need to be -- have line of sight, you need to have proximity to the item and you're reading one at a time. With our ICs, you're reading up to 3 feet away without line of sight, thousands of items a second. The IC is literally smaller than a grain of sand. It's energy harvesting, which means it's battery-free and has effectively an unlimited lifetime.

Awesome. And with RFID, how would you size the market? How big is it? And how fast is it growing?

Yes. Rough and tough, we see the market opportunity at 10 trillion units to which we're less than 0.5% penetrated today. Now the 4 verticals that we focus on primarily are apparel, which is 80 billion units a year; general merchandise, 325 billion units a year; supply chain and logistics, 400 billion units a year; and food, which is multiples larger than all 3 of those other verticals combined. The industry has been growing since 2010 at a unit CAGR of around 20% to 25%. Impinj's CAGR over that time has been 26%.

Okay. Okay. Okay. And in terms of RFID adoption in those -- in apparel, apparel is a big part of the revenue base today. How would you describe that penetration of it?

Yes. Apparel is the most mature market for us today. By volume, we're probably 40% penetrated to that 80 billion units. In supply chain and logistics and general merchandise, we're low-single-digits penetrated, but we have the largest players in those respective categories moving forward first. In general merchandise, it's led by Walmart. In supply chain and logistics, it's led by UPS. And then food is no penetration to speak of today. We're delivering modest volumes into those opportunities with big players, but it's still early days in food.

Okay. Awesome. Awesome. And in terms of just the life cycle of RFID, that kind of adoption, maybe just talk us quickly through kind of the -- that life cycle of the customer, the kind of ROI decision they make. How long does the rollout take? If you can just talk around high level.

Yes. Every time line across customers is different, but they all share some commonalities. Typically, they start with a single use case. They get that deployed, they get a base ROI earned, and then they start asking where else can I deploy this RAIN RFID to extract even more ROI. So in apparel, it typically starts with handheld readers checking inventory at the store level. And then once those retailers reach 100% tagged, they unlock a whole bunch of new use cases. They can then go to loss prevention, to self-checkout, to front store, back store management, to smart fitting rooms. And as they move to those different use cases, they're extracting even more ROI.

Okay. Okay. And in terms of time frame, what have you seen kind of -- from when that customer makes that decision to kind of actually deploying, what is the type of time frame typically?

The sales cycles are typically long. They'll start out with a single store pilot just to prove out the use case. Then when they have the use case proved out, they go to what we call the controlled deployment. It's a small portion of their overall footprint where they're proving out the ROI at scale and they're working out any kinks that they see. And then once they prove out that ROI at scale, they work out the kinks, then they go to a broad rollout, which is typically measured in multiple years. Now while it is a long sales cycle, what we see is once an end customer makes a move forward, they never turn back.

Okay. Understood. Understood. And any anecdotes in terms of like the ROI customers got from the apparel, like inventory savings or growth? Just any anecdotes you can share?

Yes, for sure. So back in the early days, Macy's had an apparel deployment and a handful of other categories. Macy's was able to take out $1 billion from their inventory because they were able to see down to every item on the store floor. And they were also able to achieve nearly 10% same-store sales lift because they knew what was on the shelf and more importantly, what was not on the shelf. And that's a pattern we typically see. The base ROI always starts out with labor savings and then it quickly translates to sales uplift because of the visibility that the RAIN tags provide.

Okay. Okay. And across logistics, any anecdotes there of where the RFID ROI was driven on the logistics side?

In logistics, it's a reduction in manual scans -- it's a reduction in missed shipments. It will eventually move to a sales uplift as well. You can pull any of the last several earnings call transcripts from UPS who has deployed RFID throughout their infrastructure, and you can see the immense ROI that they're earning.

Okay. Okay. Turning to kind of on the growth side of things, growth markets, you talked about food, freshness. Which markets are you most excited? Which markets should investors be watching from the following Impinj growth story?

Yes. I'm excited about all 4 of the major categories that we're focused on, even apparel. Apparel is the most mature. It's 40% penetrated by volume. But by logo, it is north of 90% penetrated in North America. Most retailers have already made the decision to move forward with a RAIN deployment. Most retailers are not 100% deployed. So there's a lot of inertia in apparel, even though it's the smallest category. And then there is significant opportunity in general merchandise and supply chain and logistics and food, given it's such early days for those categories.

Okay. And in terms of freshness market, is that -- how big can that be freshness? We're early in that deployment. You guys recently just started talking about it.

Yes. In the freshness deployment, think of that as part of the supply chain and logistics. So think of freshness as the food chain or the cold chain within food. So we think of that inclusive of the 400 billion units. So that's a component of the overall food opportunity.

Okay. Okay. Okay. Understood. Maybe talking about -- we spoke a lot about the U.S. Where is the U.S. versus international rollout? Is international a big part of the growth story for Impinj? Or is it really driven by U.S. adoption of RFID?

Think of it as more of the Western world. Probably 80% of the ICs end up between U.S. and Western Europe with U.S. larger than Western Europe. The remaining 20%, less than 10% China, Japan, Brazil, other categories that are out there, but mostly in the Western world.

Okay. And outside U.S. and Europe, for instance, or other Western markets, any programs or pilots that investors should be keeping an eye on?

Those programs are across the board.

Any big ones?

Any big ones. Nothing that is in the public domain right now.

Okay. Okay. Okay. Understood. Understood. Maybe turning over to competition in the space. Can you talk a bit about the strong competitors? What are you seeing out there from competition at the moment?

So in the endpoint IC market, the 2 primary competitors are Impinj and NXP. Between the 2 of us, we have north of 90% market share. Impinj's market share last year was greater than 60%.

60% for the last few years is pretty stable.

No, it's been growing over the last few years. We gained significant share over the last couple of years.

Okay. Okay. And that's in apparel, do you think or logistics, or across the board?

It's across the board. Certainly in apparel, but also logistics, we have a strong share in the logistics opportunities out there right now.

Okay. Okay. Any Chinese competitors or you don't really play as you mentioned, the China market is a bit separate.

Yes. We do see activity coming out of China. Nothing that is quality at scale, nothing that is more than a China-for-China solution. I think it will be hard for Western companies to put a Chinese radio on everything that's important to them in the current political environment. But we don't stop there. That's not what we rely on to maintain our moat. Impinj's competitive advantage is we're the only player that operates on both ends of the radio link. We compete on the endpoint ICs, and we compete on the read points, the readers and the reader ICs and the gateways and whatnot. That creates an opportunity for us to put functionality in the IC that is engaged by functionality in the reader while still embracing the communication protocol that the entire industry prescribes to. So one example of that is our Gen2X. The base existing protocol for the industry is the Gen2 protocol. And basically, it means that every reader can read every IC irrespective of manufacturer. What Gen2X does is it embraces that standard and then extends it based on learnings that we've had over the years to make the IC and the reader more performant. So as an example, in a normal Gen2 reading environment, the tags constantly respond to the reader, basically saying, I'm here, I'm here, I'm here. That clutters the reading environment. It reduces read range, it reduces read speed. With Gen2X, we give the reader the capability to tell the tag to stop responding once it's been read. That declutters the reading environment and increases read range and increases read speed. That becomes -- that improvement in performance becomes more important when you move out of apparel and you start moving into logistics or into general merchandise. In logistics, the items going down a conveyor belt are moving very, very fast. You only have a split second to read them. And when you move into general merchandise, especially the very dense categories, shelf categories like cosmetics, like health and beauty, like OTC pharma, decluttering the read environment becomes very important to a successful deployment.

Okay. Interesting. So some secret sauce around the RF side of things. No doubt covered by patents, which maybe brings us to the NXP, the licensing deal. So maybe just talk about kind of where -- how investors should see the sustainability of that kind of licensing revenue.

At the outset, it was a 10-year license agreement or until NXP designs out our IP and stops selling IP or ICs that infringe on our IP. We've always said or we said all along that 2028, if they move fast enough, would be the year where the rubber meets the road on the longevity of that license payment.

Okay. Okay. Understood. And just in the different markets, it's the same products that you sell across different segments of the market. You talked there about different operational efficiencies of different segments. It's the same product that you can cross-sell across all segments?

For the most part, yes. The M800, our most performant IC, can work in any apparel, general merchandise, logistics, food opportunity. We've also built for our second large logistics customer, a custom IC that -- think of that as, again, operating on both ends of the radio link that is specifically designed for the features that, that end customer needs.

Okay. Okay. So that's good for business, custom ICs, more lock-in.