Good afternoon, and welcome to the Impinj Fourth Quarter and Year 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, we will conduct a 1b-and-answer session. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Maria Riley, Investor Relations. Please go ahead.

Thank you, Operator, and thank you all for joining us today, to discuss Impinj's fourth quarter and year 2016 results. On today's call, Chris Diorio, Impinj's Cofounder and Chief Executive Officer will provide a brief overview of our performance in market. Evan Fein, Impinj's Chief Financial Officer, will follow with a detailed review of our fourth quarter and year 2016 financial results and 2017 outlook. We will then open the call for questions. Impinj's President and COO, Eric Brodersen, is also on the call and we'll join Chris and Evan in the Q&A session. Please note that management's prepared remarks along with quarterly financial data for the last eight quarters are available on the company's Web site. Also we will consider questions received via email prior to the call and will adjust some of these questions in the Q&A session on this call. Before we start, note that we will male certain statements during this call that are not historical facts, including those regarding our plans, objectives and expected performance. To the extent we make such statements, they are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements we make are reasonable, our actual results could differ materially because any statements based on current expectation are subject to risks and uncertainties. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements whether as a result of new information, future events or otherwise except as required by applicable law. Also during today's call, all statements of operations results with exception of revenue or where we explicitly state otherwise our non-GAAP financial measures. Balance sheet metrics and cash flow metrics are on a GAAP basis. Before moving on to the financial results, I'd like to note Evan and Eric will attend the Morgan Stanley Technology, Media & Telecom Conference on March 1, and Pacific Crest Emerging Technology Summit on February 28 in San Francisco. We hope to see you there. I will now turn the call over to Chris Diorio, Impinj's Cofounder and Chief Executive Officer. Chris?

Thank you, Maria, and thank you all for joining the call. I'm delighted to be here with you today. We delivered another record in the fourth quarter of 2016, exceeded our revenue guidance and closed a successful year that included an IPO and a follow-on offering. Fourth quarter revenue grew 49% year-over-year to reach $33.7 million, our best quarter ever, driven primarily by demand for our endpoint ICs. Revenue for the year was $112.3 million, representing 43% growth over 2015. As we have noted in prior calls, we view endpoint IC volumes as an indicator of RAIN market adoption, and are excited by the demand we are seeing. As 2016 progressed, our estimates for 2016 endpoint IC volumes increased significantly, especially in the back-half of the year. On our November call, we raised our estimate to between 5.6 billion and 5.8 billion endpoint ICs. We closed the year above that prior estimate, shipping 6 billion endpoint ICs or approximately 70% year-over-year growth. As I will discuss in more detail in a few minutes, we expect strong volume growth again in 2017, but more in line with the predictions of industry analysts than the heightened growth we saw in 2016. On this call I would like to briefly review Impinj's vision and mission, and discuss where and how we believe the value proposition and benefits of RAIN and the Impinj platform are driving market adoption, and then close with our strategy to capitalize on that market adoption. Impinj's vision is digital life for everyday items. Our mission is to wirelessly connect those items to applications. We are literally extending the reach of the Internet by a factor of a hundred everyday items, and delivering to the digital world each item's unique identity, location and authenticity, which we call Item Intelligence. Our…

Thanks, Chris. Before I review our fourth quarter and year 2016 financial results, I want to remind you that with the exception of revenue or unless explicitly stated otherwise, today's statement of operation's information is on a non-GAAP basis. All balance sheet and cash flow metrics are on a GAAP basis. A reconciliation between our non-GAAP and GAAP measures as well as how we define our non-GAAP measures is included in our earnings release available on our Web site. As Chris mentioned, the fourth quarter brought another record and a strong close to a landmark year that included both robust growth and margin improvement. Revenue in the fourth quarter grew to $33.7 million, ahead of our guidance, and representing 49% growth over the fourth quarter of 2015. That growth was driven primarily by increasing demand for our endpoint ICs. For the full year, we grew revenue 43% to reach $112.3 million. Our endpoint IC volume for the year grew to 6 billion, roughly a 70% increase over the prior year's 3.5 billion, which brings our 2010 to 2016 endpoint IC volume CAGR to 36%. Our gross margin for the fourth quarter increased to 55.6% compared with 53.6% in the prior quarter and 54.4% in the fourth quarter of 2015. The sequential 200 basis point increase was primarily the result of new product adoption such as Monza R6, and increased software revenue in the quarter. As a reminder, our gross margin can fluctuate from quarter-over-quarter and a seasonally lower in the first half of the year has new annual pricing for endpoint ICs becomes effective. With our plan to invest in the market opportunity, total operating expense in the quarter increased $1.9 million to reach $16.3 million or 48.5% of revenue compared with $14.4 million or 46.4% of revenue in the…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. During this question-and-answer session management will address questions received via email prior to this call as well as questions received live on this call. [Operator Instructions] Our first question comes from Mitch Steves of RBC Capital Markets. Please go ahead.

Hi guys, great quarter again. I just had a few questions actually, but I'll start first with a kind of more topical one. So, is Amazon a customer for you guys in any capacity regardless of where it sits in Amazon's ecosystem?

Hi, Mitch, thanks for the question. We don't comment [indiscernible] on business relationships unless we publicly disclose them. And so all we can really say at this time is to note that Amazon recently joined the RAIN RFID alliance.

Okay, got it. And then secondly, I'm kind of putting together your comments here. So you were saying that connectivity is an increased percentage of revenue but you're guiding to kind of 32% plus in the endpoint. So does that imply that gross margins are going to continue to increase in '17 as well, and how do we kind of model that through the year?

I'll let Evan take that question.

Hi, Mitch, so we do anticipate a gross margin increase in our long-term model. As you know, we anticipate that to be 57% to 60% in the 2019 to 2020 timeframe. We think gross margins will be affected by the price negotiations with our endpoint IC customers in the first half of the 2017, and that will mitigate in the second half of 2017.

Got it. And then one last one if I could sneak it in, just on the software side you mentioned that was actually a driver for gross margin in December quarter. Can you update it, so maybe how many customers you have or how you think that's going to trend over the next kind of four quarters here.

Eric, would you like to take that one?

Sure, I'd say that software and the software selling motion is key to our platform sales process. So I would say that when you think about Q4 we added new pipeline, new customers, new POCs, and really did build momentum on software, so we're making good progress. I'd also just highlight, when you look at the strength of those POCs in our software engagements we're talking about really strong quality, Fortune 500 tier customers. And we feel really positive about those engagements today.

Got it, thank you.

Thanks, Mitch.

Thank you, Mitch. Operator, now I'll take a question we received via email. That question is how does Impinj intend to maintain its cost and price leadership against much larger competitors?

So Evan, I'll take that one. So that we don't speak to any particular customer or competitor we continue to believe that we're well positioned in the market. We are the only company with an integrated platform and preference among the platform layers. We've had significant economies of scale, for example, as represented by our endpoint IC volumes. Our sole focus is RAIN RFID, it's all we do, unlike many of our competitors in this space who have other businesses, and to them RAIN is only a part of their business. Our solutions selling motion is contributing significantly to all layers of our platform and driving demand for our products and our platform as a whole. We have market share leadership at every platform layer, and compete effectively at every platform layer. I'll note that I said on prior calls that the RAIN standard has a lot of optional features and allows for significantly differentiated products. For example, to meet the needs of aerospace, which are very different from the needs of automotive, which are different again from the needs of retail, and our ability to introduce differentiated products and support them by our platform is kind of unique in the industry because we can support those differentiated features all the way up and down our platform when we introduce the products. And last, we have a very -- I'm sorry, a very large intellectual property portfolio which we continue to grow and scale. So we've competed effectively against large competitors in the past and continue to drive our business, and intend to be able to compete effectively going forward. Evan?

Operator, we're ready for the next call.

Our next question comes from Brad Erickson of Pacific Crest Securities. Please go ahead.

Hi guys, thanks for taking my questions. I guess first, just back to the connectivity outlook, the guidance implies a pretty good inflection there, as Mitch pointed out earlier. Curious what's driving that I guess, and in particular what verticals are the biggest contributors there, any new deals you can point to just in further color?

So Brad, thanks for the question. I think when you look at the connectivity layer I'd echo back to some of the points that I made when Mitch was asking about software. If you think about the traction that our team has driven across our pipeline, our new customers with POCs, those are fundamentally platform and solution-based selling motion, so those are contributory to the connectivity and software momentum. I'd restate, we feel very good about the quality and the strength of customer base that we're selling into. And I'd also highlight that from a timing standpoint and a projection standpoint we feel very confident in our strategy and the deal flow. We're learning, and seeing. In some ways we're somewhat proud of the fact that these are, in many cases, for our end users, our end customers' transformational deployments. We're solving net new use cases, driving new application integration, and in some cases these require a process change or adaptation inside that end customer to really extract the full value of what we can provide. So the timing and the rollout of these deployments are variable. Some, as we've said before, more quickly, others take more time. But in aggregate, again, we're confident and remain very comfortable and pleased with the deal flow and our projections for connectivity and software and that platform motion in 2017.

Can you -- great, that's great. Can you address the part of the question about the verticals that may be contributing disproportionately to that implied inflection?

Sorry, Brad, I left that part out. So from a selling motion standpoint, we continue to focus in three key areas that we continue to make progress in the retail space. Chris highlighted a couple of the key healthcare solutions that we have productized, and we see solid progress in those relationships in the healthcare space, and also logistics, another emergent and important area that I see our team making really strong progress against.

Great, that's super-helpful. And then Evan, you've said repeatedly that you're going to reinvest most of the upside if and as it comes through which is going to hold the margins down here again in '17. And still we now had, I guess, three quarters as the public company where you've been able to drop probably more than all of us anticipated to the bottom line. What's allowing for that? And what if any -- what's driving any deviation I guess from that very consistent and previously laid out investment strategy you've talked about?

Good question, Brad. So first I do want to say we think our strategy is the right one. There's a huge opportunity, and investing in the business allows us to enhance our leadership position. With regards to the overachievement, most of our investments are in the form of people. And as you know, Seattle is a tight labor market, and we're competing for the world's best talent, and that means much bigger companies than us with larger resources in the Seattle area. So when there are occasions that we do not hire as fast as we might like, that is the primary factor why incremental revenue and gross margin dollars could drop to the bottom line.

Great, thanks.

Operator, we're ready for the next question.

Prefect. Our next question comes from Mike Walkley of Canaccord Genuity. Please go ahead.

Great, thank you. Just a question with the strong uptake of endpoints connectivity solutions I would think would be somewhat of a lagging indicator and pickup. Can you just help us, in your guidance maybe you talked about this happening, can you give us any data point in terms of the mix of endpoints exiting 2016, and what you think it might be exiting 2017?

Mike, this is Evan, I just want to make sure I understand your question. When you say mix, do you mean as percent of revenues?

Yes, just a percent of revenues, maybe where they were exiting '16 and where you think they might be exiting '17. Just trying to get a feel for because you've shipped so many endpoints how this might lead to an uptake of connectivity solutions.

Sure, yes, for 2016 the endpoint ICs represented 77% of total revenues. The best way to think about the 2017 mix is the endpoint IC guidance we gave, which is 7.8 billion to 8.0 billion units.

And Mike, this is Chris again, just as I said, we expect the connectivity layer to drive a greater portion of our revenue in 2017. And to your point, those endpoint ICs going out into the market do drive demand for our connectivity and software layers, and also our solution selling efforts drive demand for this connectivity and software layers. So we believe the combination of the two will actually allow us to drive more connectivity in software on a percentage basis in 2017.

Okay, that's helpful. And 32% growth, it's still strong growth, but can you give us any color on kind of the two large deals this year that aren't going to happen again, just maybe size those for us or give us some color on what led to this really strong year, and why it's going to return to more normal growth next year on the endpoints?

So, you spoke to two large deals, but there aren't any particular two large deals. What we saw in 2016 was some end user advance, some significant uptake in some end users just unanticipated by us at the beginning of the year, and actually unanticipated in terms of the overall gross rate by the industry analysts. So some special uptick at some end users, as well as some new end users entering the market, and then on top of that some competitive events. And those events we are projecting to continue in 2017, so they contribute to our 2017 volumes. So for our 2017 projection we're looking at our overall historical CAGR, which is 36%. We're looking back at what it was from 2010 to 2015, which over the five-year CAGR was 30%. And projecting sort of growth that we see -- that baseline growth we see based on our CAGR and based on what industry analysts see. And those are all in line in the mid-30's percentage range. And we are not building our business on forecasting additional upside events, like we saw in 2016. If those events happen they will be upside to our forecast.

Okay, great, that's helpful. And then the last question for me. Evan, you talked about some short-term gross margin pressure. Can you give us any feel for pricing negotiations at the start of the year that are a bigger downtick than normal or is it just kind of the normal downtick that you see as you enter new negotiations in the year?

Sure, Mike, this is Evan. Good question. So as a reminder we really view ourselves as a platform company, and that has enabled us to enhance kind of our price negotiations with our endpoint IC customers. This year's negotiations are complete, and they are completely in line with our expectation.

Okay, great. Thank you very much.

Thanks Mike. Operator, we'll take another question we received via email. That question is, is there a barrier to accelerated market adoption, and if so what are those barriers?

So, I'll grab that one, this is Chris. I guess I'm sort of reluctant to use the word "Barrier." What I look at is opportunities in the market for us to accelerate the penetration of our platform and our products into the industry, and to enable overall adoption. And we see deployability as one of the key areas where we can address opportunities enable the market, making our platform easier to use, making the technology, the RAIN RFID technology easier to use, and in fact abstract away the technology so that customers are focused more on the data that we deliver to them rather than on the specific details of the technology, and improving deployability so that end customers, end users can ramp more quickly, more effectively, and use RAIN RFID, and use our platform to improve their overall business operations. And along those lines we introduced our ItemSense software last year really to simplify adoptions because the whole premise behind the ItemSense software is it's our operating system that abstracts away the hardware complexities and just serves up that item intelligence that item identity, location, and authenticity to business and consumer applications. And as we continue to grow, and develop, and ramp ItemSense, we believe ItemSense, although in its infancy today, we'll continue to improve it. And ItemSense will improve that deployability and scalability, and allow more rapid and frankly more effective end customer deployments.

Great. Operator, we'll take the next question from the phone.

Our next question comes from Jim Ricchiuti of Needham & Company. Please go ahead.

Hi, good afternoon. So your guidance for Q1 again looks toward a pretty healthy year-over-year growth. But, Evan, just wondering, if I look at the guidance versus your guidance for Q4, it's seasonally a little down, a little weaker. So I've asked the question before, and I guess I'll continue asking it. Are you beginning to see some seasonality to the business from Q4 to Q1 just in terms of how we should think about the business going forward?

Sure. Thanks Jim. So our guidance for Q1, for revenues, is $30 million to $31.5 million. At the midpoint, that represents 42% revenue growth. It is down from the fourth quarter, which is a trend we have seen for a few years now. So we think that seasonality is a part of our business and it will become a smaller part of our business in the future as more and more verticals, more end users, more different use cases kind of adopt our platform at different adoption rates. We think in the future seasonality becomes less important, but it is a part of the business today.

Got it. And, Chris, maybe this is one for you. And you may not be able to talk specifically to the customers or -- but I'm wondering, some of the special competitive wins, special end user wins that you identified as helping to drive some of the upside in 2016. Is it fair to say that that was mainly from the retail market?

It's fair to say, I guess, Jim, my best estimate of where we are now is at the same fraction that retailers of the overall industry, which continues to be the leading consumer of the endpoint ICs. That the share of those special case wins and everything is likewise. In terms of a share percentage also just follows that trend. So those significant upticks were -- a lot of them to reach out, but they weren't the only ones. I can, for example, cite Delta's announcement that they're going to be connecting all airline baggage, and there were some other wins in other sectors. But again, if you want to look at on a percentage basis, my gut says, without having all the numbers in front of me that it was roughly probably broke down -- breaks down by the relative share percentage that the different industries have towards our endpoint IC volumes.

Okay. And you had identified a number of market-specific joint solutions that you know, in healthcare, transportation, logistics, I'm wondering if you can give us a sense as to which of these applications, new solutions that you are bringing to market perhaps to gain traction earlier in 2017, and presumably some of these will also carry higher margins, is that fair to say?

I'm going to take part of that question and then I will hand off to Eric as well. So my crystal ball is always a little foggy on predicting the future, but to try and give the best answer I can to your question, we see significant opportunities in the healthcare space and we see healthcare adoption growing and some of the needs in the healthcare space are for specialized products that potentially have a higher price point and little more differentiated than in the retail sector. And the same is certainly true in other verticals. As you know, we are focusing as Eric said on healthcare and then also on logistics, and so we see some significant uptake in those verticals, but that's not to say those are the only ones. Eric, something to add?

Well, I think your core target is where do we think we will see more expansion if we were to make a projection based on our solution, sales motion in the year ahead, I would reinforce Chris' point, we see solution traction across multiple verticals as we have highlighted which are healthcare and logistics. But if you just point back to the absolute number solutions we productized in '16, I believe the indicator of traction for solution-based sales motion, and I can add color that based on the traction we see in the 2016 results, I feel like healthcare is a really good example of our ability to integrate that application partner level and drive a joint selling motion. So that's the place where I think we see good progress. Okay. Thanks a lot. Congratulations on the quarter by the way.

Thank you, Jim.

Our next question comes from Troy Jensen of Piper Jaffray. Please go ahead.

Hi. Congrats on a nice quarter and a nice year.

Thank you, Troy.

So, quick, for you Chris, I am curious to know can RAIN be implemented in smartphones, where the smartphone works as the reader.

So, the answer is yes. RAIN can be implemented in smartphones and in a whole range of consumer devices and we have been focused significantly on the concept of ubiquitous reading, where readers are part of the environment, part of consumer devices integrated into the environment and that ubiquitous reading is a real focus for us. There is -- and so, I guess I will just say that in the same way that other radios have been integrated into call a tablet as well as smartphones, as well as other consumer devices, there is nothing fundamental that prevents RAIN readers integrated into those devices as well and we expect over time to see those RAIN readers get integrated into consumer as well as business devices.

Can you help us on the timeline for when you think you will see it in the smartphone?

I am probably not able to really give you a specific timeline because market adoption depends on a lot of trends. I think what I would probably project is that we will see RAIN readers probably appearing in a number of consumer type or consumer meeting devices that also are available to businesses, for example, tablets. Those integrations are little bit easier and they may profess the smartphone integration by a little bit, but of course, as I noted in my statements, I walked around NRF carrying a Motorola Z phone that has a reader in it, and I run around the show floor and I was reading text. So, the opportunity is there for smartphones. Which one is going to happen first and how quickly it's going to happen, I'm not probably not going to speculate it at this time.

So, last question on that topic, do you have any trials underway right now, the smartphone…

Trials, other than the demonstrations that we've done, like for example, the Motorola Z and there are some -- another partner that built also, another phone that's using them in Asia in some limited volumes. I can't speak to any -- point you really directly to any trials that we could plan our publicly.

Okay. And public…

No. But when the time comes, we will let you know.

Perfect. And last question here, NXP getting acquired by Qualcomm, I am curious if have you seen any disruption, any opportunities?

So we see an opportunity associated with that Qualcomm acquisition, just because as with any acquisition it produces some uncertainty in the market, and so we are trying to capitalize on that uncertainty and drive our overall business and our overall share. But really our focus is on our business. It's on driving our business, our platform, our integration, and doing the things that we need to do to be successful in the market, and although we watch what's happening with that particular acquisition it's not something that we are really focused on day-to-day.

Okay. All right, good luck this year guys.

Thank you. Thanks, Troy. Operator, now we will take another question. It will be our final one that we received via email. That question is what factors will contribute to improved leverage in your model? So, Evan I've already taken two, I'm going to hand that one back to you.

Okay. Thanks, Chris. The most important factor in increasing leverage, as a reminder we've pointed EBITDA margins as a percent of sales in the low single-digit in 2017 which is precisely where 2016 and '15 were. In the long-term model, which is 2019 to '20, we point towards EBITDA margins of 12% to 16%, and we will see some bend in the model in 2018. The primary driver of that bend in the model is the increase in the gross margin percentage. As you know, in 2016, our full year gross margin percentage was 54%. That represents 320 basis points increase over 2013. So, we believe we will continue that march upward in gross margins due to two factors. One is the adoption of newer products, which tend to have a better gross margin profile than their predecessors. Monza R6 and xSpan is an example of that. And the second is the impact that software will have on the income statement. As you know, it's very small today and it will grow in the future we think to approximately 5% in the long-term model. The second factor driving operating leverage is now our investments in operating expenses are growing at the rate of revenue growth and in that 2018 timeframe, we think those grow just slower than revenue growth, and so that will add a few points to operating leverage. Operator, we are ready for the next phone question.

Our next question comes from Brad Erickson, and this is our last question, of Pacific Crest Securities. Please go ahead.

Thanks. Hi, guys. I just had one quick follow-up on Tag IC pricing. Historically, or I guess for '16, I think as I recall you were looking for, call it, low single-digit ASP declines on Tag ICs, were you successful in achieving that, and then just how are we thinking about the year-over-year pricing trends for Tag ICs in '17 relative to the guidance?

I will let Evan take that one, and then Eric will jump in if he needs to.

Sure. Yes, good question, Brad. We have concluded those negotiations. They are in line with the expectations that we have, meaning, there is no material change to the trend that we've been seeing recently. As a reminder, there are two reasons that prices can be reduced. One is there are SKU-over-SKU declines year-over-year, and the second is the new products that introduced tend to be either price the same or sometimes lower than their predecessors even while having a greater gross margin percentage. So, anyway, this year's price negotiations were in line with prior years.

Okay. Thanks a lot.

Okay. Thanks, Brad.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Diorio for any closing remarks.

So, I would like to thank everybody for joining us on the call today, 2016 was a great year for Impinj and I look forward to a very strong and exciting 2017. So, thank you for being with us.

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