Good evening, and welcome to the Impinj, Inc., Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ellen Davis, please go ahead.

Thank you, Operator. Good afternoon and thank you all for joining us to discuss Impinj’s third quarter 2019 results. On today’s call, Chris Diorio, Impinj’s Co-Founder and CEO, will provide a brief overview of our market opportunity and performance. Eric Brodersen, Impinj’s President, COO and Principal Financial Officer, will follow with a detailed review of our third-quarter 2019 financial results and fourth-quarter 2019 outlook. We will then open the call for questions. Impinj’s CFO Consultant, Linda Breard, and Impinj’s Executive Vice President of Sales and Marketing, Jeff Dossett, are also on the call and will join Chris and Eric in the Q&A session. Management’s prepared remarks, along with trended financial data, are available on the investor relations section of the company’s website. Before we start, please note that we will make 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 from 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 expectations are subject to risks and uncertainties. Please see the risk-factors sections in the annual and quarterly reports we file with the SEC for additional information about these risks. 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. During today’s call, all financial numbers we discuss, except for revenue, or where we explicitly state otherwise, are non-GAAP financial measures. Balance-sheet and cash-flow metrics are on a GAAP basis. Before turning to our results and outlook, I’d like to note that the company will attend the RBC 2019 TIMT Conference on November 19th in New York and the 22nd Annual Needham Growth Conference on January 15th in New York. We hope to see many of you there. I will now turn the call to Chris Diorio, Impinj’s Co-Founder and Chief Executive Officer. Chris?

Thank you, Ellen. Thank you all for joining the call. Our third-quarter results were strong, with quarterly revenue exceeding $40 million for the first time in Impinj’s history. Strength in both endpoint ICs and systems contributed to our record revenue. Year-over-year endpoint IC revenue growth was solid, with retail adoption the primary driver of that revenue growth despite macro and trade uncertainties. Like last quarter, the performance apparel and footwear segment showed strength, with retailers and brands publicly citing the benefits of RAIN tagging including inventory optimization, improved labor productivity and sales uplifts. We see RAIN as the foundation of retailers’ business-transformation and omnichannel-selling strategies and their continued adoption highlights our enthusiasm for retail as an endpoint IC growth vector. To address that retail opportunity, we will begin ramping production of the first Impinj M700-based endpoint ICs starting first quarter next year. That ramp will deliver what we believe to be our most significant endpoint IC innovations since Monza 1. Those innovations include increased sensitivity and stronger replies that together can enable smaller inlays. They include near-constant sensitivity with inventory speed that will allow retailers to reduce inventory time and increase labor productivity. And they include digital features that will enable RAIN-based loss prevention with frictionless self checkout and embedded tagging with seamless product returns. But it is the M700’s migration down Moore’s law, which some said was impossible for a RAIN endpoint IC that is the key innovation. That migration begins with the M700 family, which should begin favorably impacting our business next year, and will continue with future innovations and advancements. That migration also portends a future that I believe will eventually make possible initiatives like Japan’s goal to connect 100 billion convenience-store items per year. Year-over-year systems revenue growth was also solid, with continued adoption in supply…

Thank you, Chris. Third quarter revenue was $40.8 million, a new company record. Revenue grew 18.5% year-over-year, and 6.7% quarter-over-quarter, compared with $34.4 million in third quarter 2018 and $38.2 million in second quarter 2019, respectively. Third quarter endpoint IC revenue was $26.4 million, growing 11.2% both year-over-year and quarter-over-quarter, compared with $23.7 million in both third quarter 2018 and second quarter 2019. Third quarter systems revenue was $14.4 million, growing 34.6% year-over-year compared with $10.7 million in third quarter 2018, led again by the large North American gateway project, as well as by strong reader sales, partially offset by a decline in reader IC revenue. On a quarter-over-quarter basis, systems revenue declined 0.6% compared with $14.5 million in second quarter 2019, primarily due to modest declines in reader and reader IC revenue, partially offset by growth in gateway revenue. Third quarter gross margin was 50.2%, compared with 50.0% both a year ago and last quarter. The 20 basis-point year-over-year improvement was driven primarily by leverage on the increased revenue partially offset by product mix. Total third quarter operating expense was $18.3 million, compared with $18.1 million in third quarter 2018, and $18.3 million in second quarter 2019. Research and development expense was $8.1 million. Sales and marketing expense was $6.1 million. General and administrative expense was $4.1 million. Adjusted EBITDA for the third quarter was $2.1 million compared with a loss of $900,000 in third quarter 2018 and a profit of $800,000 in second quarter 2019. The $3 million year-over-year improvement in adjusted EBITDA marks another quarter of solid execution. GAAP net loss for the third quarter was $4.1 million. Non-GAAP net income for the third quarter was $1.9 million or $0.09 per share, using a weighted-average diluted share count of 22.9 million shares. Turning to the balance sheet.…

[Operator Instructions] Our first question comes from Mike Walkley with Canaccord Genuity. Please go ahead.

Great. Thank you very much. Congratulations on another strong quarter of results.

Thank you, how are you?

Thank you, Mike.

Yes, great. On the systems business, it’s been running so strong for so many quarters. Can you give us any idea of just, kind of, where you are in that North American project and how do you think about that business growth longer term coming off the 30% plus growth we’ve seen for several quarters now?

Mike, this is Jeff Dossett. As we discussed on the last couple of calls and including in the script today that large North American gateway deployment is in the supply chain and logistics sector. We’re very excited about this deployment, but for confidentiality reasons, we can’t say more about the specific customer. I’d also say that we are continuing to guide only one quarter at a time. And I want to reiterate that, project-based revenue is subject to the size of the project, timing and the mix. And as we discussed last quarter, also impacted by overall project schedules, including partner and end customer integration efforts. So I think that’s what we would be willing to share at this time.

Okay. That’s fair. Understood. Maybe switching gears a little bit then. If you look at the air transportation industry, those could be some long system deals, any update on how that’s progressing after the success of delta with their program?

Yes, Mike. This is Chris. We’re still in the early days of the aviation opportunity. We continue to see progress in that space, some actually worldwide with new airlines continuing to move forward. But like I said, it’s still early days and that kind of – that rollout and deployment is going to take a good number of years.

Thank you. Last question from me and I’ll pass on the line, Chris with another quarter out with the M700 family and discussions with your partners in the ecosystem, can you just give us an update on your lead versus your compensation and how this is setting up with your customer demand into the – into the upcoming years? Thank you.

Yes, I can say a few things, and then maybe Jeff will have something to add in terms of where we stand relative to the market. As I think you can tell from the earnings script, I’m super excited about the M700. We announced it earlier this year, and during that time frame, we’ve been assisting our partners with their antenna designs and their qualification and our customers qualifications. And going forward, our production ramp provides some limited product availability to early access partners in first quarter next year with general availability to follow. And as I said, just in the script just a minute ago, I really think it’s a migration down Moore’s Law, the fact that we can make a smaller chip with increased logical functionalities that really portends the future for – significantly for us and for the RAIN industry as a whole. It really shows the path forward that will drive innovation in our industry. Jeff, anything you’d like to add.

I think what I would add, Mike, is that, and I know we’ve discussed this in the past, but our products tend to have a very long life and is excited as we are about the Impinj M700 and the new opportunities that yet unlocks. We traditionally experience a relatively long-term layering of continued demand for our existing endpoint ICs. So we – while we anticipate the industry will evolve and prepare end users to adopt the Impinj M700 series, we think the full impact will be realized over a period of time. And so, we would anticipate the Impinj M700 series having an impact later in 2020.

Great. But everything remains on track with your timing now?

Yes, yes.

Great. I’ll pass the line. Thank you very much.

Okay. Thank you, Mike.

Thank you, Mike.

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

Good afternoon. Well, you may not be able to answer the question in any way, with respect to the North American gateway project, can you say if any of this business that you’re seeing represents follow-on business or is it the initial order that you received?

Jim, this is Jeff. What I can say is that successful customer deployments result in consideration typically within that company and more broadly in the industry of other deployments. But they don’t think I could say more – anything more specific than that at this time.

Okay. And then on the M700, it sounds like you’re on track there. I’m wondering if you could talk a little bit about where we might see the early adoption use cases for this new IC within retail. And I’m assuming, it’s initially going to have probably more traction within your core retail market. If you could comment on that.

Yes. So, Jim, this is Chris. Yes, we expect retail to be the significant adopter of the Impinj M700 straight out the gate. We do see of course opportunities in aviation supply chain and logistics and other areas, but since retail, apparel and footwear is really the driver of at least endpoint IC volumes in our industry, we expect that segment to be the leading adopter. And consistent with the words we just used in the earnings script, we see opportunities in loss prevention as really the next step forward for the industry and we’ve actually included our features and capabilities in the Impinj M700 series that facilitate that loss prevention opportunity.

Got it. And last question, if I may, is on the R&D. Is that – is the increase we saw in R&D, is that – is that mainly associated with the launch of the M700 or is it more broadly allocated to other areas that you’re investing in?

Yes, so the increase we had in R&D is primarily related to new product launch, but we continue to invest across all of our product lines on our roadmap. As far as we have a roadmap, it’s got more than just M700 on it, but a fair amount of the increase was related to the M700 launch.

Does that tail off or does it continue for the next quarter or so as you – prepare the launch?

Yes, I would say, and we talked a little bit about in the script that we will continue to invest in R&D as we get ready for the launch and also related to other products on our roadmap.

Okay. Thank you.

But in absolute dollar and percentage.

Thank you.

Thank you.

Thanks, Jim.

Our next question comes from Craig Hettenbach with Morgan Stanley. Please go ahead.

Yes, thank you. First question just for Chris, on the context of the Japanese convenience stores and really around this M700 and so. Is it the product capabilities in terms of the driving force that can kind of push adoption, because I know you were talking about Japan over the last year and then from a timing perspective now you have a product launch that seems to kind of line up pretty well to drive that market?

So yes, thanks Craig. So I think the way you should think about the Impinj M700s, number one, it’s a significant migration down Moore’s Law. And so its smaller size and high performance capabilities, and also the ability to add some additional functionalities, which are of significant value add in the market as I’ve already mentioned for loss prevention. It will enable new segments associated with its capabilities and smaller inlays sizes that are made possible. What we should also look at is, it really is the first significant step in continuing innovation in our industry and with Impinj leading that industry and leading those innovations that sets us up for the future, sets us up for further advancements and further developments that as I said in the script will over time, I believe, enable that Japan opportunity and really as you think about the Japan opportunity is not just depend. It’s really the food tagging opportunity. And so I believe it portends a future where our industry will be able to address food tagging which is by far and away the largest opportunity out there.

Got it. And then, just a discussion around increased R&D. Can you talk about that perhaps in terms of the investments needed to, kind of, advance through kind of Moore’s Law? And then maybe on the back of those investments, you kind of get it back in terms of higher revenue growth on margins?

So I think you know the history of standard semiconductors in general, right, migrate down Moore’s Law you get smaller ICs, which initially due to the cost of the new process node, you have to work through to get the cost down and you continue innovating in that note and you jump to the next one. I think the benefit we’ve got in our industry is that we are still relatively – at least previously, we’re still a relatively mature technology. So we have all of Moore’s Law ahead of us to drive down. And so, you should expect us to increase our R&D spend as we drive down those more advanced process nodes. You should also expect us to, in any given process node, including the one we just moved into, continue to innovate within that process node for a while before you move to the next one, it is sort of kind of the standards – standard in the semiconductor industry. But overall, yes, we will be increasing our R&D spend in absolute dollars and on a percentage basis to develop those innovations on the endpoint IC side as well as across our entire portfolio.

Got it. Thank you.

Thank you. Thanks, Craig.

Thank you, Craig.

Our next question comes from Troy Jensen with Piper Jaffray & Company. Please go ahead.

Hey, first off, congrats on a great result again.

Thank you, Troy.

Thank you

Hey, guys. A quick – just to follow-up on the 700s. Is there anything you can give us with maybe the number of design wins you’ve had or the win rate percentage versus prior on platforms?

Troy, we really can’t at this time, it’s a little bit early. We are providing – of course, we previously provided engineering wafers to our early access partners. We’re now working on driving and enabling the market. Then in terms of design wins or anything else, it’s too early for us to say anything.

Okay. That makes sense. So and maybe how about for, I guess, for Eric and Linda, just gross margin trends going into next year. And I’m curious to know, as the M700 ramps, I think longer term with have higher margins but less low volumes, would be initial drag at all. So any color on how you think gross margin trend going forward would be helpful.

Sure. Thanks, Troy. When we look at the M700, we really do continue to expect that whole product family to positively impact our business in 2020 and beyond. But we really, although, we said that we don’t break out gross margins for individual products, and one thing that I think is important to keep in mind is during those initial production ramp phases, underlying product costs will be higher than normal. That’s a pretty standard, anytime you’re productizing and coming from small volume to large. So just things to keep in mind as you’re modeling gross margin next year.

Yes, that’s why I asked. Okay. And then, maybe my last question here. I think, Chris, you mentioned that you guys had 26 patent violations against NXP today, say, how many you’re violating theirs?

Yes, they did. In the suit, they filed against us, they cited eight patents.

Eight patents. All right. Perfect. All right guys. Keep up the good work.

Thank you, Troy.

Thanks, Troy.

Thanks, Troy.

Our next question comes from Mitch Stevens with RBC Capital Markets. Please go ahead.

Hey guys, thanks for taking my question. I just had two of them. The first one is just in terms of the overall market. If you like, we’re getting close to a year-over-year comparables be more – so I guess what is the overall industry outlook and you’re going to be over the next, probably three years to five years and it’s possible by end-market. And then the second one, just more on the just modeling. So I realize that Q1 is typically seasonally down, but is there a way to think about it? Gross margins come down a bit more than operating margins or the OpEx come down more than the cost of goods sold. Just any help there would be helpful.

Okay, Mitch. And so, this is Chris. I’ll start on the first one, which is kind of the overall industry growth trends and we remain excited about the opportunity in front of us. As I think you can – you can hear in our tone and all of the verticals that are moving, whether it happens to be retail performance – performance in apparel and footwear, aviation, and these other opportunities, we see growth and strength in the market. And I think the best indicator you can have of where the industry itself things is going is to look at the RAIN Alliance data, where they make projections going forward in terms of where they think endpoint IC going to at least are going to be a year out. And so beyond year out, we’re not making any forecasts but we still, we remain excited both about existing opportunities in existing segments as well as growth in new segments.

And then Mitch, with respect to first quarter and just sort of how to think about gross margin and operating margin, I just go back to some of the key points I was highlighting earlier with respect to some of the seasonal trends where, the first quarter annual pricing negotiations are going to impact our endpoint IC revenue and gross margins. And then on an OpEx level we also tend to see increases in the first quarter, and primarily due to some things associated with payroll and healthcare. So that’s just some feedback on how to look at first quarter.

And I’d also say first versus second quarter of the year. We also have more training that we attend so that’s another thing that we typically see seasonally adding to Eric’s comment.

Okay. I guess just one last of clarify. So I guess simplistically, would COGS go up more or OpEx?

We haven’t guided for COGS or OpEx perspective, I think just – we can take the seasonality trends around endpoint IC and the pricing negotiations that we’re going through now. And then the fact that we’ve stated that we would be investing more in R&D as we get closer to launch, along with some of the other G&A costs around health care and so forth. So probably helpful to look at trends of the past and also our commentary related to our R&D investment in M700 as we get closer to the launch.

Okay, perfect. Thank you.

Thanks, Mitch.

Thanks, Mitch.

Our next question comes from Charlie Anderson with Dougherty & Company. Please go ahead.

Yes. Thanks for taking my questions, and my congrats as well on a strong quarter.

Thank you, Charlie.

Chris, you mentioned exit doors, the reader opportunity on exit doors and it sounds like there’s maybe some modification to the product or a new product has to come out to address that. I wonder if you maybe just speak to what has to change to address that opportunity from your current products up and maybe if you want to speak about the size of the opportunity as well. And I have a follow-up.

Yes. So, specifically in citing exit doors, what I was really referring to there was store exits, right, for loss prevention for store exits. So there’s a couple of things that we’ve looked at for store exit. So one is really not necessarily so much modifications to our hardware products but the software algorithms that we use to detect items that are transitioning out of storage and it really is, as we’ve talked about previously, our desire to do more and more software, less and less between the hardware, because in so doing we will enable deployability suite. So we continue to innovate on the software side to enable those capabilities. And then the second is, Impinj M700 IC has capabilities and it’s specifically focused on loss prevention to allow embedded tagging with seamless product returns and to allow loss prevention with frictionless self checkout. We haven’t described in any more detail at this point in time with those innovations arguably coming out in more detail as we go further down the product announcement and launch. But we’re really focused on that use case and it has been a use case that’s been in front of the RAIN industry for a long period of time. In fact, retailers began talking about it probably more than 10 years ago, but the technology wasn’t ready. Now with the Impinj M700 with its sensitivity, small size and these features we’ve embedded in it and with our innovations on the system, software algorithms, we believe the opportunity is now just start addressing that use case. And we end up, it isn’t very large opportunity.

Okay, great. And then following in the Japanese, can we interrupt. Go ahead Jeff.

Charles, I just thought I would add that as you know, well, partners play a very important role in creating and deploying solutions for all of our customers, but in particular in retail as it relates to the loss prevention challenge and opportunity. And so as we approach our contribution to those solutions, we think of creating, leveraging RAIN to create the most powerful and capable loss prevention engine that essentially enables partners to achieve loss prevention solutions previously not possible.

That makes a lot of sense. Thank you for that. And then just a follow-up, just going back to the Japanese same-store opportunity, I think you guys put a press release out maybe a month ago, telling M700 and I think there was a quote from Lawson executive, I wonder if you could maybe just, speak to, where we are today. I think there’s been some stores that have trialed the technology. What does 2020 look like in terms of deployment? I know there are targets way in the future, but just more of the immediate term, what has happened in Japan. Thanks.

Yes, so Charlie this is Chris again. So I think the way you should look at this opportunity is that it’s a long-term development to address the significant use case, which is food tagging, those pilots have been ongoing in Japan. And we have every reason to anticipate pilots will continue ongoing and as evidenced by the Lawson statement that was in our press release. We see food tagging opportunities kind of worldwide and see the opportunity to Impinj M700 to start addressing those food opportunities. But the Japanese convenience store opportunity is a marker out there. And Japan – itself cited, they want to have the system rolled out in 2025 as a marker for the future, that says you can get to this opportunity, you can deliver the ability to tag these items at a cost effective and performance at the point. The opportunity in Japan alone is 100 billion items. So I think what you should look at is, it’s a North Star. It’s a North Star for where the industry needs to get to, in order to tag all the food items. And I think you should look at the Impinj M700 as a first but significant step in the direction of that North Star.

Got it. Thanks so much.

Okay, thanks Charlie.

Our next question comes from Scott Searle with Roth Capital. Please go ahead.

Hey, good afternoon. Nice quarter, thanks for taking my question.

Thanks, Scott.

Hey just a quickly follow up on the gross margin front, given the mix in the third quarter, gross margins were very strong, I’m wondering if there’s anything else that was going on within that, particularly on the IC front or gross margins starting to bounce back there and get a little bit better. Is there something else going on? And then looking to the seasonal price declines that you see in the first quarter? You haven’t highlighted anything, so I’m assuming it’s within the normal range of expectations? And then I had a couple of follow-ups.

I’ll take the first one on gross margin. So year-over-year gross margin increased primarily due to the leverage on the increased revenue, which was partially offset by our product mix. And then if you look at it from a sequential perspective, gross margin increased slightly due to more favorable mix within the endpoint IC and systems, partially offset by overall mix between the endpoint IC and systems in the third quarter compared to the second quarter. And then I think you had a question on …

The typical sales, yes, sales concessions going into the first quarter, within the normal seasonal expectation that you’ve seen over the past couple of years, anything to highlight or note?

This is Jeff, Scott, as you know and as we cited in the earnings script, we are in the fourth quarter of this year, we are in pricing negotiations with our partners and it’s really too early to comment on the outcome of those negotiations.

Got it and following up on the M700, it sounds like, we start to see the engineering samples, general availability in the first half, transitioning into revenue in the second half, looking at past product cycles, how long did it take for the prior introductions of Monza to reach perhaps 10% of sales, give us some idea of how quickly you would expect the ramp over the next several quarters.

To reach 10% of sales, so this is Chris. I’m looking around the room here, I am trying to remember the facts in my head, I think that we reached 10% of sales within the first year and that generally took off fairly quickly after that as designs got qualified and started ramping. And as Jeff said, we will continue selling the existing products for an extended period of time because once you’re qualified in designing and qualified an opportunity, they tend to stay there, in contempt, Impinj M700 will be significantly addressing new opportunities and enabling new use cases and as those come online, we’ll see the ramp.

And then lastly, if I could, Chris, following up on some of your comments related to the M700 loss prevention, but also past comments talking about chain of ownership of various certifications, authentication, types of opportunities for authenticity of products. Are you starting to see the green shoots and model of different revenue streams being derived from partnerships with different players out there in apparel and otherwise as you start to roll out products like the M700? Thanks.

Sure. So the M700 is our first foray into some of these advanced capabilities, with its loss prevention opportunity and we are seeing excitement among end customers, significant end customers for those capabilities. In terms of the next round of capabilities, that Moore’s law migration enables, we haven’t set introduction dates or really disclosed anything specific about them so I can’t say anything about them right now, but we remain excited about what Moore’s law will enable us to do in RAIN endpoint IC see today, with the Impinj M700 launch and in the future and it’s our opportunity to innovate.

Great, thank you.

Thank , Scott.

Thank you, Scott.

Thank you. [Operator Instructions] Our next question comes from Jim Ricchiuti with Needham and Company. Please go ahead.

Thanks. Jeff, you alluded to I believe strong readers sales year-over-year. I was wondering if you might be able to quantify that.

We typically don’t quantify within readers or readers IC within in systems, Jim. The system – IC systems year-over-year systems growth up 35% from 10.7 million in 3Q 2018 to 14.4%, part of that is led by strength in that area.

And I don’t recall, I’ll have to check, was it an easier comparison on the readers side of the business versus year ago?

Jim, third quarter year ago, we noted was 10.7 million. So lower significant growth this year. But I think that’s reflective of the business at the time and I don’t think it yet. I don’t think there’s anything in particular that made it an easier to compare or anything happened back at that time.

Okay. Any other way you could provide on the domestic versus international portion to the business. Just one point, if you’re seeing any difference in business conditions in the key verticals?

I’ll try to answer that. I would say that we’re seeing a similarity in the growth opportunities around the globe. I know we’ve cited supply chain and logistics that continued strength in retail, Industry 4.0 or smart manufacturing, so often referred to as strong in Europe, we see it around the globe and the same is true with aviation, air transport. So I think we’re seeing those use cases and those opportunities to grow fairly consistently around the globe.

And last question for me, it’s a very different industry, but I was just wondering versus a number of years ago when we did see a pickup in some of the litigation – industry litigation, but is there – do you see any risks with ongoing litigation that it could be at all disruptive to the market?

So, Jim, we don’t really comment much about the litigation or kind of its plans or trends going forward, but it is our desire as I stated in a note that I put out to the community when we first filed the lawsuit, that is our desire not to disrupt the industry and for the adoption – end-user adoption to continue going forward.

Okay. Thank you.

Thank you, Jim.

Thank you, Jim.

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

This is Chris. I just like to say thank you all for joining the call today and a special thanks to the Impinj team for the solid execution this past quarter. Thank you all.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.