Good day, and welcome to the Impinj Third Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Ellen Hayes-Roth, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and thank you all for joining us to discuss Impinj's third quarter 2020 results. On today's call, Chris Diorio, Impinj's Co-Founder and CEO, will provide a brief overview of our market opportunity and performance. Cary Baker, Impinj's CFO, will follow with a detailed review of our third quarter 2020 financial results and fourth quarter 2020 outlook. We will then open the call for questions. Jeff Dossett, Impinj's Chief Revenue Officer, is also on the call and will join Chris and Cary in the Q&A session. Management's prepared remarks, along with trended financial data, are available on the Investor Relations section of Impinj's website. Before we start, please note that we will make certain statements during the call that are not historical facts, including those regarding our plans, objectives, or expected performance; the expected or potential impact of COVID-19 on our business, operating results, financial condition, or prospects; and the expected or potential responses of government authorities, customers, partners, and the company to COVID-19. 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, including concerning COVID-19, 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 in the annual and quarterly reports we file with the SEC, and risk factors in the Form 10-Q we filed today for more 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 except for net cash used in operating activities. Free cash flow is a non-GAAP measure. Before turning to our results and outlook, I’d like to note that the company will participate in the Roath Technology Virtual Conference on November 12 and the 23rd Annual Needham Growth Conference on January 13. We look forward to connecting with many of you at these upcoming events. 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 our call. I hope you and your loved ones are safe and well. Third quarter revenue improved sequentially, driven primarily by rebounding retail apparel volumes that drove endpoint IC sales. Many of our market segments remain impacted by COVID-19. So total revenue remained below third quarter 2019. Regardless, we remain excited about our opportunities for both endpoint ICs and systems as we look forward into 2021. Endpoint IC revenue increased sequentially in the third quarter, aided in part by customer requests to reschedule second quarter 2020 backlog to the second half. Year-to-date endpoint IC revenue was up 2.6%, marked by first quarter strength from market demand and customer expedite requests, second quarter weakness due to shutdowns, and third quarter demand recovery tempered by inventory reduction at our inlay partners, the latter essentially normalized by quarter end. Looking to the fourth quarter, we anticipate sequential revenue growth despite typical seasonal declines. We shipped more than 100 million Impinj M700 endpoint ICs in the third quarter and now, with multiple inlay partners receiving approvals from Auburn University's testing lab, we see our opportunities expanding. We anticipate more certifications in the fourth quarter and accelerating M700 adoption and volume growth. Third quarter systems revenue declined sequentially with COVID-19 impacting demand in retail, automotive, and consumer-facing use cases such as travel and sports. Compounding that reduced demand, our reader and reader IC distributors continued reducing their inventory to match the new demand, fulfilling orders where they could from inventory on hand. We anticipate further fulfillment from distributor inventory in the fourth quarter, obscuring continued improvements in sales out to our solution and reseller partners. Supply chain and logistics remained a bright spot in the quarter, with revenue increasing sequentially primarily from us shipping additional gateways to the North American supply chain and logistics end user we discussed on prior calls. We do not expect shipments to that end user in the fourth quarter. We also generated modest third quarter revenue from shipments of our Impinj R700 readers into our second large North American supply chain and logistics end user, and we anticipate modest revenue from that end user again in the fourth quarter. That opportunity, as we said last quarter, is large, but the deployment timing and pace remain uncertain. Looking to the fourth quarter, systems revenue will remain constrained as we balance inputs from improving demand and the second North American supply chain and logistics end user beginning its ramp against outputs from ongoing channel inventory reductions and the first large North American supply chain and logistics end-user continuing its transition to an operational phase. With our recent announcement of R700 general availability and the new opportunities the R700 enterprise-class capabilities open in the supply chain, we remain excited about our systems prospects ahead. COVID-19 has fundamentally altered end-user business operations, suppressing demand for fixed readers in the near term, but we believe engendering a demand rebound when those businesses have clarity to COVID-19's end. In some verticals, we already see green shoots of recovery. Looking first at retail, with foot traffic down, retailers in the near term are focused on the imperative for omnichannel fulfillment using mostly labor-intensive, but quick to deploy handheld readers. Consequently, we see growing fourth quarter demand for endpoint ICs, and to a lesser extent for reader ICs, the latter because retailers have fewer fulfillment centers than they do stores. Our pipeline of retail fixed reading opportunities remains strong, especially in loss prevention and self-checkout, but omnichannel investments remain paramount. We also now see retailers driving two distinct go-forward paths to RAIN-based loss prevention and self-checkout. One is entirely RAIN-based and uses RAIN-enabled exit gates, RAIN tags, and RAIN self-checkout terminals. The other combines RAIN and traditional RFEAs. This combination allows retailers to use their legacy EAS exit gates with merged RAIN and RFEAs tags and RAIN self-checkout terminals. The former requires more readers and gateways, whereas the latter promises quicker deployments; both afford significant opportunities for us. In supply chain and logistics, we also see traction into go-forward paths. One path focuses on identifying tagged pallets transitioning through dock doors. The other focuses on identifying tagged cartons on conveyor belts. The former drives gateway sales and pallet tags, the latter drives reader sales and carton tags; both are in our platform sweet spot and leverage our experience from our North American end-user deployments. Like for retail, we have a strong pipeline. The deployments have been slowed by COVID-19 impacting our partners’ installation teams and users pacing reader installations when they are operating at peak volumes, or both. Regardless, with our first large deployment transitioning to its operational phase and a second large deployment just starting, we are only scratching the surface of the total supply chain and logistics opportunity. In closing, revenue rebounded in the third quarter with underlying strength in our core markets, but the effects of COVID-19 remain. Regardless, we remain focused on exiting the other side of COVID-19 as a stronger company in a stronger market position than when we entered it. We also remain focused on the big picture of the strong underlying secular trends evidenced by our business strength prior to COVID-19 and on our opportunity to use RAIN to deliver the digital transformation our end users want and need. With a strong balance sheet, game-changing new products, and a platform and vision that sits squarely in the center of that digital transformation, the opportunity in front of us is more compelling than ever. We will continue focusing on leading apparel retailers and on leading supply chain and logistics companies driving operational improvements for them and business opportunities for us. We will do so even as we keep a close eye on expenses, charting a path to adjusted EBITDA breakeven on the other side of COVID-19. Be safe and be well. I will now turn the call over to Cary for our detailed financial review and fourth quarter outlook. Cary?

Thank you, Chris. Good afternoon, everyone. Today, I will cover the metrics we typically discuss on our earnings calls and provide a financial outlook for the current quarter. Third quarter revenue was $28.2 million, declining 30.8% year-over-year and increasing 6.6% quarter-over-quarter, compared with $40.8 million in third quarter 2019 and $26.5 million in second quarter 2020. Third quarter endpoint IC revenue was $21.6 million, declining 18.1% year-over-year and increasing 16.4% quarter-over-quarter, compared with $26.4 million in third quarter 2019 and $18.5 million in second quarter 2020. The recovering retail demand environment drove a favorable dynamic in the third quarter, with our inlay partners reducing the inventory they built in first quarter 2020 and turns orders returning in the latter half of the third quarter. While our third quarter revenue declined year-over-year in part due to that channel inventory reduction at our inlay partners, we believe our year-to-date revenue growth now reflects our 2020 demand environment. Looking ahead, while fourth quarter endpoint IC revenue is typically lower sequentially, fourth quarter 2020 will benefit from a comparison against third quarter 2020, where inlay partners will reduce inventory. Generally, we expect 2020 endpoint IC revenue to be on par with 2019. Third quarter systems revenue was $6.6 million, declining 54.1% year-over-year against a difficult third quarter 2019 comparison of $14.4 million and declining 16.5% quarter-over-quarter compared with $7.9 million in second quarter 2020. Gateway revenue declined year-over-year but grew quarter-over-quarter as the large North American project continued generating modest revenue in the third quarter. Reader revenue declined year-over-year and quarter-over-quarter, impacted by demand, deployment pace and timing, and channel partner inventory dynamics. The second North American supply chain and logistics deployment progressed, with modest financial contributions in the quarter. Reader IC revenue declined year-over-year and quarter-over-quarter due to lower demand for handheld readers at retail and in comparison to the second quarter, where partners built modest inventory to reduce supply risk. We expect fourth quarter systems revenue to remain constrained as broad-based rebounding demand is offset by channel partner inventory dynamics and by the North American supply chain and logistics customer moving fully to the operational phase. Third quarter gross margin was 50.1% compared with 50.2% a year ago and 51.4% last quarter. On a year-over-year basis, gross margin declined 10 basis points driven by revenue mix and leverage on lower revenue, partially offset by lower E&O charges. On a quarter-over-quarter basis, gross margin declined 130 basis points driven by revenue mix, partially offset by lower E&O charges. Total third quarter operating expense was $20.4 million compared with $18.4 million in the third quarter of 2019 and $18.8 million in second quarter 2020. Research and development expense was $9.4 million. Sales and marketing expense was $5.4 million. General and administrative expense was $5.5 million. Third quarter adjusted EBITDA was a loss of $6.2 million compared with a profit of $2.1 million in third quarter 2019 and a loss of $5.2 million in second quarter 2020. Third quarter GAAP net loss was $14.3 million. Third quarter non-GAAP net loss was $6.7 million, or $0.29 per share using a weighted average diluted share count of 22.9 million shares. Turning to the balance sheet, we ended the third quarter with cash, cash equivalents, and short-term investments of $105.1 million, compared with $63.1 million in third quarter 2019 and $120.9 million in second quarter 2020. Inventory totaled $38 million, up $1.7 million from third quarter 2019 and increasing $900,000 from second quarter 2020. In the third quarter, net cash used in operating activities was $11 million, and property and equipment purchases totaled $1.1 million. Free cash flow was negative $12.1 million. We have excluded from third quarter net cash used in operating activities and free cash flow the $5.4 million cash outflow associated with the settlement of our shareholder class action lawsuits. I will now provide an update on a few of our strategic initiatives. First, the capital investment in our 300 millimeter endpoint IC vital post-processing flow continues. This ROI-driven project spans multiple years and will increase our operations responsiveness, broaden our geographic and partner diversity, and improve our inventory terms. Looking ahead, capital expenditure will look more like 2018 versus 2019 or the beginning of 2020. This investment will begin paying dividends in 2022 and over time will generate a positive return to shareholders. Second, we will maintain adequate supply of 200 millimeter endpoint IC wafers as we stage our transition to the 300 millimeter M700 family. That 200 millimeter inventory uses cash in 2020 and will be a source of cash in 2021. In 2021, we expect our days of inventory to improve. Third, we entered 2020 with ambitious hiring goals to boost our engineering investment and filled most of those open roles by the end of the third quarter. As a consequence, we expect an increase in fourth quarter operating expense, and we will grow into that investment in 2021. Looking forward, we will continue to monitor expenses and remain confident in our plan to return to adjusted EBITDA breakeven on the other side of COVID-19. Turning to our outlook, we expect fourth quarter revenue to be between $26.5 million and $28.5 million, a 32.6% year-over-year decline at the midpoint of the range. We expect adjusted EBITDA to be between a loss of $8.9 million and $7.4 million. On the bottom line, we expect a non-GAAP net loss between $9.3 million and $7.8 million, reflecting non-GAAP per share earnings of between minus $0.40 and minus $0.34 on a weighted average diluted share count of 23 million to 23.1 million shares. In closing, I want to thank our Impinj team, our customers, our suppliers, and you, our investors, for your ongoing support. I will now turn the call to the operator to open the question and answer session.

Thank you. We will now begin the question-and-answer session. Our first question comes from Ted with Morgan Stanley. Please go ahead.

Great. Thanks, this is Ted on the line for Craig Hettenbach. My question is on 300 millimeter wafers. Just curious if you could provide an update on your transition there. The puts and takes around costs and gross margins in your prepared remarks. It sounded like you expected to begin paying dividends in 2022. So just a little bit more color there and your expectations for cost curves and adoption as that ramps?

Hi Ted, thanks for joining us, and thanks for your question. As I noted in the script, we've already shipped 100 million units of our Impinj M700 IC, which is made from almost 300 millimeter wafers. We have multiple certifications and inlay approvals coming in from the University of Auburn's testing lab, so we look forward to strength and growth heading into fourth quarter and then into 2021 in that 300 millimeter product line. We've also introduced some key new features in that product, for example, Impinj protected mode, which allows us to address key use cases in loss prevention and self-checkout. For some of the remainder of your question, I'll turn it over to Cary for a little bit more details.

Yes. Hey Ted, on the M700 we expect gross margin accretion, and we're going to get to the lower cost point. There are two significant improvements with the M700. First, as you noted, we've moved from 200 millimeter to 300 millimeter wafer, so we get more dye per wafer as a result of that. But more importantly, we've also improved the process node. We've moved down Moore's Law on this and we've shrunk the size of the dye, generating even more dye per wafer. This has reduced our cost. It's allowed us to be more aggressive at a price point while maintaining gross margins. We anticipate that gross margin accretion once we get up to production volumes and deeper into our ramp. So as Chris noted, we did about 100 million units in Q3. We'll do more than that in Q4. I would expect gross margin to start improving in 2021. Now, keep in mind that in order to achieve that improvement, we have to increase our mix of the M700. When we introduce a new IC, it's typically not a replacement; think of it as a layering effect. So as we move through that year, we'll build our mix and our share of the M700, and we'll start seeing that gross margin improvement in our results.

And this is Chris. I'll just add one more thing. Note that because we migrated significantly down Moore's Law, we have roughly twice as many dye for wafer as our nearest competitor in the same size wafer diameter. So although the wafer costs a bit higher due to our migration down Moore’s Law, the depreciation curve is also a little bit steeper, and we see opportunities for the future in that process.

Got it. Thank you. And then just one more quick follow-up if I can. It also sounds like CapEx for 2021 is going to come up a bit to 2018's levels. Just curious if you could maybe provide a little bit more color on the current quarter and the pace for 2021 and beyond?

Yes. So in the current quarter, we did $1.1 million of CapEx. We really hit our pace on the process flow improvement effort. So I would expect another modest step-up in Q4 and then for fiscal year '21 to be pretty consistent with where we were in 2018.

Got it. Thanks.

Our next question comes from Michael Walkley with Canaccord Genuity. Please go ahead.

Great. Thanks for taking my question, and hope everybody on the call is staying safe and healthy. Chris, just...

Thank you Mike, and I hope the same to you.

Yes. Thank you very much. Just first question for me, the endpoint ICs rebounded a bit more than I anticipated for the quarter. So that was great to see, and I have to think the pandemic has stressed the importance for retailers to have improving inventory controls and improve contactless checkout procedures, and all the other areas that you guys highlight that benefits RAIN adoption. Can you discuss just kind of your interactions with customers for improving the long-term pipeline for RAIN adoption just given changes in buying patterns because of the pandemic?

Mike, thanks for your question. This is Jeff, and I will begin to answer that and look to Chris and Cary to add some comments. You're absolutely right. If there is a bright spot in COVID-19, it is in the increasing interest and intent of visionary end customers to invest in their digital transformations, and in particular, to get improved visibility of all of the things that move through their business that enable them to create value. So, we're very encouraged by the end customer interest and intent to invest in these digital transformations. We see a strengthening in our pipeline of large opportunities in retail and in supply chain and logistics more generally. As we know, retailers are trying to shift to better serve shifting customer demand, and as you noted omnichannel is at the forefront. In order to execute omnichannel effectively, retailers need to understand what inventory they have at the specific item level, that is, a particular garment in a particular size and color, not just in general but very specifically at the item level. That’s where RAIN contributes significantly to these initiatives. The goal here is to optimize efficiency by matching available inventory wherever it is to that specific customer demand and then to service that or deliver against that demand from the most efficient closest inventory location, be it in a given store, in a near distribution center, or wherever that inventory may be throughout their supply chain. So again, we're very encouraged by the interest and intent to gain that visibility across the entire supply chain.

And Mike, this is Chris. I will add that following on the omnichannel fulfillment, what we see is retailers looking to modernize their stores post-COVID-19, and supply chain and loss prevention and self-checkout are key areas we see there. In order to do self-checkout, you need to do RAIN-enabled loss prevention because you're going to deactivate the tag at the point of sale, and then your RAIN exit gates need to determine that the tag has been electronically deactivated. So we see significant interest, and those are long-term investments as we highlighted, but we see an opportunity there for the future, which is why I highlighted the loss prevention and self-checkout opportunity in the script and talked about the two ways that we see retailers moving forward.

Great. Thanks, Chris. And just kind of building on that question, as we've talked over the years, you've talked about in key industries having the investment with a huge customer call what you say crossing the chasm to drive more growth. It certainly seems like your large North American project in supply chain logistics is starting to get that area going. I guess two questions off that: First, is the second large customer almost the same as the one you currently have, and are there other ones besides that one now lining up testing out RAIN? And then two, do you see any other industries that might be close to crossing that chasm for RAIN adoption?

So we have talked about the first supply chain and logistics opportunity as being primarily a gateway opportunity associated with pallets, and we've talked about the second supply chain logistics opportunity being a little bit different associated with readers and more about conveyors. So, there is some difference between them, but they are both significantly focused on the supply chain and logistics opportunity broadly, which is tracking items moving through the supply chain. In that sense, we see those opportunities just being bellwethers for the larger industry. Turning just to the retail environment for a second, again, using that crossing the chasm analogy, historically, retail has been handheld driven inventory accounting, and what we now see is this desire to do consumer self-checkout and then that driving loss prevention, which is driving seamless returns as being an opportunity for fixed reading, because you just don't do self-checkout using a handheld, and certainly not loss prevention. So again, we see an opportunity in the future. I won't say we've crossed the chasm yet, but we see an opportunity for some large retailers to invest in the loss prevention and self-checkout opportunity. In so doing, we see those opportunities driving the industry forward beyond handheld-driven inventory counting to this fixed reading in retail stores.

I think the last question for me. I'll pass on the line. Just on the systems business, it sounds like a lot of activity, but shorter term, there are some lumpiness and timing of contracts in the inventory that you guys highlighted. Are there any other things maybe slowing near-term systems sales, just access for testing and trialing due to COVID? And if that's the case, is it starting to ease at all, or is that still a challenge in terms of new customer adoption on some of these systems deals?

Yes. Go ahead, Jeff.

Yes. Mike, this is Jeff. We do see signs of modest recovery in the near-term systems pipeline, as businesses have begun to adapt and are increasingly able to provide a safe return to operations or to work. We are seeing the reactivation of end customer deployments that had been initially paused in our second quarter with the onset of the COVID-19 pandemic. We're also seeing our partners increasingly able to re-engage within end customer work environments to undertake testing of new use cases and new opportunities. So we are seeing an uptick in activity and engagement, which is encouraging. That being said, even when the activity translates into demand, that demand is primarily being satisfied with inventory already placed in our systems distributors around the globe. That will continue into the fourth quarter, but we do anticipate that we will exit fourth quarter with healthy and appropriate systems inventories across all systems distributors around the globe. So looking for 2021, we would anticipate our results to better match actual end customer and market demand.

All right. That's helpful. Thanks for taking my questions, and congrats on the progress you're making and on the R700 ramping.

Thank you very much, Mike.

Thanks very much, Mike.

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

Good afternoon. Thanks for taking my questions. Chris, I hope you guys and your team are healthy and safe to just kind of echo Mike's sentiments.

Thank you.

Hey, just to quickly follow up on the gross margin front related to ICs. It seems like you're back in equilibrium in terms of working inventory through at your customers. You've got the M700 coming, but you also typically have the pricing decreases that kick in January, February timeframe. Is that still on track? Does the M700 offset some of that? I know it's very small at the current time. But the follow-up on the M700 front, to follow up on some of the certification questions, it sounds like you're slowly moving through that process. Is that a big hindrance at this point in time in terms of qualifying the product with new customers, and what’s your broad-based kind of expectation when you're looking at exiting 2021? What percentage of the mix do you think M700 is?

Okay. This is Chris. Let me start with the question in terms of the certifications and qualifications, and then I'll hand it over to Jeff to follow up on the overall gross margin question. So, obviously, launching a new product into a pandemic is less than ideal, and so the end customer certifications once they do themselves or the University of Auburn approval and testing have both been delayed by COVID-19. Although we are happy with where we are, having kept 100 million units, the pace without COVID-19 would have been quicker. That said when you compare our pace of adoption compared to our history, we are still moving at a good clip, and we expect accelerating adoption, as I said heading into 2021.

Yes. I think I would just say that I see it as positive momentum. The approvals and qualifications are now moving and should not be a hindrance or a negative factor whatsoever. I think in terms of the pricing negotiations, as is typical, we are engaged in our annual pricing negotiations for the year or years ahead in the fourth quarter. We're very early in that process, and there are really no material updates to share at this time.

Got you. And if I could just quickly on the systems front, it sounds like endpoint ICs you're back in equilibrium as we enter 2021, but there are a couple of big dynamics going on this year in terms of the large North American logistics customer completing its deployment, moving operational, but the second one coming on board. Could you kind of give us some idea of the magnitude of that and how that's been impacted by the current environment? Is that going to progress, and as we think about 2021 from a system standpoint, does it look more like 2019 or does it look more like 2020 as it relates to the size of opportunity? And kind of coupled with that systems winning new systems business now, can you close the business with customers? I'm sure there's a lot of interest given a no-touch environment and the benefits of what you can do from an omnichannel standpoint, but is it difficult to close business and get things across the goal line in this environment? Thanks.

There's a couple of questions in there, and I'm going to try and tease one or two out or whatever I forget maybe Cary will cover for me. So we have said that the second North American supply chain logistics opportunity is large, and that's a true statement. We're looking forward to growing with and supporting that customer to our ability. That said, we're just getting going, and the pace and timing of the rollouts remain uncertain, and that uncertainty is exacerbated by COVID-19. The large shipment volumes that are going on in the supply chain, the reluctance of then customers across the board to touch things when they're running full tilt, and they don't want to break anything. The difficulty of our partners getting into actually do work in the facilities, it's all impacted by COVID-19. The inherent uncertainty we would have with any large customer deploying is exacerbated by COVID-19. In terms of closing deals and deal timing, like Jeff said a little while ago, we see a growing pipeline of big opportunities. We see a growing need for these end customers to digitally transform their operations yet at the same time, those end customers are trying to gauge the end of COVID-19 and determine the pacing of their investments. So, like I said in running the script, the pace and timing of some of these deployments is going to depend on end-user visibility into the end of COVID-19. That's indeed the case, and I don’t think we have any better crystal ball than anybody else in terms of the pace of work and the consequent ramp of deployments. I will just say that what we see now and feel is a growing pipeline of large end customer opportunities.

Great. Thanks so much, guys.

The only thing I would add, okay, thanks, Scott.

Thanks, Scott.

Thanks.

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

Hi, good afternoon. The comment I think in the script is talking about endpoint IC revenues roughly consistent with 2019 levels. So I guess that implies a pretty healthy sequential increase in Q4, which we normally don't see. I think you alluded to that. So I'm just trying to get a better sense as to maybe your confidence level in that dynamic seeing that improvement in Q4, especially given the uncertainty around the holiday season.

Yes. Thank you, Jim. This is Cary. I appreciate the question. We reported last quarter that we felt that we turned the corner on our bookings volume, and we decided at the time of our earnings call that our quarter-to-date Q3 bookings were up 20% versus Q2. That pace continued throughout the quarter and even accelerated a little bit as we were moving into Q4. In a disciplined way, we were able to burn through the channel inventory that we began the quarter with and return on the endpoint IC business to a normal turns volume. So, the normal compare that we would have from a seasonal perspective moving into Q4 really doesn't translate to our revenue because demand was greater than our revenue in Q3. So we don't necessarily anticipate following exactly along the normal seasonality in Q4 because of that dynamic, and that's why we're able to say that not only will we from an actual perspective year-to-date be up 3% on endpoint IC volume versus 2019, but we think we'll be at parity with 2019 when we complete the year.

And Jim, this is Chris. I'm just going to add that we're being thoughtful in terms of predictions relative to the holiday season's impact or lack thereof. We're giving visibility into how we see our business, but the COVID-19 uncertainties surround the large holiday season, whether materializes or not. The uncertainties are there, and we'll have to wait to see just as you are how the environment and overall economy progresses over the next two months.

Yes. The way we've translated that to our outlook for the fourth quarter, Jim, is we're not assuming we're going to maintain the turn volume that we saw in Q3. So for that uncertainty, we've wrestled down a little bit or become a little more conservative on our terms estimate for Q4.

Got it. And just on expenses, looking at your R&D levels and sales and marketing, how should we, if any help in terms of how we might think about that for Q4? Should we see a similar pattern with R&D and sales and marketing on a sequential basis?

Yes. So on R&D expense, we expect a step up in Q4. I mentioned that we had a pretty ambitious hiring plan for the year. We substantially completed that hiring plan in Q3, so the expense associated with those hires is not fully reflected in our Q3 number. I anticipate with a full quarter of those folks on the team to naturally grow up, and also looking into Q4, we've got some non-wage spend coming up that’s greater in Q4 than it was in Q3 as we’re testing a couple of new products and getting ready to get those out the door.

Okay. Thank you.

Our next question comes from Charlie Anderson with Colliers Security. Please go ahead.

Yes. Good afternoon. Thanks for taking my questions. I wanted to start with supply chain logistics. You mentioned a good pipeline there, and I think your largest customer also described a robust pipeline as well. So clearly a lot of activity there, and you've also had the large customer deploy, and there is a new one who's starting now. Chris, just stepping back, I'm curious as you compare this to apparel a decade or so ago, does it feel like we're on the way where we're going to be adding new logos and new appointments with every passing year? Do you feel like you've sort of fully crossed over there, or is there still a lot of evangelism out there? Maybe if you could also just remind us on the size of the opportunity relative to apparel over the long term for you? And I've got a follow-up.

Okay. Yes. Thanks, Charlie. I'll do my best with your question. Let me start with the latter part first. The size of the total apparel opportunity, as we see it, in terms of endpoint ICs is roughly 80 billion units per year. That's still a number that we're holding with, and that's not the total number of apparel items sold worldwide. That's probably 40% of the total number of apparel items sold worldwide. It’s the number we think are connectable, at least with where we stand today, especially in Europe, North America, and parts of Asia. So we still see a good ramp, but that opportunity to date has been handheld driven. In terms of the opportunity to deploy loss prevention and self-checkout in those use cases, we see it as kind of the future. But that said, it's very early days, and we have not yet crossed the chasm in terms of loss prevention and self-checkout opportunities. We see opportunities for continued growth and expansion in the retail space even beyond the tagging opportunity. It’s bigger than that. It’s tagging. It’s basically transitioning the retail stores to stores of the future, and the visionary retailers who see COVID-19 as an opportunity to transform themselves will become more modern and address quickly their end customers' needs and consumers' needs. We're guardedly optimistic that they will invest and drive these new opportunities and technologies. So, that's sort of the history of where we were in retail. Handheld-driven inventory accounting was good for a number of years, still growing, and there's still a big opportunity ahead. We're probably 15% penetrated, and then transitioning to even more use cases. Moving over now just to talk about the supply chain and logistics use case, many of the supply chain and logistics opportunities have been small-sized in the past. We've talked, for example, about tracking items through dock doors. It has been historically the large end customers that have pulled an industry forward. In the case of retail, it was Macy's and Marks & Spencer and Decathlon. In the case of supply chain and logistics, we are optimistic that it will be these large North American end users that will pull the supply chain of logistics opportunity firmly across the chasm, but it's still early days. To the extent they do, we see opportunities not just for tracking pallets and cases but also for postal items, automotive parts, and many other things. One of the reasons for our optimism about the future is that we have two very large end users in supply chain and logistics who are doing important things, and we believe or at least hope that they will be a bellwether for other companies to enter this space and do the same things and expand further.

Okay. Great.

Did that answer your question?

Yes. No, absolutely so. So for my follow-up, I was curious about the hires in engineering that you mentioned. You could mostly complete it here, so that's going to cause the step-up. I wonder maybe if you could articulate some of the capabilities you've brought to the team, and what are some areas where there's headroom to improve from an engineering standpoint? I'm just sort of curious what is the strategy behind some of the hiring that you've made there?

Our main focus areas in terms of verticals are retail and supply chain logistics. In engineering hiring, we are concentrating on Silicon development and solutions development alongside our partners in those applications, particularly in supply chain logistics, retail loss prevention, and self-checkout. Hiring in these areas is essential for us because we recognize future opportunities and believe it is a good time to invest as we move forward and hopefully emerge from the impacts of COVID-19.

Great. Thank you so much.

Thank you.

The next question comes from Harsh Kumar with Piper Sandler. Please go ahead.

Yes. Hi guys. I had a couple of questions. So my question was on your commentary about systems. You mentioned systems would be constrained in the fourth quarter. I guess for clarity purposes, does that mean it would be around the same level as that you saw in the September quarter, or were talking maybe a small step down? And sort of related to that question on endpoint IC, you’re on to the other side, but you burned through the inventory and you're actually able to grow. I think your commentary implied that in systems, there’s still some of the inventory from the industry shipping out of. Where do you think your distributors are in terms of the amount of excess inventory that's left in the system to the point that where you will start mirroring the real demand?

This is Jeff. I will take a first step at the answer, and I would say that the key point is that we think that we will exit the fourth quarter with healthy and appropriate systems inventories in our distributors around the globe, adjusted for the current demand environment. So it means we're making good progress. We did in Q3, and we anticipate continuing that progress to work down the inventories to service and satisfy the demand that is re-emerging in the modest recovery and then come into 2021 with healthy and appropriate systems inventories.

Hi Harsh, this is Cary. Thanks for the question. If I can add just a little bit to Jeff. So, he has articulated the demand being met with or matched with channel inventory. The other factor to consider when you're looking at our systems revenue and what that might be for Q4 is that the North American supply chain logistics customer, the first one, delivered revenue in Q3. That revenue goes away in Q4 as they move more fully to the operational phase of its deployment. So that's an additional headwind. It's an important factor to consider in new models.

Understood. Thank you for that clarity. And for my second question, we cover a lot of semiconductor stocks, and some of them are in the auto space. The auto guys, at least on the semiconductor side, are seeing sort of a pretty significantly improving environment. I suppose there’s a lead time to when the cars actually get built. The point I'm making here is the auto sector, which is an important sector for you guys potentially down the line, appears to be recovering along with retail. So when you talk to your customers, and this is a tough question to ask and for you to answer, when would you kind of best estimate when you get back to a normal environment?

This is Jeff. What I would say is that our solution partners, who are active in the automotive sector, have re-engaged with their end customers during the third quarter. As I said in the opening, some existing deployments have been reactivated and are now underway again, and some additional testing is being done in new use cases in automotive. So, I think your point about automotive experiencing a modest recovery is translating into our re-engagement with our partners in automotive. It's still hard to call more specifically when that will translate into specific demand fulfilled outside of our distributor inventory, but it is encouraging to see that re-engagement.

Understood. Thank you.

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

I'd like to thank you all for joining the call today, and as I said in the past two quarters, I will say it again: I hope you and your loved ones are safe and well. Thank you all very much for joining us today.

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