Welcome to the Impinj Third Quarter 2021 Earnings Conference Call and Webcast. All participants will be in listen-only mode. I would now like to turn the conference over to Mr. Andy Cobb, Vice President, Strategic Finance. Please go ahead.

Thank you, Andy. And thank you all for joining the call. Our third-quarter results were strong, with revenue and profitability exceeding our guidance. Demand was also strong, driven by enterprise needs for omnichannel fulfillment, supply-chain visibility, environmental sustainability, and process digitization. At the same time, COVID-related manufacturing and shipping disruptions compounded our ongoing product shortfalls, accentuating our difficulty in meeting that demand and constraining our third-quarter revenue. Third-quarter also brought wafer, component, assembly, packaging, and shipping cost increases that are now too large for us to absorb. We began passing those increases to our customers in the fourth quarter. Despite those increases, we still entered the quarter with demand greatly exceeding our supply. All told, our fourth-quarter outlook is strong, buoyed by those cost pass-throughs and that demand, albeit with insufficient product supply that continues to disappoint our customers. Endpoint IC revenue grew sequentially, driven by accelerating Impinj M700 sales. Despite regional factory shutdowns due to COVID-19, we doubled our 300mm post-processing capacity in the quarter and plan a further 50% increase in the fourth quarter. By year-end, we will be wafer supply limited rather than post-processing limited, able to quickly turn any 200mm or 300mm upside wafers we receive from our foundry partner. Regardless of the cause, our wafer shortfall means our inlay partners continue running hand-to-mouth, periodically lines down, and with critically low inventory. Like for last quarter, third-quarter endpoint IC demand exceeded shipments by more than 50%. In September, our endpoint IC foundry partner gave us first-half 2022 wafer supply commitments that should allow us to equal or exceed fourth-quarter 2021 shipment levels through mid-2022. Like us, they recognize the mission-critical importance of RAIN to the global supply chain, and they have prioritized us for more wafers. Inopportunely, in October our wafer costs increased. Even as we began passing those cost increases to our inlay partners, demand remains so strong that they would layer additional bookings onto our order backlog, if we could procure more wafers. Third-quarter systems revenue exceeded expectations, with strong reader and reader IC shipments partially offsetting the decline in loss-prevention engine shipments. Reader revenue set a quarterly record even as channel inventory declined further, with component shortfalls again constraining our reader production. Although we expect modest improvement in reader build quantities in the fourth quarter, we also expect some of those readers to come too late to ship in that quarter. We had significant reader backlog entering the fourth quarter and we expect to have backlog again entering the first quarter, with our supply normalizing in the first quarter at the earliest. Third-quarter reader IC revenue continued recovering from our first-half 2021 supply shortfall. We expect supply to finally catch up to demand in the first quarter of 2022. Excitingly, we booked significant orders for our new reader ICs, as we grow the partner base building products with those ICs. With more than 75 design wins to date, we expect those reader ICs to be a key driver of RAIN adoption. Like for endpoint ICs, third quarter brought significant cost increases for our systems products. Also like for endpoint ICs, we began passing those increases to our systems partners. Demand remains strong even with those increases. On the project front, for the fourth consecutive quarter the Asia-based global retailer drove meaningful reader revenue from their self-checkout deployment. The Europe-based global retailer began transitioning from deployment to the operational phase of their loss-prevention rollout. And the second North American supply chain and logistics customer further advanced their deployments. Each project progressed nicely, and we continue to see strong opportunities ahead. I’d like to now say a few words about environmental sustainability, which I always expected to be a driver of RAIN adoption, which we are now seeing. RAIN helps enterprises digitize and virtualize their operations, providing real-time data that can improve operational efficiencies and reduce waste. As one example, our partner Lyngsoe Systems upgraded Norway Post’s RAIN infrastructure using the Impinj platform, improving real-time package visibility and helping Norway Post identify process improvements that will reduce fuel consumption, cut CO2 emissions, and meet their sustainability goals. Before I close, I’d like to say a few words of thanks to the Impinj team. With incredible effort and grace under pressure, they, over the past 18 months, launched and ramped new products across every Impinj product line, migrated to a new ERP system, and transitioned to a largely work-from-home environment, all during an unprecedented global pandemic with unparalleled supply-chain disruptions. To call their effort herculean doesn’t do justice to what they have accomplished. So, to each and every Impinj team member, I’d like to give my heartfelt thank you. In closing, we exceeded our third-quarter revenue and profitability guidance, accelerated our M700 production, navigated unprecedented challenges, and see strong, long-term demand from enterprise digital transformation. By year-end, we will have sufficiently straightened and widened our endpoint IC post-processing pipes that we will be well primed for upside wafers, whenever they may come. Until then, we continue working side-by-side with our ecosystem partners to navigate today’s supply-chain challenges, so both we and they emerge stronger on the other side of COVID-19.

Thank you, Chris, and good afternoon everyone. On today’s call, I will review our third-quarter financial results and fourth-quarter financial outlook. Third-quarter revenue was $45.2 million, down 4.4% sequentially compared with $47.3 million in the second quarter of 2021, and up 60.3% year-over-year compared with $28.2 million in the third quarter of 2020. Third-quarter endpoint IC revenue was $32 million, up 3.8% sequentially compared with $30.8 million in the second quarter of 2021, and up 48.1% year-over-year compared with $21.6 million in the third quarter of 2020. Absent COVID-related factory shutdowns that exceeded expectations embedded in our third-quarter guidance, endpoint IC revenue could have been higher. Looking forward, we expect fourth-quarter 2021 endpoint IC revenue to increase sequentially, driven by both the initial impact from our cost pass-throughs and incremental upside wafers. Third-quarter systems revenue was $13.2 million, down 19.7% sequentially compared with $16.5 million in the second quarter of 2021, and up 100.2% year-over-year compared with $6.6 million in the third quarter of 2020. Both reader and reader IC revenue increased sequentially and year-over-year, while gateway revenue declined sequentially and year-over-year. Our gateway revenue faced a difficult comparison to the second quarter, which included $6 million for the loss-prevention engine shipments. We expect fourth-quarter 2021 systems revenue to decline sequentially, as a supply-related decline in reader revenue more than offsets continuing strength in reader ICs. Third-quarter gross margin was 53.3%, compared with 54.5% in the second quarter of 2021 and 50.1% in the third quarter of 2020. The quarter-over-quarter decline was driven by indirect costs and product mix, partially offset by sales of fully reserved inventory. The year-over-year increase was driven by sales of fully reserved inventory, product mix, and underlying product margins. The gross margin benefit from selling that reserved inventory was 200 basis points. Another bright spot, the M700 provided gross-margin tailwind in the third quarter and, looking forward, we expect that trend to continue as M700 volume grows as a percentage of our endpoint IC mix. Total third-quarter operating expense was $24.4 million, compared with $22.4 million in the second quarter of 2021 and $20.4 million in the third quarter of 2020. The sequential increase was due primarily to increased engineering expense, including a partial quarter of cost for our new RF design team, and general and administrative expense. Research and development expense was $11.8 million. Sales and marketing expense was $6 million. General and administrative expense was $6.6 million. We expect fourth-quarter operating expense to increase sequentially. Third-quarter adjusted EBITDA was a loss of $400,000 compared with a gain of $3.3 million in the second quarter of 2021 and a loss of $6.2 million in the third quarter of 2020. Third-quarter GAAP net loss was $12.9 million. Third-quarter non-GAAP net loss was $900,000, or $0.04 per share, using a weighted-average diluted share count of 24.3 million shares. Turning to the balance sheet, we ended the third quarter with cash, cash equivalents, and short-term investments of $113.3 million, compared with $112 million in the second quarter of 2021 and $105.1 million in the third quarter of 2020. The sequential cash increase was due primarily to reduced inventory and proceeds from stock option exercises, partially offset by capital expenditure from our endpoint IC post-processing expansion. Inventory totaled $18.4 million, down $5.6 million sequentially. Based on our current visibility to wafer and component supply, we do not anticipate building inventory in the fourth quarter of 2021. Third-quarter net cash provided by operating activities was $5.4 million. Property and equipment purchases totaled $6.3 million. Free cash flow was negative $900,000. Before I turn to our fourth-quarter guidance, I want to highlight items unique to the third quarter and give an update on a few of our strategic initiatives. First, product costs, across all product lines, increased markedly over the past year. In October, we began passing those increased costs to our customers. We have factored those increases, as we see them today, into our fourth-quarter guidance. Second, we anticipate a favorable mix of specialty and industrial endpoint ICs in the fourth quarter, driving margin-rich revenue. We expect that favorable mix, coupled with increasing M700 volumes as a percentage of endpoint IC revenue, to drive an increase in our fourth-quarter gross margins. Third, we expect CapEx spending to decline in the fourth quarter as we complete our current endpoint IC post-processing capacity expansion. Looking forward, we expect 2022 CapEx spending to be similar to 2021 as we continue investing in our business. Turning to our fourth-quarter outlook, we expect revenue between $46 million and $48 million, a 29% year-over-year increase at the midpoint of the range compared with $36.4 million in the fourth quarter of 2020. We expect adjusted EBITDA between a loss of $500,000 and a gain of $1 million. On the bottom line, we expect non-GAAP net income between a loss of $1.1 million and a gain of $400,000 reflecting non-GAAP earnings per share between a loss of $0.04 and a gain of $0.02 on a weighted-average diluted share count between 24.3 million and 26.5 million shares. In closing, I want to thank our Impinj team, customers, suppliers, and investors for your ongoing support.

First of all, let me just congratulate you guys on some tremendous execution. There's a lot of headwind, but I think you guys are doing all the right things in terms of supply and execution. So, a huge congrats. My question was, the chip revenues, the endpoint IC revenues jumped up. I know supply was a pretty big concern for you guys. You were expecting some additional wafers coming later on in the quarter around the November time frame. Is that the set of wafers that you were able to already secure, or is that still I guess supposedly on the come?

Harsh, this is Cary. Thanks for the question, and it's a good one. So as we've talked previously, endpoint IC volumes typically decline in the fourth quarter. And even with our accelerating demand, we said last quarter that that typical 5% to 10% decline would hold in Q4 because we were limited by supply. The incremental wafers we've received in Q3, we are now able to satisfy more of that demand. Certainly not all of it, but more of that demand than we had thought last quarter, and it's allowing us to deliver endpoint IC unit volume in Q4 that beats that typical seasonality. The price increases then layer on top of that better-than-seasonal volume, and those two factors will drive the sequential increase in endpoint IC revenue.

Yes, Harsh. Thank you. So this is Chris. We do have visibility now to first half 2022. Obviously, there's a possibility for further wafer upsides. That visibility to the first half of next year allows us to say that we will be able to equal our fourth quarter shipments in the first half of the year.

I want to start with the commentary on demand being 50% higher, sort of consistent with last quarter. Just given the wafer supply commitments that you guys are getting, that's improving a bit. Do you guys expect to start to eat into that 50% demand that's above sort of the ability for the industry to supply? Or would you expect that even with the wafer allocation, that demand is going to continue beyond that 50%?

Derek, this is Chris. Thanks for the question. We guide one quarter at a time. We're getting some advanced visibility at this point in time, just given the wafer supply shortfalls. So we don't guide as far out as would be able to answer your question, but demand does remain strong. And as I said, for last quarter, demand exceeded supply by more than 50% of our endpoint ICs. So if and when we get upside wafers, we will layer on that additional supply to meet some of that additional demand. In terms of the strength of demand, we see demand continuing to be strong across our industry. And we will give further guidance in terms — or further visibility on our next earnings call.

Gentlemen, congrats on nice results. So maybe Chris, for you. You touched briefly on loss prevention in Europe and the cashier-less checkout in Korea. Thoughts on which one's moving faster, which one's going to be a bigger application for you guys in 2022?

Thanks for the question. What I'm going to say is that the driver for both deployments is self-checkout. There's the self-checkout deployment in Asia. And then although we talk about loss prevention in Europe, the driver for that loss prevention is self-checkout. Because if you got regions where that tends to be a little bit higher and you want to do self-checkout, you actually can't have self-checkout without a functional loss prevention system. If you think of existing loss prevention technologies, for example, the hard tag with a pin that goes through a garment, that doesn't work for self-checkout because you can't give the detacher to the customer to remove the hard tag because they can just remove any hard tag then. So in order to make the self-checkout work, you need to basically register the item that's being sold or deactivate the tag at point-of-sale, and then have the exit gate not recognize that that same tag on the item is leaving the store or recognize the item is being sold. So in both instances, it's self-checkout that is driving the opportunity. In parts of Asia, there's not as much need for loss prevention, although it's still there. And so we expect even in some of those Asian opportunities for loss prevention to come into play in the future.

Yes, good question. Yes, gross margins have been nuanced throughout the year. Q4, it will continue to be nuanced. We will have the strong mix of industrial and specialty SKUs, which are our higher margin, and we will have an increasing mix of M700. Both of those factors, even without the benefit of E&O sales that we had in Q3, I anticipate gross margin increasing in Q4. As I look into 2022, I do not think we will maintain that same level of industrial specialty SKU mix. So we'll lose that benefit, but we'll maintain and likely increase the benefit coming from an increasing M700 mix.

Nice job in a difficult environment, guys, and I apologize for the background noise. But just a couple of quick questions to get in. Looking into the fourth quarter, M700, I'm wondering if you could give us an idea of what that endpoint mix looks like now that you're starting to become less constrained on that front. And also to follow up on Troy's question as it relates to gross margins, looks like you got a favorable mix going into the fourth quarter. Cary, I want to clarify that that sequentially up gross margin, that is off of the reported number of 53% as opposed to an adjusted number, reflecting the one-time reserves. Wondering also if you're thinking about any one-time reserves reversing in the fourth quarter. And then as we go into the first quarter, typically you get that pricing negotiation impact that takes a step down. Does that not happen this year because you've just kind of gone through passing price increases through to your customers?

Thanks for the question. I'll address the first part regarding the M700, and then I'll turn it over to you. We are facing limitations with 200 millimeter and 300 millimeter wafers, as well as with the Impinj M700 moving forward. The constraints are still present. The transition from 200 millimeter to 300 millimeter products, where the M700 will become our main product for endpoint ICs, is taking place this quarter. It will be our primary volume product in the future.

Thanks for your question, Chris. This is Jeff. I think overall, I would say the pipeline remains strong. In each of the large projects that we've discussed on prior earnings calls, those projects are continuing to progress well. But overall, we're seeing a diversification of opportunity across multiple sectors, multiple geographies, with particular strength in supply chain and logistics and ongoing strength in retail.

This is Chris Grenga in for Jim Ricchiuti. Congrats on the great quarter. Chris had mentioned some strong opportunities ahead on the project side. Could you talk about the pipeline for large projects in the systems area and whether you're seeing more underlying demand from larger customers or from customers who have been in earlier stages of project deployments?

We will now begin the question-and-answer session. Our first question today comes from the Harsh Kumar with Piper Sandler. Please go ahead.

Thank you, Grant. I'd like to thank you all for joining the call today. I hope you and your loved ones are and remain safe and well. Thank you again. Bye, bye.

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