Good day, and welcome to the Impinj Fourth Quarter and Full Year 2021 Earnings Conference Call and Webcast. Please note this event is being recorded. I would now like to turn the conference over to Mr. Andy Cobb, Vice President and Strategic Finance. Please go ahead, sir.

Thank you, Chuck. Good afternoon and thank you all for joining us to discuss Impinj’s fourth quarter and full-year 2021 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 fourth quarter and full-year 2021 financial results and first quarter 2022 outlook. We will then open the call for questions. Jeff Dossett, Impinj’s CRO, will join us in the Q&A session. You can find management’s prepared remarks, plus trended financial data, on the investor relations section of the company’s website. We will make statements in this call about future expectations and financial performance that are based on our outlook as of today. Any such statements are forward-looking under the Private Securities Litigation Reform Act of 1995. While we believe we have a reasonable basis for making these forward-looking statements, our actual results could differ materially because any statements we make today are subject to risks and uncertainties. We describe these risks and uncertainties in the annual and quarterly reports we file with the SEC. We do not undertake, and expressly disclaim, any obligation to update or alter our forward-looking statements except as required by applicable law. On today’s call, all financial metrics except for revenue, or where we explicitly state otherwise, are non-GAAP. Balance-sheet and cash-flow metrics are on a GAAP basis. Please refer to our earnings release for a reconciliation of non-GAAP financial metrics to the most comparable GAAP metrics. Before turning to our results and outlook, note that we will participate in the Morgan Stanley Technology, Media & Telecom Conference on March 9th and the 34th Annual Roth Conference on March 15th. We look forward to connecting with many of you at those events. I will now turn the call over to Chris.

Thank you, Andy. And thank you all for joining the call. Impinj capped 2021 with record fourth quarter and full-year revenue and bookings, despite the disruptive impact of Covid-19 and wafer-supply shortfalls on our supply chain. We ended the year with three consecutive quarters of double-digit revenue growth, as well as record bookings in three out of four quarters, culminating with record backlog entering 2022. Our results were driven by strong Impinj execution and enterprises accelerating their investments in supply-chain visibility, omnichannel fulfillment, and operational efficiencies. We delivered our 60 billionth endpoint IC, another milestone on our journey to connect every item in our everyday world. If not for the wafer-supply shortfalls, we would have delivered even more. Despite that constraint, we orchestrated a strong quarter and a strong year, and that strength continues into 2022. Fourth quarter endpoint IC revenue exceeded our expectations, with record bookings despite us instituting cost pass-through starting in October. Retail demand remained strong, with retailers large and small turning to RAIN RFID to improve both in-store and supply-chain inventory visibility and to accelerate omnichannel fulfillment. We also saw growing adoption from mainstream supply chain and logistics providers, with the key adoption drivers being productivity gains, shipment-tracking accuracy, and capacity expansion. Full-year endpoint IC revenue set an annual record, with the year-over-year percentage growth at its highest pace since 2016. Looking forward, we see bellwether enterprises broadening their use cases and driving our endpoint IC demand. Like for the second and third quarters, fourth quarter endpoint IC demand exceeded shipments by more than 50%. And with our inlay partners periodically down and both their and our inventory levels measured in mere days, we continue to believe they would increase their bookings if we had more supply. Unfortunately, as of today, we don’t. Our first half 2022 wafer supply remains relatively unchanged, with 200 and 300mm wafer supply commitments that should allow us to equal or exceed fourth quarter 2021 shipment levels through mid-2022. But those shipment levels fall far short of our rapidly growing demand. And although our foundry partner continues to prioritize us for upside wafers, with both we and they hopeful for relief in the process nodes we use, to date that relief has not come, at least not sized to our need. Regardless, we continue expanding our 300mm post-processing capacity to stay ahead of our opportunity, even after successfully quintupling that capacity in 2021. We will be ready when the wafers finally do come. Fourth quarter systems revenue also exceeded our expectations. Reader IC revenue was a bright spot, continuing its recovery from the first half 2021 supply shortfall. We still expect supply of our prior-generation Indy reader ICs to catch up to demand in first quarter 2022, and supply of our new E-family reader ICs to catch up to growing demand in second half 2022. We have high expectations for the latter, now with more than 100 design wins. Fourth quarter reader and gateway supply was better than we expected, contributing to our strong systems performance. That said, we continue navigating difficult component shortfalls that increase schedule variability and costs while we wait for key components to complete our product builds. We currently do not see supply normalizing or necessarily even improving in the first or second quarters. Like for fourth quarter, we entered first quarter with significant reader backlog that we must fulfill in a constrained supply environment even as demand remains strong. On the project front, follow-on orders for our RAIN loss-prevention product for the visionary European retailer contributed nicely to fourth quarter revenue. The customer is happy with the product performance and what it means for their store of the future and, we hope, will deploy more broadly. The second large North American supply chain and logistics customer continued deploying, contributing modest fourth quarter revenue. And a broadening of partner-led revenue in both retail and supply chain and logistics, our two target markets, was a bright spot in our fourth quarter. We are very pleased to see growing leverage from these partner-led deals. Beyond our strong results, 2021 was a fantastic year for RAIN. I am perhaps most excited by AmerisourceBergen launching its RFID Tagging Service. To my knowledge, their launch marks the first time a major corporation is sharing information about their RAIN-tagged items with people. I think back to the many years I’ve championed a vision of digital twins for physical items and what it means for the Internet of Things, the power of RAIN item visibility in every person’s hand, available information about every connected item, the massive inflection opportunity, and I can see it materializing. I am absolutely thrilled. 2021 was marked by other big stories as well. For example, the CEO of the world’s largest package-delivery company announced a plan to add RAIN tags to all their packages to drive efficiencies and eliminate 20 million manual scans a day. An Accenture report stated that 93% of North American retailers are piloting or deploying RAIN. And we know that few of those retailers are fully deployed, signaling huge opportunities ahead. Despite Covid-19 and the operational challenges, and the stress we all feel, I do believe someday we will look back and say 2021 was a big year for Impinj and for the RAIN market overall. On the organizational side, we made two major announcements last week. First, I would like to congratulate Hussein Mecklai on his promotion from Executive Vice President of Engineering to Chief Operating Officer, with engineering and operations now reporting to him. For the past three years, Hussein championed the development of the Impinj platform, delivering groundbreaking endpoint ICs, reader ICs, readers, and gateways. And most recently, he spearheaded growing our operations capacity across our product lines. Congratulations, Hussein. Second, I’d like to thank current director Steve Sanghi, who has agreed to serve as Impinj’s next Board Chair, effective at our upcoming general meeting. Steve’s experience as Microchip’s long-term CEO and current Executive Chair brings an extraordinary level of knowledge and insight to Impinj. Also, I’d like to welcome Meera Rao who just joined our board. Meera was previously CFO at Monolithic Power Systems and she brings significant executive and board-level experience to Impinj. Steve, thank you. And Meera, welcome. Finally, long-term board members Peter van Oppen and Theresa Wise have decided not to stand for reelection this year. We will continue benefiting from their guidance for the remainder of their terms. I want to express my heartfelt appreciation to both Peter and Theresa for their support and guidance to me personally, as well as for their many contributions to Impinj over the years. I will miss them on our board and I wish them both the very best. Before I close, I’d like to thank every member of the Impinj team for their incredible effort every day of 2021. Your spirit and dedication in the face of Covid-19, the unparalleled supply-chain disruptions, and inadequate product supply amazes me. Our record results are a testament to your grace under pressure. So, to each and every Impinj team member, I’d like to give my heartfelt thank you. In closing, 2021 was a solid year driving our bold vision. We delivered record bookings, revenue, and adjusted EBITDA while launching key new products, investing in our team, building our 300mm post-processing capacity, and accelerating our M700 series ramp. As we continue working side-by-side with our ecosystem partners to navigate both growing demand and ongoing supply-chain disruption, I remain confident in our market position and energized by the opportunities ahead. I will now turn the call over to Cary for our detailed financial review and first quarter outlook.

Thank you, Chris, and good afternoon, everyone. I want to start by taking a moment to reflect on 2021. On the surface, it was a fantastic year for Impinj. We delivered record revenue, adjusted EBITDA, and bookings, with revenue and profitability significantly exceeding our expectations. We saw strong bookings momentum throughout the year, capped by a record fourth quarter. Below the surface, however, our team wrestled with Covid-19, supply chain challenges, and wafer shortfalls, constraining our ability to fully capitalize on record demand. I can only imagine how much stronger 2021 would have been with more supply. Today, more than ever, I am energized by our massive opportunity. And with the strength of our team, I am optimistic we will capitalize on our record backlog when the supply constraints ease. Fourth quarter revenue was $52.6 million, up 16% sequentially compared with $45.2 million in the third quarter of 2021, and up 44% year-over-year from $36.4 million in the fourth quarter of 2020. Fourth quarter endpoint IC revenue was $38.4 million, up 20% sequentially compared with $32 million in the third quarter of 2021, and up 35% year-over-year from $28.5 million in the fourth quarter of 2020. Quarter-over-quarter endpoint IC revenue growth significantly outpaced typical seasonal declines. Our specialty and industrial product mix proved richer than our original assumptions, driving revenue above our expectations. Looking forward, we expect first quarter 2022 endpoint IC revenue to decline slightly sequentially, driven by a smaller percentage of specialty and industrial ICs. Fourth quarter systems revenue was $14.2 million, up 7% sequentially compared with $13.2 million in the third quarter of 2021, and up 79% year-over-year from $7.9 million in the fourth quarter of 2020. Systems revenue exceeded our expectations, due to our contract manufacturer delivering readers earlier than we expected. On a quarter-over-quarter basis, reader IC and gateway revenue increased while reader revenue declined. On a year-over-year basis, reader IC, reader, and gateway revenue all increased. We expect first quarter 2022 systems revenue to follow seasonal trends, declining slightly sequentially. 2021 revenue was $190.3 million, up 37% year-over-year compared with $138.9 million in 2020. Endpoint IC revenue grew 36% year-over-year, driven by strength in omnichannel fulfillment, new deployments, expansion of existing deployments, and Covid-19 recovery. Systems revenue grew 39% year-over-year, driven by loss prevention and broad-based demand for readers and gateways. Fourth quarter gross margin was 58.2%, compared with 53.3% in the third quarter of 2021 and 50.4% in the fourth quarter of 2020. The quarter-over-quarter increase was driven by underlying product margins, partially offset by a smaller contribution from sales of fully reserved inventory. The year-over-year increase was driven by underlying product margins and product mix. Beyond the margin-rich industrial and specialty products, the M700 series became our volume runner, providing a gross margin tailwind in the fourth quarter. The fourth quarter 2021 benefit from selling fully reserved inventory was 130 basis points. Full year 2021 gross margin set an annual record at 54.2%, compared with 49.0% in 2020, with the increase due primarily to lower E&O charges, sales of fully reserved inventory, and higher underlying product margins. The 2021 benefit from selling fully reserved inventory was 150 basis points. Total fourth quarter operating expense was $25.3 million, compared with $24.4 million in the third quarter of 2021 and $21.5 million in the fourth quarter of 2020. Research and development expense was $12.3 million. Sales and marketing expense was $6.8 million. General and administrative expense was $6.2 million. 2021 operating expense totaled $94.1 million, compared with $79.6 million in 2020. Fourth quarter adjusted EBITDA was a profit of $5.3 million, compared with a loss of $400,000 in the third quarter of 2021 and a loss of $3.1 million in the fourth quarter of 2020. 2021 adjusted EBITDA was a profit of $9.1 million, compared with a loss of $11.5 million in 2020. Fourth quarter GAAP net loss was $20 million. Fourth quarter non-GAAP net profit was $4.3 million, or $0.16 per share, using a weighted-average diluted share count of 26.8 million shares. 2021 GAAP net loss was $51.3 million. 2021 non-GAAP net profit was $6.4 million, or $0.25 per share, using a weighted-average diluted share count of 25.9 million shares. Turning to the balance sheet, we ended the fourth quarter with cash, cash equivalents, and investments of $207.6 million, compared with $113.3 million in the third quarter of 2021 and $106.1 million in the fourth quarter of 2020. In the fourth quarter of 2021, we issued 1.125% convertible notes due November 2027, generating $287.5 million in gross proceeds and $94.2 million in net proceeds after fees and retiring almost 90% of our 2% convertible notes due December 2026. Inventory totaled $22 million, up $3.5 million from the prior quarter, with the increase primarily from systems. Fourth quarter net cash used in operating activities was $3.9 million. Property and equipment purchases totaled $2.1 million. Free cash flow was negative $6 million. For the full year, net cash provided by operating activities was $6.5 million. Property and equipment purchases totaled $16.2 million. Free cash flow was negative $9.8 million. Before I turn to our first quarter guidance, I want to highlight items unique to the fourth quarter and give an update on a few of our strategic initiatives. First, a margin-rich mix of industrial and specialty endpoint ICs, combined with the benefit from selling fully reserved inventory and M700 volume nearly doubling, drove our record fourth quarter gross margin. We expect a slightly less favorable mix of industrial and specialty endpoint ICs in the first quarter, driving margins down sequentially. In the second quarter 2022, we expect that mix to normalize. Second, back in 2019, to conserve cash, we pivoted our incentive compensation to 100% stock. Since then, we strengthened our balance sheet and, in 2021, delivered record adjusted EBITDA. In 2022, we will pivot our incentive compensation back to a mix of cash and stock. We have reflected the increase in operating expense in our first quarter 2022 guidance. Third, we delivered business-model leverage in an environment where revenue was supply constrained, setting adjusted EBITDA records in the fourth quarter and full-year 2021. Even as we continue investing in our business in 2022, we remain focused on delivering adjusted EBITDA breakeven or better. Finally, we expect first and second quarter revenue to be supply constrained, with those constraints likely continuing throughout 2022. From today’s vantage point, demand far outstrips our supply. Turning to our outlook, we expect first quarter revenue to be between $50 million and $52 million, a 13% year-over-year increase at the midpoint of the range compared with $45.2 million in first quarter 2021. We expect an adjusted EBITDA profit between $100,000 and $1.6 million. On the bottom line, we expect non-GAAP net income between a loss of $1.1 million and profit of $400,000, reflecting non-GAAP earnings per share between a loss of $0.05 and a profit of $0.01 on a weighted-average diluted share count between 24.9 million and 27.2 million shares. In closing, I want to thank our Impinj team, our customers, our suppliers, and you, our investors, for your ongoing support.

The first question will come from Toshiya Hari with Goldman Sachs.

Hi, guys, congratulations on a very strong year. And thank you for taking the question. I guess just to start off, I had two questions. Chris, I was hoping you could elaborate a little bit more on how you're thinking about supply in ‘22. Based on your comments, it's pretty clear, you're going to be supply gated for at least the first half and potentially the second half as well. But as we think about how to model ‘22 on a sequential basis, both for the endpoint IC business as well as the systems business, how should we think about the cadence at which you sort of gain additional supply throughout the year?

Okay, thank you, Toshiya, and thanks for that. Thanks for your comments. So I'm going to preface the comment specified by saying that our demand entering 2022 is very strong. We have, as I said in the prepared remarks, visibility to our wafer supply that allows us to maintain constant or slightly increasing quantity volumes in the first and second quarters of this year. We are working closely with our foundry partner to get upside wafers. The process nodes we are in are very tight. There, for example, shared by automotive and others. And to date that supply has been short and coming at least relative to the outsized magnitude of our demand. And we want to make that point that our demand is large, our opportunity is growing rapidly. And with that record backlog entering 2022, the strength and demand we're experiencing, we and our foundry partner are working closely together to deliver into that opportunity. But to date, we don't have the supply that allows us to meet that opportunity for the year. So we continue working with them. They have prioritized us for upside; we will work hand in hand with them to try to deliver into our opportunity and kind of capture everything that we see in front of us. Did I answer your question adequately, Toshiya?

Yes. On the system side, Chris, were there any other dynamics at play?

Yes, on the system side, as I mentioned in the prepared remarks, for example, for our readers specifically, we do have supply shortfalls in some critical components. We are working ahead in order to basically have our kids belt as those components come in. And we do see supply constraints in the first and second quarters. We are optimistic that those constraints will alleviate in the latter part of the year, but it's still too early to tell. Our Indy reader ICs we expect to catch up to our supply to catch up to demand in the first quarter this quarter; our E-family, the new reader ICs for which we have more than 100 design wins, we expect supply to catch up to a growing demand in the second half of the year. So overall, even felt on the system side just like the two sides, strong demand really strong demand growing opportunities out in the market driven by enterprises, kind of reinventing themselves, omnichannel fulfillment, broadening their use cases, supply chain and logistics increasing thereafter operational efficiencies and driving capacity improvements. All those enterprises are driving rapid demand growth and causing us to strain to meet the needs of the market. And we're doing our best from an operational perspective, and with our foundry partner and with our other suppliers out in the market to meet that demand.

Got it. And then I guess, Chris, based on those comments, would it be fair to assume sort of a low $50 million revenue number for obviously, for Q1, given your guidance, but also for Q2, and then a potential step change to the upside in Q3 and Q4, at a high level? Is that kind of the right way to think about the year?

Yes, I hate to say, this is Cary, thanks for the question. I think I'll take that one from Chris. So, yes, we've obviously guided midpoint of $51 million in the first quarter. As I look through into the second quarter, the endpoint IC situation hasn't changed that much. Yes, we've continued to receive modest upside wafers. But we're still in the pocket of shipping kind of Q4 level units through Q1 and into Q2 or mid-2022. There will be a little bit of an impact from a reducing mix of industrial and specialty products. So that drove high revenue and high gross margin in Q4; that mix will tail off a little bit in Q1, and then it'll normalize in Q2. From the system side, Chris really highlighted it, where we're navigating an ever-changing list of components shortfalls. And we do our best to solve those. And then the next quarter, we're out solving another list of challenging projects. So that I think that kind of sets us up for fairly consistent performance on the systems. Obviously, however, anytime we're talking about our systems revenue line, the timing and sizes of large projects can play a factor in it. But we'll keep you up to speed on how that progression.

And, Toshiya, I guess, I'm just going to add that our environment we're in, we are supply limited, not demand limited. So demand far outstrips our supply. So to the extent we can get outside supply, we will deliver into that demand. If supply remains constrained, then we will be tied. It's just that we only guide one quarter at a time, and it's especially difficult right now for us to talk beyond the current quarter we're guiding because we are strictly supply constrained. Demand is very significant right now. And we're doing our best across the company in every way we can to deliver into that supply. But it requires a lot of things to require support from our partners, of course, incredible execution by our team. And of course, visibility into where the supply market is going to go. So we'll keep talking about supply; if supply improves, we'll deliver it.

Got it, and then sorry, as my second question just on gross margins, I guess this one's probably for you, Cary. I mean great job in Q4, you talked about a slight decline in Q1 and then further normalization in mix in Q2, if you can kind of speak to how you're thinking about some of the swing factors, if you will, the M700, cost inflation, you talked about passing through some of the cost increases to customers starting in October. But if you can walk us through the puts and takes and how we should think about normal gross margins for your business going forward. That'd be great. Thank you.

Thanks Toshiya. That's a great question and one filled with a lot of nuance. So Q4 gross margins were obviously very strong; the driver of that strength was a particularly strong mix of industrial and specialty products. This is the second time in my tenure that we've seen a similar strong mix of industrial and specialty skews, the last time was about 18 months ago in 2Q, '20, and in that quarter, 2Q, '20, we delivered 51.4% gross margin. And we had also benefited by about 220 basis points from fully reserved, excuse me, we had a negative impact of 220 basis points from the E&O layoff. So in that quarter, Q2 of '20, we had about a 53.5% normal gross margin. All of that list above are then typical 50% average is really attributed to the strong mix of specialty industrial skews. As I look at Q4 results, that mix was even a little bit stronger than it was 18 months ago. And into Q1, '20. It's worth noting that Q4 benefited from the reverse of those E&O write-offs from 2020 where we sold some of that fully reserved inventory and benefited by 130 basis points. So normalize those two factors out. And you can start to understand what the benefit of the M700 is. As I look into Q1 of '22, I expect a weakening mix of industrial specialty skews, but still stronger than normal. So we'll get a little bit of a lift in Q1 from that, but nowhere near the size of the lift had we got in Q4, '21. And then by the time we get into Q2, I expect us to be at kind of our normalized run rate with our strong mix of M700 support even.

The next question will come from Michael Walkley with Canaccord Genuity.

Great. Thanks for taking my questions and congrats on the strong 2021 execution despite the challenging year. I guess the first question, Chris, just on a high level with a tight labor market and all the efficiencies so many industries could benefit from adopting RAIN. What do you see as potential for some new industries that are interesting long term and could potentially cross the chasm, as you put it in terms of broad adoption, like we've seen with retail and now the logistics markets?

Yes, thank you, Mike, for the question. I guess I'm going to start by answering the question by saying you're seeing broad-based adoption in many verticals. We're seeing it in, of course, retail and supply chain logistics, we're seeing opportunities in automotive, we're seeing opportunities in food, we're seeing industrial and manufacturing, electronics, I mean, just very broad-based adoption. And with the AmerisourceBergen announcement in pharmaceuticals and healthcare, we as a company are significantly focused on retail because it was the early adopter. And there's so much opportunity there, and supply chain and logistics with some of our very significant design wins. That doesn't mean that we're ignoring those other opportunities in other spaces, but we are significantly counting on our partners to deliver against them, as we think about the tight labor market and where we could see further significant adoption in vaccine industry costs of crossing the chasm, not really going to be able to hazard a guess right now, because there's so much movement happening in so many verticals. You hear some of our partners talking about significant opportunities in food. And food, of course, is a huge opportunity. And you hear other stuff, for example, talking about automotive, and if aviation comes back, there's still aviation opportunity. I think that the key point I want to make is that, look at what RAIN really does. It allows companies to track every item they manufacture, transport, and sell, gives them visibility to where those items are as a function of time, to increase their efficiencies, reduce their operational costs, reduce mistakes, track items better, and deliver more efficiently. It really allows enterprises to transform how they run their businesses. And fundamentally, I don't see any other technology today or on the horizon that does that. So our future is incredibly bright. We'll focus on our two target verticals for now. And as we make more progress, we'll open up to a third. The third are definitely out there.

Thanks. And I guess my follow-up question, just how is the large project pipeline and as the industry's shortage of RAIN ICs that causing a pause in terms of timing of large product rollout? Because we're worried about getting the end point eventually? Or is the pipeline still strong? Just given all the use cases you just laid out?

Mike, this is Jeff. I'll take that one. First of all, in terms of the pipeline, I think as reflected in our prepared remarks and Chris' earlier answers, the demand environment is strong; our pipeline is strong, and to build on what Chris has commented on, the diversification of that demand, both geographically and across different industry sectors is exciting. And it includes a range of sizes of projects, of course, but the component which is the large project is growing, and it reflects the digital transformation projects and initiatives of industry-leading enterprises, and so the pipeline is strong. Now to the second part of your question, which relates to how supply environment is impacting end customers projects, we work in close collaboration with our partners and customers in the planning of either the expansion of existing projects or the introduction of new projects, with a view of trying to ensure that we optimize the timing and pace of those expansions to new projects according to the supply visibility. So I think we and our partners are seeing continued growth in demand and a need to thoughtfully plan supply to meet that growing demand.

The next question will come from Harsh Kumar with Piper Sandler.

Yes. Hey, guys, first of all, congratulations, Hussein. And great job getting Steve and Meera; we know Steve Sanghi from Microchip covering that company. And both of these guys, both of them are amazing gets as board members. But the first question, Cary, I want to go back to Toshiya’s question earlier and try and, for lack of a better word, pin you down a little bit on what the margins can be normalized in 2Q. So I think what you told us is 130 bps is reserved inventory that was written off. And maybe I'm assuming you've got maybe 100 bps of mix. So is it fair for us to think that we take 58% and we sort of take off 250 bps and that would be a good number for us to think about for margins going forward, and the benefits you're getting and starting, call it 2Q, 3Q and onwards?

So, Harsh, this is Cary; thanks for the question. And I appreciate the opportunity to follow up because gross margin is incredibly nuanced in Q4 less in Q1, but we'll still be nuanced in Q1. So of the 58.2% that we reported for Q4, you're absolutely right. 130 basis points were related to the sale of fully reserved items that won't repeat again in Q2. So take that off. The piece where I think a little bit under is on the mix benefits from the specialty and industrial skews. When I was pointing back to Q2, '20, the last time we had that strong mix, we were able to back into the strength of that mix being about 350 basis points in Q2 of '20. This quarter, I think that benefit is even stronger for the specialty and customer mix. So that's how I would back out to what I think of as a normalized gross margin. And in that normalized gross margin is our M700 doubling from Q3.

The next question will come from Troy Jensen with Lake Street Capital.

Hey, congrats, gentlemen, maybe two quick questions here for Cary. You mentioned a cost pass-through; I was wondering if you can quantify that. And then also, was there any 10% customers in Q4?

Yes, so from cost pass-through, so in October, last October, and as a response to our cost or COGS increasing, we began the process of passing through those costs onto our customer. We did it in a way to maintain the integrity of our margin model. So think of that as preserving everything that was in place in a margin model prior to it. So not only the kind of the 50% corporate average gross margin that we had, but also the ambitions of M700 driving margin accretion to the business, all of those tenets of that margin model were maintained in our cost pass-through philosophy. And then in terms of 10% customers on an annual basis, that will be included in our 10-K, which we file early next week.

Okay, understood. Maybe just a quick follow up, or maybe one for Chris here; other industries that have followed when new product cycles start or when capacity gets tight, customers can double order to try to get more allocation of what you're currently getting. So just curious to know, kind of your confidence that those massive bookings that you guys have had throughout the year really reflects the demand versus customers just trying to get more of the kind of capacity commitment.

Yes, thanks, Troy. So there's always a risk of double ordering and the two-step distribution model that we've got, but our team is pretty seasoned on it now. Our purchase orders are non-cancelable, and we've contact directly with a lot of end users. So our visibility into both our partners' inventory levels, our end users, effectively inventory levels, and their need. And the fact that our direct partners are frequently down, gives us good confidence that the demand we're seeing is true demand. Yes, it's real.

The next question will come from Derek Soderberg with Colliers.

Hey, guys, thanks for taking my questions. Cary, just going back to gross margins again, I know it's going to take some time to sort of fully realize the benefit of the M700. I guess, when can we expect the M700 to achieve this sort of long term target gross model that you guys have said internally, which ending are you guys in around achieving that gross margin benefit fully? How long is it going to take to get a target?

Yes, thanks, Derek. It’s a good question. First off, think of M700 as a platform. And the chip that we're selling today is the first chip in our TikTok strategy. And there's going to be more innovation that the teams working on to both increase productivity, add new features to it or capabilities to it, as well as drive costs out. So as I'm looking at the M700, today in Q3, we reached the crossover point; think of that as during late in the quarter, we began shipping more M700 products or 300 millimeter products than we did our prior generation, Monza R6 and R6-P on 2dBm. In Q4, the volume nearly doubled relative to Q3. We're getting that very strong mix in Q4 of the M700 as a percentage of our sales and you're seeing that benefit in our strong gross margin. Yes, gross margin benefited from industrial specialty skews. We've assigned that impact. Yes, we have benefitted from the sale of fully reserved inventory. But underlying both of those, our continued increase in gross margin directly driven by the M700. And as I look forward to next year, the overarching comment is supply is going to have an impact on our M700 mix, and we are ready and waiting for any way for we can get, whether that be 200 or 300 millimeter products, and we will, whatever when we get, we'll turn it into product and sell it to our customers.

The next question will come from Scott Searle with Roth Capital.

Hey, good afternoon. Thanks for taking my questions. Hey, Cary, just quickly wanted to clarify on the gross margin comments. In the current quarter, there is no benefit from inventory that was previously written off. And then the comment about the 300 basis point plus benefit included both specialty and M700. Is that correct?

So let me correct on both of those. So there was 130 basis points benefit from selling fully reserved inventory, not expected to repeat. And then I highlighted, using the last time we had a strong industrial specialty mix, which was 2Q of '20; that impact was about 350 basis points to the quarter. The impact of Q4 was larger than that; this was a stronger, even stronger industrial specialty mix in Q4. The remaining of that benefit is you can think of the remaining gross margin lift over our normal 50% as what you can think of as the cumulative impact or the current effect of the M700. We've been ramping up M700 as a percentage of our mix for five quarters now. And really heavily in the last two quarters. It became, we reached the crossover point in Q3 and it became the volume runner in Q4. And in Q4, we nearly doubled our volume of M700 chips.

Okay, Cary, just a follow-up on those. The gross margin outlook then for the rest of the year. Is it an expectation in terms of what the mix will look like exiting this year? I know it's subject to a lot of factors but a best guess at this point in time. And given the price increases that have gone through are they expected to be permanent through the year? Or do you have a give back at some point?

We, so let me answer the last one first, we made the decision to pass through cost when we received cost increases on our part, so that was the driving factor behind it. It's hard for me to speculate what we would do in the future if the costing environment changed how that would impact our pricing. But I just don't see that happening right now. I expect elevated costs throughout 2022.

Given the short, this is Chris, just given a short break for supply and the needs of the market. And I personally will be surprised that the founders actually dropped their wafer pricing; it would be some material change on the market. And that would be just route if just kind of a much broader ways.

And Chris, and then, oh, sorry, go ahead.

And I just want to add one more thing, just longer term, we've emphasized to our foundry partner the fact that our products need to be as available as paper. Because our end customers are using our products to track the items they manufacture transport and sell. So longer term, we actually need to have good availability; we can't be in the supply environments because it has such a great impact on supply chain and logistics across the globe. So there's another way of thinking about things going forward is that the demand we have in the market actually, in order to get the end customers to deploy, we actually need to be able to deliver today and for the long term, we focusing on that kind of topic for the next many years without, because it's so critically important.

The next question will come from Mark Lipacis with Jeffries.

Hi, thank you for taking my question. I have one for Chris and one for Cary. Chris, I wanted to clarify your statements and ensure I understood them correctly. You mentioned there is demand for the M700 platform products, but also indicated a risk that if competitors can supply earlier, that demand could decrease. I want to make sure I grasp this. Do you think that your customers are ordering, particularly for endpoint ICs or the M700, because they need specific functionality that perhaps competitors do not offer? Or is it more of a first-come, first-served scenario, where if someone increases capacity, your backlog might diminish? Additionally, I have a follow-up question. Thank you.

Okay, great. Mark, this is Chris. I really appreciate your question, and it helps to clarify things. When I mention platform wins, I'm referring to situations where we're fully utilizing our platform. Generally, we are enhancing system performance to leverage our entire platform, and as supply allows, we prioritize fulfilling these platform wins. Not every win in the market is tied to our platform integrated circuits. If you consider the retail sector, for instance, we just introduced an inventory counting solution and are competing directly with our main competitor in the market. Substitution is possible, meaning the market consists of two parts for us. One consists of use cases that can utilize both our and our competitors' endpoint integrated circuits, where we compete directly, and the other includes opportunities where we provide our full platform, which offers unique capabilities or better performance. Naturally, for these platform wins, we prioritize supplying our endpoint integrated circuits. Our challenge lies in competing for market share and finding opportunities for undifferentiated products, as our competitor's advancements could allow them to capture a larger share of those opportunities. Does that make sense?

Got you. That makes that's very clear. Thank you, then for Cary. Appreciate your comments about shifting the incentive portion of the compensation expense to more of a mix of stock-based compensation and cash, if I heard correctly. Can you quantify that a little bit on how should we think about the OpEx through the year and like the mix of how should we think about stock-based compensation expense for the year and then kind of the total aggregate line of stock-based compensation and then regular operating expenses? Thank you.

Yes, so thanks for the question, Mark. I think as I look at the OpEx impact for making the shift to back to a mix of cash and stock for incentive compensation, I think that impact is about $700,000 to $800,000 per quarter in new OpEx that wasn't there last quarter, if you will. On the stock-based compensation, we have included that in our one 1Q guide. It's a little bit hard to project for the full year. Yes, we will have fewer shares related to incentive compensation issued. But it really depends on what the stock price does.

The next question will come from Scott Searle with Roth Capital.

Hey, good afternoon. Thanks for taking my questions. Hey, Cary, just quickly wanted to clarify on the gross margin comments. In the current quarter, there is no benefit from inventory that was previously written off. And then the comment about the 300 basis point plus benefit included both specialty and M700. Is that correct?

So let me correct on both of those. So there was 130 basis points benefit from selling fully reserved inventory, not expected to repeat. And then I highlighted, using the last time we had a strong industrial specialty mix, which was 2Q of '20, that impact was about 350 basis points to the quarter. The impact of Q4 was larger than that; this was a stronger, even stronger industrial specialty mix in Q4. The remaining of that benefit is you can think of the remaining gross margin lift over our normal 50% as what you can think of as the cumulative impact or the current effect of the M700. We've been ramping up M700 as a percentage of our mix for five quarters now. And really heavily in the last two quarters. It became, we reached the crossover point in Q3, and it became the volume runner in Q4. And in Q4, we nearly doubled our volume of M700 chips.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Diorio, Co-Founder and CEO for any closing remarks. Please go ahead, sir.

Thank you, Chuck. I'd like to thank all of you for joining the call today. I hope you and your loved ones are and remain safe and well. Thank you very much, and we'll talk again next quarter. Bye-bye.

The conference has now concluded. Thank you for attending today.