Hello, and welcome to the Impinj First Quarter 2024 Financial Results Conference Call and Webcast. 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 Mr. Andy Cobb, Vice President, Strategic Finance. Please go ahead.

Thank you, Anja. Good afternoon, and thank you all for joining us to discuss Impinj's First Quarter 2024 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 first quarter 2024 financial results and second quarter outlook. We will then open the call for questions. Jeff Dossett, Impinj's CRO, will join us for the Q&A. You can find management's prepared remarks plus trended financial data on the company's Investor Relations website. We will make statements in this call about financial performance and future expectations 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 such statements 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 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 GAAP. 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 Baird's Global Consumer Technology and Services Conference on June 4 in New York. We look forward to connecting with many of you there. I will now turn the call over to Chris.

Thank you, Andy, and thank you all for joining the call. 2024 started strong. The momentum we saw exiting 2023 continued through the first quarter, with revenue and profitability exceeding both our fourth quarter results and first quarter guidance. Our strategic focus on silicon and enterprise solutions helped create that momentum while paving the way for multiyear growth tailwinds. Our recent reorganization and legal settlements pave the way for growing profitability. Turning first to silicon. The growth we saw in the last two quarters continued. First quarter endpoint IC revenue exceeded our expectations, driven by improving demand in both retail apparel and general merchandise, as well as the long tail of other applications. Looking forward, we expect the second quarter to again deliver solid product revenue growth. We also expect M800 volumes to double in the second quarter as our production ramp picks up, albeit still a small portion of our endpoint IC volumes overall. For RRP, we expect shipment rates to accelerate in the second quarter as we near the end of our prior-generation product shipments, buoyed by a healthy number of design wins and emerging opportunities. Turning to solutions, the visionary European retailers' ongoing rollout of our self-checkout and loss prevention solution is performing nicely, and we expect these initiatives to allow us to add additional brands at that customer to drive modest gateway demand through at least the end of 2024. Our tagging ramp, which replaces existing hard pads with embedded tags that maintain consumer privacy, is also on track, driving growing endpoint IC volume. In general merchandise, a large North American retailer's usage of tags has accelerated, driven by an increase in tagged products and new product orders. We anticipate sustaining growth in general merchandise tagging for the rest of the year. Finally, in supply chain and logistics, we expect a second large North American supply chain and logistics user to increase their label consumption in 2024. Taken together, our enterprise solutions efforts are continuing to yield clear dividends in endpoint IC volumes. I'd like to now touch on two growth opportunities: the digital product passport and food. On DPP, I recently spent a week in the EU, speaking with partners and end users on how we can advance RAIN as the technology of choice for textile DPP. RAIN has strong apparel penetration; the DPP also requires consumer engagement. We are making the strongest case yet for putting RAIN reading technology into the hands of consumers, and large enterprises are acknowledging that need now. On food, demand is growing at a faster pace than I had expected, with several food service chains openly discussing their use of RAIN for inventory, shelf life, and freshness. The overall food opportunity is so large that any adoption could drive meaningful endpoint IC volumes. On the intellectual property front, in March, we successfully settled our patent dispute with NXP, concluding a multiyear litigation in which we intended to prevail in multiple jury trials. NXP agreed to pay Impinj an upfront amount and a yearly license fee in exchange for a broad patent cross-license. This settlement increases our cash reserves and competitiveness, frees up management bandwidth, and removes uncertainty from the industry overall. While we are happy to put this dispute behind us, we remain vigilant and committed to safeguarding our patented inventions, as well as identifying additional licensing opportunities. In closing, we delivered a very strong first quarter in many respects—financial, organizational, and market leadership. We see continued strength looking into the second quarter. Looking further out, we see growing opportunities to drive recurring licensing and services revenue, monetizing our IP platform and cloud services. We continue driving our bold vision to connect every item in our everyday world, with confidence in our market position and excitement about the opportunities ahead. Before I turn the call over to Cary for our financial review and second quarter outlook, I want to thank every member of the Impinj team for their ongoing efforts in driving our bold vision. As always, I feel honored by my incredible fortune to work with you. Cary?

Thank you, Chris, and good afternoon, everyone. On today's call, I will review our first quarter financial results and second quarter outlook. First quarter revenue was $76.8 million, up 9% sequentially compared with $70.7 million in the fourth quarter of 2023, and down 11% year-over-year from $86 million in the first quarter of 2023. First quarter endpoint IC revenue was $61.5 million, up 14% sequentially from $53.9 million in the fourth quarter of 2023, and down 8% year-over-year from $67 million in the first quarter of 2023. The first quarter endpoint IC revenue exceeded our expectations, led by retail. Looking forward, we expect second quarter endpoint IC product revenue to increase sequentially, again led by retail. First quarter systems revenue was $15.3 million, down 9% sequentially from $16.8 million in the fourth quarter of 2023, and down 19% year-over-year from $18.8 million in the first quarter of 2023. Systems revenue was below our expectations, primarily due to lower channel reader sales. Looking ahead, we expect a sequential decrease in second quarter systems revenue, with increasing channel reader sales more than offset by declining project-based gateway sales. First quarter gross margin was 51.5% compared to 50.9% in the fourth quarter of 2023 and 52.4% in the first quarter of 2023. The sequential increase was driven by a mix within endpoint ICs. The year-over-year decrease was driven primarily by lower revenue covering fixed costs, partially offset by improved systems product margins. Looking to the second quarter, we expect gross margins to increase. Total first quarter operating expense was $32.9 million compared to $33 million in the fourth quarter of 2023 and $36.4 million in the first quarter of 2023. Operating expenses were lower than we anticipated, owing to strong spending management across all major functions, as well as reduced litigation costs. Research and development expense was $16.5 million, sales and marketing expense was $7.7 million, and general administrative expense was $8.7 million, including litigation expense of $1.3 million. We expect a slight sequential decrease in second quarter operating expense as litigation expense declines to immaterial levels, more than offsetting investments in our base expenditures. First quarter adjusted EBITDA was $6.7 million compared to $3 million in the fourth quarter of 2023 and $8.6 million in the first quarter of 2023. First quarter adjusted EBITDA margin was 8.7%. First quarter GAAP net income was $33.3 million. First quarter non-GAAP net income was $6.2 million, or $0.21 per share on a fully diluted basis. Turning to the balance sheet, we ended the first quarter with cash, cash equivalents, and investments of $174.1 million compared to $113.2 million in the fourth quarter of 2023 and $164.7 million in the first quarter of 2023. Inventory totaled $87.8 million, down $9.4 million from the prior quarter. First quarter net cash provided by operating activities was $60.1 million. Property and equipment purchases totaled $6.2 million. Excluding the $45 million income from the litigation settlement, free cash flow was $8.9 million. Before turning to our guidance, I want to highlight a few items related to our results and outlook. First, NXP paid us a one-time $45 million litigation settlement payment in the first quarter. We recorded that $45 million in our first quarter GAAP financial statements as other income in our income statement and as cash on our balance sheet. Next, NXP will pay us an annual licensing fee each April for up to 10 years unless they design out our IRP and exercise an early termination right. Earlier this month, we received a first $15 million payment, covering the period from April 1, 2024, to March 31, 2025. We will recognize the full value of that payment as second quarter endpoint IC revenue, which is reflected in our second quarter guidance at nearly 100% gross margin. Going forward, the payments will increase annually by a modest fixed rate for as long as the agreement is in effect. As a reminder, when calculating our quarterly diluted earnings per share, if quarterly non-GAAP net income exceeds $12 million, you should add the 2.6 million shares underlying our convertible debt into our diluted weighted average shares and remove the corresponding $1.2 million of interest expense from our net income. Finally, the first half of 2024 marks a turning point in our operating margin profile. We added high-margin licensing revenue and reduced operating expenses by eliminating litigation spend and reorganizing our reader and gateway channel business. As you can see in our second quarter guidance, those actions will drive substantial earnings per share accretion and significant free cash flow. Furthermore, these margin improvements accrue before the M800 drives additional leverage. Turning to our outlook, we expect second quarter revenue between $96 million and $99 million compared to $76.8 million in the first quarter of 2024, representing a 27% quarter-over-quarter increase at the midpoint, including the licensing payment, and a 7% quarter-over-quarter increase at the midpoint, excluding it. We expect adjusted EBITDA between $23.9 million and $25.4 million. On the bottom line, we expect non-GAAP net income between $21.7 million and $23.2 million, reflecting non-GAAP fully diluted earnings per share between $0.72 and $0.77. In closing, I want to thank the 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 very much. We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Harsh Kumar with Piper Sandler.

First of all, huge congratulations on the settlement of the litigation and then also just the turn in the business. Chris, what a difference six months can make. There are a lot of interesting points in your comments. I wanted to start with general merchandise, particularly the large North American retailer that you highlighted. Could you provide some additional color on how this is going? What are the implications if this implementation succeeds? Is this a significant event that the entire retail industry is waiting for? Does it have huge implications for adoption across the retail sector? I have a follow-up as well.

I appreciate it. I'm going to let Jeff lead in here because he is very close to the customer side, obviously. So, Jeff?

Thank you for your question, Harsh. Our tagging ecosystem partners, who serve this large North American retailer's tagging needs, have signaled steady gains in the tagging of additional general merchandise categories, as well as a modest uptick in overall consumer demand. Some of the general merchandise categories are progressing more quickly than others, but we are optimistic that this progress will continue in the year ahead.

First, I'll add that historically, that end user has significantly led our industry, and others have usually followed their moves. Of course, there was a setback during the years from 2013 to 2019 associated with the previous challenges, but that's well behind us now. Although we don't have firm data yet, it's my expectation that this customer, being a bellwether for many other large customers and for our industry overall, will serve as a benchmark for others as they move forward.

Very well. Chris, for my follow-up, regarding logistics—again, about the second customer that is ramping—do you think you're in a position to say that this customer will grow with you steadily in every quarter for the rest of the year? And when do you think you might reach the point of 100% penetration with this customer in tagging?

I'll start here, and then let Jeff jump in after. With these large deployments, there are always initial teething issues. We work closely with the customer as they navigate those challenges. So, it's difficult for me to promise that things will consistently improve each quarter. However, we do see a strong commitment from that customer to digitize their operations and a clear willingness to incorporate tagging comprehensively into their business. There are multiple opportunities with this customer, which I hope will lead to broader changes across the supply chain for logistics and influence the entire industry.

The next question comes from Jim Rashidi with Needham & Company.

Just maybe on that second logistics customer. As you know, they have discussed moving into the Stage 2 implementation where presumably they will install RFID readers in the hands of their drivers. I assume that will help your reader IC business. Chris, could you elaborate on the significance of this deployment? Is this all part of their grand plan that you guys were always aware of?

I'll let Jeff take the lead here, and then I'll come back to the impact on silicon.

First, I want to reiterate that we prefer to have our existing partners and customers speak about their own programs and deployments. However, I will say that I believe we have platform opportunities with this particular customer going forward, especially with multiple silicon touch points.

Got it. And for a follow-up question: Chris, going back to your comment about the food applications moving faster than you expected, how should we think about this opportunity? When could this potentially drive meaningful incremental growth for the endpoint IC business?

Reflecting on past expectations, I indicated that the food opportunity is so large that it could take time to see significant movement. However, what I’m witnessing now is that this space is progressing more rapidly than I initially thought. The escalating conversations around inventory, shelf life, and freshness are particularly encouraging. The overall market presents substantial opportunities, and as we learn more, we will share insights with you.

Congrats on the quarter, and also on the settlement.

Thank you.

The next question comes from Mike Walkley with Canaccord Genuity.

Great. Congrats on everything too. On the topic of strong intellectual property and your comments about protecting it, what has been the feedback from the industry following your settlement with NXP? Are there additional opportunities to license your technology?

I'll start with the latter part of your question first, Mike. There are indeed additional opportunities out there for licensing overall. We are seeing possibilities in our IP front related to cloud services and our platform. Our strength and capabilities provide a solid foundation for identifying additional recurring revenue opportunities through partnerships and market engagement. So on that front, we feel optimistic. Regarding the industry's reaction to our settlement with NXP, there is a sense of relief. The uncertainty surrounding ongoing litigation between the two significant suppliers created a cloud over the industry, and now that uncertainty has been lifted. I am cautiously optimistic that this will help the industry move forward smoothly.

That’s great, very helpful. For my follow-up, Cary, regarding gross margins. Next quarter should exhibit high gross margins due to the licensing payment, but as we project gross margin trends without it, how should we view these trends for the remainder of the business?

Excellent question. We expect gross margins to increase in the second quarter, benefitting significantly from the license revenue. If you exclude that, we project gross margins at the product level to remain relatively flat quarter-over-quarter. Currently, we are slightly below our targeted 53% to 54% gross margin range for a few reasons. Firstly, we are still working towards better scale and are closing that gap quickly. Secondly, historically, the systems business recovery tends to lag that of endpoint ICs, which has contributed to endpoint IC revenue growing as a percentage of our total revenue. Lastly, the sales volume of our lower-margin 200-millimeter products continues to run slightly higher in the second quarter and likely in the third quarter as well. That product line is a couple of generations old, and we are phasing it out before M800 ramps up. Overall, we remain confident in our gross margin targets we outlined during our Investor Day.

The next question comes from Christopher Rolland with Susquehanna.

Thanks for the question. Regarding the digital product passport, could you share more about the associated applications and economics? How significant do you believe it can ultimately become?

The application really centers around the new U.S. regulations that require the tracking of textile items from production through sales to consumer use and eventually recycling. These regulations will begin rolling out in 2027. Our goal is to enable consumers to choose sustainable products through access to provenance data. This effort could drive significant opportunities for consumer engagement. However, it's worth noting that DPP is not universally adopted since alternative data carriers exist. Our partners and end users aim to make RAIN technology more available for DPP, which necessitates consumer-read capabilities. I believe mobile phones could facilitate this, opening a transformative opportunity for their suppliers. I'm hopeful that increased demand will lead to widespread RAIN usage, particularly in mobile phone readers that could unlock numerous possibilities beyond just the DPP. Thus, our focus is on enhancing consumer engagement and connectivity with embedded technology already present in retail items.

That's very interesting. Just a quick follow-up: Would you be selling ICs into the mobile market for that, or could they utilize existing functions? And is there a volume component to royalties for future payments?

To address your latter question first, the payment structure is based on a fixed amount that will increase modestly each year. Now regarding the mobile market, it's premature to ascertain whether there’s an opportunity for us in silicon use within mobile devices. Regardless, our platform, which includes endpoint ICs, is becoming integral in many services around our offerings. We're dedicated to being alongside retailers and phone manufacturers to drive market solutions, even if our silicon isn't included.

The next question comes from Scott Searle with Ross MKM.

It's encouraging to see the continued recovery in the core business and the outlook regarding key customers. On the retail apparel front, it sounds like that sector drove the upside for endpoint ICs in the first quarter and will likely do so in the second quarter as well. Chris, is the retail apparel market now normalized? Are we still recovering from previous excessive inventory, or are we seeing new design wins and ramp-up in unit volumes?

Thank you. I'm going to hand off to Jeff for commentary on this.

We are witnessing restocking in both apparel and general merchandise to realign inventory with an increase in consumer demand. Whether this trend continues is hard to call; we cannot predict it definitively at this time. However, partners working with those retailers express optimism for the second half of the year, albeit cautiously awaiting confirmation of sustained demand growth.

In addition to restocking, we're seeing progress from embedded tagging, which replaces traditional hard labels with our technology, and our ongoing efforts in solutions have contributed to this growth.

Got you. If I might follow up regarding the DPP opportunity: Chris, could you walk us through the milestones we can expect in the next couple of years? What about product categories like tires or batteries—the implementation timelines for these compared to textiles?

The current state of DPP is that batteries are being prioritized first, while textiles will follow, emerging as a larger category. However, decision-making on data carriers is still ongoing, and various options are being considered. RAIN RFID has a significant advantage in visibility and traceability since it's already integrated into many apparel items. We began to obtain pressure from large enterprises advocating for RAIN reading in mobile devices, which reflects the current efforts to drive adoption within this technology. This push represents a pivotal opportunity we hope will yield success in establishing RAIN as a data carrier for DPP within the next couple of years.

The next question is a follow-up from Harsh Kumar from Piper Sandler.

Ultimately, what should be the expected operating expense level going forward? You referenced legal expenses previously of around $4 million to $4.5 million—is that the right number for us to take out? And, just to ask, do you want us to model the next year’s payment as it will come in the second quarter of 2025, or should we watch for that number as it could fluctuate?

From an operating expense perspective, our Q2 OpEx guidance is clear. There’s immaterial litigation expenditure as we normalize post-reorganization occurring in Q1. Looking to the second half, I would expect modest growth, as we plan to continue investing in business opportunities given their scale. Therefore, you have a reliable outlook for OpEx at this point.

Okay. And supervisor of expected payments next year?

It's still early for precise estimations. While NXP has the ability to design out our IRP, that's not a common occurrence. Thus, I don’t expect substantial increases in that payment, but it’s reasonable to model it at this point. We'll provide updates as things evolve.

The next question is a follow-up from James Ricchiuti with Needham & Company.

With the litigation uncertainty resolved and your growing cash position, have you been looking into M&A as a means of accelerating growth in specific sectors of your business? The Viant acquisition seemed to provide some strategic benefits. Do you anticipate seeing more such opportunities?

I'll do my best to address that. While I can't discuss any particular opportunities publicly, Viant was a beneficial acquisition for us due to its alignment with our platform, enhancing our testing and quality assurance capabilities. We're always on the lookout for opportunities to strengthen our market position and if suitable prospects arise, we will pursue them. While we appreciate the additional cash, it’s more about identifying the right opportunity rather than solely relying on available funds.

Great. One final question if I may: Cary, regarding the M800 volumes, has your outlook changed in relation to its impact on gross margins as it scales? Could you remind us how that affects our overall volume?

The M800 benefits from a lower cost structure, which translates into approximately 300 basis points of gross margin improvement as volumes increase. Historically, with new IC launches, it takes a few years to reach running volume status. We're pleased with the current trajectory. While the M800 is beginning to ramp up in Q2, the volumes remain small, and as such, the immediate impact on gross margins is not apparent. The timeline to achieve significant volume remains challenging to predict accurately. However, we remain optimistic regarding the ramp-up and will keep you updated on progress throughout the year.

Seeing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Co-founder and CEO, Chris Diorio, for any closing remarks.

Thank you, Anja, and thank you all for joining us on the call today. Your continued support is greatly appreciated. Goodbye.

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