Impinj Inc (PI) 2016 Q4 法說會逐字稿

Good afternoon and welcome to the Impinj fourth quarter and year 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would like to turn the conference over to Maria Riley, Investor Relations. Please go ahead.

Thank you, operator, and thank you all for joining us today to discuss Impinj's fourth-quarter and year 2016 results. On today's call Chris Diorio, Impinj's Co-Founder and Chief Executive Officer, will provide a brief overview of our performance and markets. Evan Fein, Impinj's Chief Financial Officer will follow with a detailed review of our fourth-quarter and year 2016 financial results and 2017 outlook. We will then open the call for questions. Impinj's President and COO, Eric Brodersen, is also on the call and will join Chris and Evan in the Q&A session.

Please note that management's prepared remarks, along with quarterly financial data for the last eight quarters are available on the Company's website. Also we will consider questions received via e-mail prior to the call and will address some of these questions in the Q&A session on this call.

Before we start, note that we will make certain statements during this call that are not historical facts, including those regarding our plans, objectives and expected performance. To the extent we make such statements, they are forward-looking within the meaning of the private Securities Litigation Reform Act of 1995. As such forward-looking statements represent our outlook only as of the date of this conference call.

While we believe any forward-looking statements we make are reasonable, our actual results could differ materially because any statements based on current expectations are subject to risks and uncertainties. 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.

Also during today's call all statement of operations results, with the exception of revenue, or where we explicitly state otherwise are non-GAAP financial measures. Balance sheet metrics and cash flow metrics are on a GAAP basis.

Before moving onto the financial results I would like to note that Evan and Eric will attend the Morgan Stanley Technology, Media and Telecom Conference on March 1, and the Pacific Crest Emerging Tech Summit on February 28 in San Francisco. We hope to see you there.

I will now turn the call over to Chris Diorio, Impinj's Co-Founder and Chief Executive Officer. Chris?

Thank you Maria and thank you all for joining the call. I'm delighted to be here with you today. We delivered another record in the fourth-quarter of 2016, exceeded our revenue guidance and closed a successful year that included an IPO and a follow-on offering. Fourth-quarter revenue grew 49% year-over-year to reach $33.7 million, our best quarter ever, driven primarily for demand for our endpoint ICs. Revenue for the year was $112.3 million representing 43% growth over 2015.

As we've noted in prior calls, we view endpoint IC volumes as an indicator of RAIN market adoption and are excited by the demand we're seeing. As 2016 progressed, our estimates for 2016 endpoint IC volumes increased significantly, especially in the back half of the of the year. On our November call we raised our estimate to between 5.6 billion and 5.8 billion endpoint ICs. With closed the year above the prior estimate, shipping 6 billion endpoint ICs for proximally 70% year-over-year growth.

As I will discuss in more detail in a few minutes, we expect strong volume growth again in 2017, but more in line with the predictions of industry analysts than the heightened growth we saw in 2016. On this call I'd like to briefly review Impinj's vision and mission, and discuss where and how we believe the value proposition and benefits of RAIN and the Impinj platform are driving market adoption, and then close with our strategy to capitalize on that market adoption.

Impinj's vision is digital life for everyday items. Our mission is to wirelessly connect those items to applications. We are literally extending the reach of the internet by a factor of 100 to everyday items and delivering to the digital world each item's unique identity, location and authenticity, which we call item intelligence. Our platform enables that connectivity and delivers that item intelligence to business and consumer applications.

To give you a better sense of the value proposition and benefits of the Impinj platform, I would like to start with some personal observations. I attended the National Retail Federation, or NRF show, in New York a few weeks ago for the third consecutive year in which Impinj had a booth at NRF. For me personally, the differences between our first show in January 2015 and this show in January 2017 are striking.

Back in 2015, we had just closed the year in which we delivered 2.3 billion endpoint ICs. The RAIN alliance was a mere eight-months old. The RAIN name was mostly unknown. Impinj hadn't yet announced our items and software, and our ability to identify and locate items, like apparel and jewelry, was so surprising to end-users that several returned to the booth multiple times, bringing others to see our demonstrations.

Fast-forward to this years NRF and our annual endpoint IC volumes have grown 156% to 6 billion ICs in 2016. The RAIN alliance has more than 125 member companies and this time end-users returned to our booth to ask how Impinj and our platform can improve inventory visibility, enhance customer experiences and enable omnichannel fulfillment.

That's not to say we didn't also show new advancements. In fact during the show, I carried a Lenovo Moto Z phone that included a prototype demo only RAIN reader mod coupled to the phone. We also showed multiple in booth demos, including a tutorial on our McDonald's solution and item locationing solution with [Deloitte] and an Impinj platform enabled Coke Freestyle soda fountain. This time it was me who was surprised, mostly by the intensity of the end user needs and requests.

We and our partners are focused on addressing those needs and requests significantly in the form of joint solutions that we productize and bring to market. For example, in the fourth quarter of 2016, we announced a joint solution with Oak Labs on an interactive Retail Fitting Room mirror that synchronizes with the retailers inventory system and online catalog. The mirror recognizes items a customer brings into a fitting room, shows available sizes and colors, recommends related items, hits a button to call an associate and allows customized room lighting and language settings. Oak Labs has announced installations at selected Ralph Lauren and Rebecca Minkoff stores.

Of course, retail isn't the only industry adopting RAIN and the Impinj platform. Next week will attend the HIMSS Healthcare conference in Orlando. One of the largest healthcare events, fresh off the heels of two joint healthcare solutions we announced in the fourth-quarter of 2016. The first with Terso solutions is a mobile RAIN enabled card case that enables automated field inventory management, eliminating product loss and reducing late invoices by integrating field transactions into existing enterprise resource planning and inventory management systems.

The second with [View Med], embeds FDA required data, including product information like manufacturer name, badge, serial number and expiration date into medical items, and tracks the items from manufacturer to patient. It then links the data to the hospital's administrative systems and the patient's electronic health record, allowing hospitals and manufacturers to identify the item's location and inventory details. By identifying and tracking a hospital's medical supplies and items, it improves point of use visibility and data integration into billing and enterprise resource planning systems.

I will introduce a panel discussion Tuesday, February 21st at HIMSS. The panelists include customer experts from healthcare organizations like the Memorial Sloan Kettering Cancer Center, the Medical University of South Carolina, Innova Fairfax Hospital, and the Veterans Administration. The panelists will share their experiences driving improvements in asset and supply management using solutions from our partners integrated with our platform.

Overall we introduced 12 joint solutions in 2016, 4 in retail, 7 in healthcare and 1 in logistics. We also received five awards in 2016, notably the IOT Evolution 2016 Asset Tracking award, the IDTechEx best IOT Technology Development Award and the Fierce Innovation Award in healthcare. Finally we closed the year with 201 issued patents, 3 allowed applications and 39 pending applications.

Returning to endpoint ICs, we achieved record volumes, especially in the back half of 2016, that were well above our expectations and industry forecasts. We believe our 2016 unit volume overachievement was due to us securing some special end-user and competitive wins that will continue driving 2017 unit volumes, but we are not counting on additional special events in 2017. Consequently, we expect our 2017 unit volume growth rate to be more in line with our 6-year CAGR and with the market growth expectations of RAIN industry analysts. We currently estimate we will sell between 7.8 and 8 billion endpoint ICs in 2017, representing 32% growth over 2016 at the midpoint.

In large part because of the unit volume overachievement, endpoint ICs grew to a larger portion of our total revenue in 2016 than in 2015. Looking forward to 2017, we expect a fraction of our total revenue attributable to connectivity and software to increase as we realize the benefits from the significant investments we made in connectivity and software in 2016 and as we continue to gain traction with our systems selling motion. Over time, we expect the total revenue attributable to each layer of our platform to realign with our long-term model.

As we look to 2017 and beyond, we will continue investing in four key strategic areas. Platform, ubiquitous reading, verticals expansion, and joint solutions. At the same time we will concentrate on what sets Impinj apart from others in our market. Customer focus, products, operations, quality, and most importantly our employees and their dedication to our success.

Focusing just on our platform for moment, we will continue making significant R&D, marketing and sales investments in technology, performance, and ease-of-use. Our platform extracts away the complexities of RAIN technology and allows end-users to leverage our know-how and realize benefits quickly. Its breadth and scale are unmatched in the industry.

For example, at the connectivity layer, in 2016 we introduced our xSpan Gateway for monitoring items passing through portals or along corridors. As another example, at the endpoint layer, we have sold more than 18 billion endpoint ICs from our inception through the end of 2016, more than half of those, 9.5 billion, between January 1st, 2015 and December 31, 2016.

We ended the year with 245 employees and 39 open positions, the latter spread across the Company. We also had occasional departures, including sometimes from our senior leadership team. On February 10th, Walter Palhetas and Impinj mutually agreed that Walter would step down from his position as Senior Vice President of sales, in part for him to focus on personal priorities. We thank Walter for his key contributions during a critical growth period for the company. Walter will assist is the company with transition activities through April 15.

Eric Brodersen, Impinj's President and COO, will take direct responsibility for the sales organization. We expect Eric's strong sales background to serve us well as Impinj continues to scale and grow. As always we will monitor and evaluate these and other reporting relationships as needs arise, focusing on how to best grow and scale the company.

In summary, 2016 was a great year from a company, market and sales perspective. As we look ahead to 2017, we are incredibly excited about the growth opportunity ahead of us and how well positioned Impinj is to capitalize on this massive market opportunity. I one now turn the call over to Evan to give you a detailed look at our 2016 financial results and our outlook for 2017. Evan?

Thanks Chris. Before I review our fourth-quarter and year 2016 financial results, I want to remind you that with the exception of revenue, or unless explicitly stated otherwise, today's statement of operations information is on a non-GAAP basis. All balance sheet and cash flow metrics are on a GAAP basis. A reconciliation between our non-GAAP and GAAP measures, as well as how we define our non-GAAP measures, is included in our earnings release available on our website.

As Chris mentioned, the fourth-quarter brought another record and a strong close to a landmark year that included both robust growth and margin improvement. Revenue in the fourth quarter grew to $33.7 million, ahead of our guidance and representing 49% growth over the fourth-quarter of 2015. That growth was driven primarily by increasing demand for our endpoint ICs. For the full year, we grew revenue 43% to reach $112.3 million. Our endpoint IC volume for the year grew to $6 billion, roughly a 70% increase over the prior year's $3.5 billion. Which brings our 2010 to 2016 endpoint IC volume and CAGR to 36%.

Our gross margin for the fourth quarter increased to 55.6%, compared with 53.6% in the prior quarter and 54.4% in the fourth quarter of 2015. The sequential 200 basis point increase was primarily the result of new product adoption, such as Monza R6 and increased software revenue in the quarter. As a reminder, our gross margin can fluctuate from quarter to quarter and is seasonally lower in the first half of the year as new annual pricing for endpoint ICs becomes effective.

Commensurate with our plans to invest in the market opportunity, total operating expense in the quarter increased $1.9 million to reach $16.3 million or 48.5% of revenue. Compared with $14.4 million or 46.4% of revenue in the prior quarter. R&D expense was $6.6 million, or 19.5% of revenue. Sales and marketing expense was $5.8 million, or 17.2% of revenue. G&A expense was $4 million or 11.8% of revenue.

GAAP net income for the quarter was $103,000 and for the year we reported GAAP net loss of $1.7 million. On a non-GAAP basis, we achieved fourth-quarter net income of $2.2 million, or earnings of $0.11 per share using a weighted average diluted share count of 20.7 million shares. And for the full year, we achieved non-GAAP net income of $3.7 million, or earnings of $0.22 per share, using a weighted average diluted share count of 16.8 million shares. We delivered $2.4 million of adjusted EBITDA in the quarter or 7.2% of revenue. As we have said previously, we plan to incrementally increase our investment level to enhance our leadership position and capitalize on the massive market opportunity. Adjusted EBITDA for the full-year total $5.1 million or 4.6% of revenue.

Turning to the balance sheet, we ended the quarter with cash, cash equivalents and short-term investments of $[105.5] million. Our cash balance includes approximately $39 million in net proceeds from our follow-on offering that closed in December. Accounts receivable decreased slightly on a sequential basis to $17.4 million. Consistent with our plan to build inventory to meet increased customer demand, inventory increased by $7.2 million, bringing the balance to $27.7 million. Working capital increased to $123.1 million from $85.2 million in the previous quarter.

Turning now to our outlook. We expect revenue for the first quarter of 2017 to be in the range of $30 million to $31.5 million, reflecting 43% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA to be in the range of a loss of $1 million to income of $0.5 million. On the bottom line we expect non-GAAP earnings to be in the range of a loss of $1.25 million to income $0.25 million and non-GAAP EPS to be between a loss of $0.06 and income of $0.01 per share based on a weighted average diluted share count in the range of 21 million to 22 million shares.

For the full year, we expect endpoint IC volumes to be between 7.8 billion and 8 billon units, representing 32% growth over 2016 at the midpoint, and a 2010 to 2017 volume CAGR of 36% unchanged from the 2010 to 2016 period. We remain on track to reach our target model in 2019 to 2020 with endpoint IC revenue greater than 60% of our total, connectivity greater than 30% and approximately 5% from software. We also target gross margins to be in the range of 57% to 60% and adjusted EBITDA to be in the range of 12% to 16%. As a reminder, we expect to maintain EBITDA margin in the low single digits in 2017 and anticipate some leverage in the model in 2018.

With that, I will turn the call over to the operator to open the question and answer session.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from the Mitch Steves from RBC Capital Markets.

Hey, guys. Great quarter again. Just had a few questions actually, but I will start first with a more topical one. Is Amazon a customer for you guys in any capacity, regardless of where it sits in the Amazon ecosystem?

Hey, Mitch, thanks for the question. We don't comment pro or con on business relationships unless we publicly disclose them, and so all we can really say at this time is to note that Amazon recently joined the RAIN RFID alliance.

Got it. And secondly, I'm putting together your comments here, so you are seeing the connectivity in an increased percentage of revenue but you're guiding to like 32% plus in the endpoint. So does that imply that gross margins are going to continue to increase in 2017 as well, and how do we model that through the year?

I'll let Evan take that question.

Hi, Mitch. So we do anticipate a gross margin increase in our long-term model. As you know, we anticipate that to be 57% to 60% in the 2019 to 2020 timeframe. We think gross margins will be affected by the price negotiations with our endpoint IC customers in the first half of 2017 and that will mitigate in the second half of 2017.

Got it, and then one last one if I could sneak it in. Just on the software side you mentioned that was actually a driver for gross margin in the December quarter, can you update that to maybe how many customers you have or how you think it's going to trend over the next four quarters here?

Eric, would you like to take that one?

Sure, I'd say that software and software selling motion is key to our platform sales process. I would say when you think about Q4, we added new pipeline, new customers, new POCs and really did build momentum on software, so we're making good progress. I would also highlight, when you look at the strength of those POC's and our software engagements, we are talking about really strong quality, Fortune 500 tier customers and we feel really positive about those engagements today.

Got it, thank you.

Operator, I will take a question we received via e-mail. That question is, how does Impinj intend to maintain its cost and price leadership against much larger competitors?

Evan, I will take that one. So that we don't speak to any particular customer or competitor, we continue to believe we are well-positioned in the market. And we are the only company with an integrated platform and preference among the platform layers. We have had significant economies of scale, for example, as represented by our endpoint IC volumes.

Our sole focus is RAIN RFID, it's all we do. Unlike many of our competitors in the space who have other businesses and for them RAIN is only part of their business. Our solution selling motion is contributing significantly to all layers of our platform and driving demand for our products and our platform as a whole. We have market share leadership at every platform layer and compete effectively at every platform layer.

I'll note I said on prior calls the RAIN standard has a lot of optional features and allows for significantly differentiated products. For example, to meet the needs of aerospace, which are very different from the needs of automotive, which are different again from the needs of retail. And our ability to introduce differentiated products and support them by our platform is unique in the industry, because we can support those differentiated features all the way up and down our platform when we introduce the products.

Last we have a very small -- very large intellectual property portfolio which we continue to grow and scale. So we have competed effectively against large competitors in the past and continue to drive our business and intend to be able to compete effectively going forward. Evan?

Operator, we are ready for the next call.

Our next question comes from Brad Erickson of Pacific Crest Securities.

Hi guys, thanks for taking the questions. I guess first, just back to the connectivity outlook, the guidance implies a pretty good inflection there, as Mitch pointed out earlier. Curious what's driving that, and in particular, what verticals are the biggest contributors there? Any new deals you can point to and further color?

Brad, thanks for the question. I think when you look at the connectivity layer I would echo back to the point that I made when Mitch was asking about software. If you think about the traction that our team is driven across our pipeline, our new customers, those POCs, those are fundamentally platform and solution based selling motions. So those are contributory to the connectivity and software momentum.

I'd restate, we feel very good about the quality and strength of the customer base we are selling into. I'd also highlight from a timing standpoint and a projection standpoint we feel very confident in our strategy and the deal flow. We are learning and seeing and in some ways we're somewhat proud of the fact that these are in many cases for our end users, our end customers, transformational deployments. And we are solving net new use cases, driving new application integrations and in some cases these require process change or adaptation inside that end customer to really extract the full value of what we can provide.

So the timing and the rollout of these deployments are variable. Some as we said before are more quickly, others take more time. But in aggregate, again, we are confident and remain very comfortable and pleased with the deal flow and our projections for connectivity and software and that platform motion in 2017.

That's great, can you address the part of the question about verticals that may be contributing disproportionately to that implied inflection?

Sorry Brad, I left that part out. From the selling motion standpoint, we continue to focus in three key areas. We continue to make progress in the retail space. Chris highlighted a couple of the key healthcare solutions that we've productized and we see solid progress in those relationships in the healthcare space; and also logistics, another emergent an important area I see our team making really strong progress against.

That's super helpful. And then Evan, you said repeatedly that you're going to reinvest most of the upside if and as it comes through which is going to all the margins down here again in 2017. And still, we've now had three quarters as a public company where you've been able to drop probably more than all of us anticipated to the bottom line. What's allowing for that and what, if any, what's driving any deviation from that very consistent and previously laid out investment strategy you have talked about?

Good question, Brad. First, I do want to say we think our strategy is the right one, there's a huge opportunity and investing in the business and allows us to enhance our leadership position. With regards to the overachievement, most of our investments are in the form of people and as you know, Seattle is a tight labor market and we are competing for the world's best talent. And that means companies, much bigger companies than us with larger resources in the Seattle area. So when there are occasions that we do not hire as fast as we might like, that is the primary factor why incremental revenue and gross margin dollars could drop to the bottom line.

Great, thanks.

Our next question comes from Mike Walkley of Canaccord Genuity.

Great, thank you. Just a question, with the strong uptick in endpoints connectivity solutions I would think would be somewhat of a lagging indicator and tick up, could you help us in your guidance maybe? You talked about this happening but can you give us any data points in terms of the mix of endpoints exiting 2016 and what you think it might be exiting 2017?

Mike, this is Evan. I just want to make sure understand your question, when you say mix, do you mean as a percent of revenues?

Just a percent of revenues, maybe where they were exiting 2016, where you think they might be exiting 2017. I'm just trying to get a feel for -- to ship so many endpoints, how this might lead to an uptick of connectivity solutions.

Sure. For 2016 the endpoint ICs represented 77% of total revenues. The best way to think about the 2017 mix is the endpoint IC guidance we gave, which is 7.8 billion to 8.0 billion units.

And Mike, this is Chris again. Just as I said, we expect the connectivity layer to drive a greater portion of our revenue in 2017. And to your point, those endpoints ICs going out into the market do drive demand for our connectivity and software layers and also our solutions selling efforts drive demand for those connectivity and software layers. So we believe the combination of the two will actually allow us to drive more connectivity and software on a percentage basis in 2017.

That's helpful. 32% growth is still strong growth, but can you give us any color on the two large deals this year that aren't going to happen again? Maybe size those for us or give us some color of what led to this really strong year and why it's going to return to more normal growth next year on the endpoints?

Yes, so you spoke to two large deals, but there aren't any particular two large deals. What we saw in 2016 was some end-users events, some significant uptick in some end-users, just unanticipated by us at the beginning of the year. And actually unanticipated in terms of the overall growth rate by the industry analysts. So some special uptick at some end-users as well as some new end-users entering the market and on top of that some competitive events. And those events we are projecting to continue in 2017, so they contribute to our 2017 volumes.

So for our 2017 projection we are looking at our overall historical CAGR, which is 36%, we're looking back at what it was from 2010 to 2015, which over the five year CAGR was 30%, and projecting baseline growth we see based on our CAGR and based on what industry analysts see and those are all in line in the mid 30% range. We are not building our business on forecasting additional upside events like we saw in 2016. If those events happen, they will be upside to our forecast.

That's helpful. Last question for me, Evan you talked about some short-term gross margin pressure, can you give us any feel for pricing negotiations to start the year? Is it a bigger downtick than normal, or is just the normal downtick that you see as you enter new negotiations every year?

Sure Mike, this is Evan. Good question. So as a reminder, we really view ourselves as the platform company and that has enabled us to enhance our price negotiations with our endpoint IC customers. This years negotiations are complete and they are completely in line with our expectations.

Okay, great, thank you very much.

Thanks, Mike. Operator we would take another question we received via e-mail. That question is, is there a barrier to accelerated market adoption and if so, what are those barriers?

I'll grab that one; this is Chris. I guess I'm reluctant to use the word barrier. What I look at is opportunities in the market for us to accelerate the penetration of our platform and our products into the industry, and to enable overall adoption. We see deployability as one of the key areas where we can address opportunities enable the market, making our platform easier to use, making the technology, the RAIN RFID technology, easier to use. And in fact abstract [related] technologies so that customers are focused more on the data that we deliver to them, rather than on the specific details of the technology and improving deployability so that end-customers, end-users, can ramp more quickly, more effectively and use RAIN RFID, and use our platform to improve their overall business operations.

And along those lines we introduced our ItemSense software last year really to simplify adoptions because the whole premise behind the ItemSense software is it's our operating system that abstracts the way the hardware complexities, and just serves up the item intelligence, that item identity, location and authenticity to business and consumer applications. And as we continue to grow and develop and ramp ItemSense, we believe ItemSense, although in its infancy today, we'll continue to improve it and ItemSense will improve that deployability and scalability and allow more rapid and frankly, more effective end-customer deployments.

Operator, we'll take the next question from the phone.

Our next question comes from Jim Ricchiuti of Needham and Company.

Hi, good afternoon. Your guidance for Q1 again looks toward pretty healthy year-over-year growth. But Evan, I'm just wondering if I look at the guidance versus your guidance for Q4, it is seasonally a little weaker, so I had asked the question before and I guess I'll continue asking it; are you beginning to see some seasonality to the business from Q4 to Q1 just in terms of how we should think about the business going forward?

Sure, thanks Jim. So our guidance for Q1 is for revenues of $30 million to $31.5 million, at the midpoint that represents 42% revenue growth. It is down from the fourth quarter which is a trend we have seen for a few years now. So we think that seasonality is a part of our business and it will become a smaller part of our business in the future as more and more verticals, more end-users, more different use cases adopt our platform at different adoption rates. We think in the future seasonality becomes less important, but it is a part of the business today.

Got it. Chris, and maybe this is one for you. You may not be able to talk specifically to the customers, but I'm wondering, some of these special competitive wins, and special user wins you identified as helping to drive some of the upside in 2016, is it fair to say that was mainly from the retail market?

It's fair to say. I guess, Jim, my best estimate of where we are now is that the same fraction that retailers of the overall industry [would shake] it continues to be the leading consumer of the endpoint ICs. The share of those special case wins is likewise. In terms of a share percentage also, just follows that trend. So those significant upticks were -- a lot of them in retail but they weren't the only ones.

I can, for example, site Delta's announcement that they're going to be connecting all airline baggage. And there was some other wins in other sectors. But again, if you want to look at it on a percentage, my gut says, without having all the numbers in front of me that it was roughly probably breaks down by the relative share percentage that the different industries have towards our endpoint IC volumes.

Okay. You had identified a number of market specific joint solutions, in healthcare, transportation, logistics. I'm wondering if you can give us a sense as to which of these application fee solutions you are bringing to market perhaps could gain traction earlier in 2017. And presumably some of these will also carry higher margins, is that fair to say?

I'm going to take part of that question and then I'll hand off to Eric as well. My crystal ball is always little foggy on projecting the future, but to try to give the best answer I can to your question, we see significant opportunities in the healthcare space and healthcare adoption growing. And some of the needs in the healthcare space are for specialized products that potentially have a higher price point and are a little more differentiated than in the retail sector. And the same is certainly true in other verticals. As you know, we are focusing, as Eric said, on healthcare and then also on logistics. So we see some significant uptick in those verticals, but that's not to say those are the only ones. Eric, something to add?

Jim, I think your core target is where do we think we will see more expansion in 2017 if we were to make a projection based on our solution sales motion in the year ahead. I would reinforce Chris's point. We see solutions traction across multiple verticals as we have highlighted, retail, healthcare and logistics. But if you point back to the absolute numbers solutions we prioritized in 2016 as a leading indicator of traction for solution-based sales motions, and I can add color that's based on the traction we see in the 2016 results. I feel like healthcare is a really good example of our ability to integrate that application partner level and drive a joint selling motion. So that's a place where I think we see good progress.

Okay, thanks a lot. Congratulations on the quarter, by the way.

Thank you, Jim.

Our next question comes from Troy Jensen of Piper Jaffray.

Hey, gentlemen, congrats on the nice quarter and the nice year.

Thank you, Troy.

Quick one for you, Chris. I'd be curious to know, can RAIN be implemented in smartphones where the smart phone works as a reader?

So, the answer is a yes. RAIN can be implemented in smartphones and on a whole range of consumer devices. We have been focused significantly on the concept of ubiquitous reading where readers are part of the environment, part of consumer devices integrated into the environment and that ubiquitous reading is a real focus for us. I guess I'll just say, in the same way that other radios have been integrated into, call it, tablets, as well a smart phones, as well as other consumer devices, there is nothing fundamental that prevents RAIN readers from being integrated into those devices as well. And we expect overtime to see those RAIN readers get integrated into consumer as well as business devices.

Can you help us on the timeline for when you think you'll see them in smartphones?

I probably am not able to give you a specific timeline because market adoption depends on a lot of trends. I think what I would probably project is that we will see RAIN readers probably appearing in a number of consumer type or consumer leading devices that are also available to businesses, for example, tablets. Those integrations are a bit little easier and they may preface the smart phone integration by little bit. But of course, as I noted in my statements, I walked around and NRF caring a Moto Z phone that had a mod that was a reader in it. And I went around the show floor and I was reading texts. So the opportunity is there for smart phones. Which was going to happen first and how quickly, I'm probably not going to speculate at this time.

The last question on that topic, do you have any trials underway right now with smart phone applications?

Trials? Other than the demonstrations that we've done, like for example like the Motorola Z and there's another partner that's built also another back to another phone that's using them in Asia in some limited volumes. I can't speak to any -- point you really directly to any trials that we can point out publicly.

Any un-public ones? (laughter)

Nope, but when the time comes we will let you know.

Perfect. And last question here, NXP getting acquired by QUALCOMM, I'm curious if you have seen any disruption in any opportunities (inaudible).

We see an opportunity associated with that QUALCOMM acquisition just because, as with any acquisition, it produces some uncertainty in the market. And so we are going to work trying to capitalize on that uncertainty and drive our overall business and our overall share. But really, our focus is on our business, it's on driving our business, our platform, our integrations and doing the things that we need to do to be successful in the market. And although we've watched what's happening with that particular acquisition, it's not something that we're really focused on day-to-day.

Okay, good luck this year, guys.

Thank you.

Thanks, Troy. Operator, now we'll take another question, it will be our final one that we received via e-mail. That question is, what factors will contribute to improved leverage in your model?

I've already taken two, I'm going to hand that one back to you.

Thanks, Chris. The most important factor in increasing leverage, as a reminder we pointed EBITDA margins as a percent of sales in the low single digits in 2017 which is precisely where 2016 and 2015 were. In the long-term model, which is 2019 to 2020, we point towards EBITDA margins of 12% to 16%, and we think there will be some bend in the model in 2018. The primary driver of that bend in the model is the increase in the gross margin percentage.

As you know, in 2016 our full-year gross margin percentage was 54%. That represents a 320 basis point increase over 2013. So we believe we will continue that march upward in gross margin due to two factors. One is the adoption of newer products which tend to have a better gross margin profile than their predecessors, Monza R6 xSpan is an example of that, and the second is the impact that software will have on the income statement. As you know it is very small today and will grow in the future, we think to approximately 5% in the long-term model.

The second factor driving operating leverage is now our investments and operating expenses are growing at the rate of revenue growth and in the 2018 timeframe we think they will grow just slower than revenue growth, so that will add a few points to operating leverage. Operator, we're ready for the next phone question.

Our next question comes from Brad Erickson, and this is our last question, of Pacific Crest Securities.

Thanks, sorry, just had one quick follow-up on tag IC pricing. Historically for 2016, as I recall, you're looking for, call it, low single-digit ASP declines on tag ICs. Were you successful in achieving that and then how are we thinking about the year-over-year pricing trends for tag ICs in 2017 relative to the guidance?

I will let Evan take that one and then Eric will jump in if he needs to.

Sure. Good question, Brad. We have concluded those negotiations. They are in line with the expectations that we have, meaning there's no material change to the trend that we've been seeing recently. As a reminder there are two reasons prices can be reduced. One is there are generally skew over skew declines year-over-year and the second is the new products that we introduced tend to be either priced the same or sometimes lower than their predecessors, even while having a greater gross margin percentage. So anyway, this year's price negotiations were in line with prior years.

Thanks a lot.

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

I'd like to thank everybody for joining us on the call today. 2016 was a great year for Impinj and I look forward to a very strong and exciting 2017. So thank you for being with us.

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