Impinj Inc (PI) 2020 Q4 法說會逐字稿

Good day, and welcome to Impinj Fourth Quarter and Full Year 2020 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would like to turn the conference over to Ellen Davis, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and thank you all for joining us to discuss Impinj's fourth quarter and year-end 2020 results.

On today's call, Chris Diorio, Impinj's Co-Founder and CEO, will provide a brief overview of our market opportunity and performance. Cary Baker, Impinj's CFO, will follow with a detailed review of our fourth quarter and year-end 2020 financial results and first quarter 2021 outlook. We will then open the call for questions. Jeff Dossett, Impinj's CRO, is also on the call and will join Chris and Cary in the Q&A session. Management's prepared remarks, along with trended financial data, are available on the Investor Relations section of the company's website.

Before we start, please note that we will make certain statements during this call that are not historical facts, including those regarding our plans, objectives or expected performance; the expected or potential impact of COVID-19 on our business, operating results, financial conditions or prospects; the expected or potential responses of government authorities, customers and partners and the company to COVID-19; and the availability, production and adoption of our products. To the extent we make such statements, they are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements we make, including concerning COVID-19, are reasonable, our actual results could differ materially because any statements based on current expectations are subject to risks and uncertainties. Please see the risk factors in the annual and quarterly reports we filed with the SEC for more information about these risks. We do not undertake, and expressly disclaim, any obligation to update or alter our forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.

During today's call, all financial numbers we discuss, except for revenue or where we explicitly state otherwise, are non-GAAP financial measures. Balance sheet and cash flow metrics are on a GAAP basis, except for net cash used in operating activities. Free cash flow is a non-GAAP measure.

Before turning to our results and outlook, I'd like to note that the company will participate in the Goldman Sachs Technology and Internet Conference 2021 on February 11, the Morgan Stanley Technology, Media and Telecom Conference on March 2 and the Virtual 33rd Annual ROTH Conference on March 16. We look forward to connecting with many of you at these events.

I will now turn the call to Chris Diorio, Impinj's Co-Founder and CEO. Chris?

Thank you, Ellen. Thank you all for joining the call.

Our fourth quarter results capped a strong close to a turbulent year. We significantly exceeded our fourth quarter revenue guidance despite the ongoing impact of COVID-19 on our core markets, finishing the year with 2 quarters of sequential revenue growth. That momentum continued into the new year. And today, we announced a company milestone, shipping our 50 billionth endpoint IC.

As I think back to Impinj's early days and our vision of connecting everything, reaching a 50 billion unit milestone is an incredible achievement for which every Impinj employee can be proud; as is the growth pace, doubling from 25 billion units just 3 years ago. Yet as I think to the future and our opportunity to connect trillions of items per year, I know that we have only just scratched the surface of our amazing opportunity. That opportunity is far more incredible than any of our achievements to date, and it's there, within our grasp, just begging us to realize it.

That future starts with the achievements of today. On this call, I will highlight our momentum in both endpoint ICs and systems, including record annual endpoint IC revenue, healthy supply chain and logistics opportunities and a marquee retail design win. I will also highlight why I believe COVID-19 has amplified RAIN's value proposition, with Impinj well positioned to capitalize on the opportunity.

Fourth quarter endpoint IC revenue exceeded our expectations, with orders for shipment in the quarter proving significantly more robust than we had originally anticipated. We were especially pleased to see endpoint IC revenue return to year-over-year growth in the fourth quarter despite retail apparel facing continued COVID-19 headwinds. Pandemic-related store closures crystallized retailers' and brand owners' needs for omnichannel fulfillment, and for an increasing number of retailers, RAIN is the foundation for an effective omnichannel solution. That dynamic became apparent not only in our revenue growth rate compared to the overall retail apparel market but also in our conversations with partners and end users. Full year endpoint IC revenue topped $100 million for the first time in our history, setting an annual record. Looking forward, we continue to see ample growth opportunities for endpoint ICs.

Today, semiconductor foundries are experiencing widespread wafer shortfalls. We anticipated those shortfalls back in mid-2020 and built 200-millimeter wafer inventory in the depths of the pandemic. We also accelerated our strategic investment in our Impinj M700 endpoint ICs that use 300-millimeter wafers. Regardless, we enter 2021 with limited 200-millimeter inventory on our balance sheet and tight 200-millimeter foundry capacity, focused on accelerating adoption of 300-millimeter M700 ICs to maximize our unit output. In first half 2021, we are navigating the crossover between our declining 200-millimeter inventory and our ecosystem's efforts to ramp the M700, with us needing to accelerate that transition.

The M700 has the structural advantage of more than twice as many die per wafer as our competitors. In 2021, Impinj will press that advantage by accelerating our capital investment in 300-millimeter wafer post-processing technology and capacity, with the goal of producing most of our ICs on 300-millimeter wafers by year-end. Even with that capital investment, our cycle times, while reduced, will still exceed a quarter, requiring us to build inventory to respond to dynamic demand changes.

Fourth quarter systems revenue returned to quarter-over-quarter growth, with strength in readers and reader ICs capping a volatile year that saw our retail partners and end users navigating store closures and other COVID-related challenges. Continued improvement in sales-out at our solution and reseller partners allow our distributors to normalize their inventory positions, and we exited 2020 with lean channel inventory levels.

In supply chain and logistics, our first large North American end user continues transitioning to an operational phase, with success a prerequisite for further deployments. That transition drove an expected quarter-over-quarter decline in gateway revenue. Our second large North American supply chain and logistics end user generated modest reader revenue in the fourth quarter, and we expect similarly modest reader revenue in first quarter 2021, but that opportunity remains large despite an uncertain deployment pace and timing.

On the retail side, we achieved 2 milestones. The first was a significant self-checkout deployment by a global brand based in Asia, generating modest fourth quarter revenue but which highlights the leverage that our partner network can drive with a compelling solution. The second, a win for us and a key partner at a marquee account, is for RAIN-based retail loss prevention, and we received a $6 million prepayment for our loss prevention engine for that opportunity. We will deliver against that prepayment in second quarter 2021. I believe this latter win represents a defining opportunity for our platform, potentially unlocking the loss prevention opportunity that, a decade ago, retailers identified as their most important use case after inventory visibility and one that broadly enables consumer self-checkout. Consumer self-checkout, in turn, drives 100% retail tagging. Both of these successes are the result of focused engineering and great teamwork with our go-to-market partners. We believe that inventing solutions to hard but compelling end user problems with our platform and with our partners will open up many new growth vectors for Impinj in the years to come.

Continuing on that invention theme, 2020 was a year in which we delivered against, and refined, our platform road map. On the delivery side, we introduced 2 groundbreaking new product families, the M700 endpoint IC and the R700 reader. On the refinement side, we formalized our migration away from ItemSense, our stand-alone system software, after successfully porting its algorithms onto our readers and gateways. As we advance that architectural evolution, we continue developing essential software, with an overarching goal of continuously improving time to market for our partners and making our platform so easy to use, that they can seamlessly step and repeat deployments, driving a landscape of ubiquitous reading. We are also extending that software to include services that enable our partners to deliver compelling experiences for businesses and people, bringing digital life to everything. We continue investing across our entire platform and look forward to delivering on that investment again in 2021.

Looking back on 2020, I appreciate and am proud of our team and their resolve in such an extraordinary and uncertain year. They redefined how we work as a team, while nurturing and solidifying the caring and winning culture that is Impinj. I am gratified by their ability to push through this year's adversity with compassion and grace. To them, I want to give a heartfelt thank you for your tremendous effort and inspiration this past year, and I look forward to our future together.

In closing, 2020 was a solid year driving our bold vision. We invested through the COVID storm, extending our product leadership and strengthening our team. Capping another year of investment in our platform, 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. Cary?

Thank you, Chris, and good afternoon, everyone.

As I approach my 1-year Impinj anniversary, I want to take a moment to reflect on 2020. The year clearly did not progress as we had planned. The pandemic brought much uncertainty and impacted our trajectory. Yet, despite the headwinds, the pandemic also amplified our value proposition in retail omnichannel fulfillment and in supply chain visibility, and we exited the year with strong momentum. Today, I am even more convinced of our ability to grow and scale into our massive opportunity than I was when I joined Impinj a year ago. Now on to our strong fourth quarter results.

Fourth quarter revenue was $36.4 million, up 29.3% sequentially compared with $28.2 million in third quarter 2020 and down 10.7% year-over-year from $40.8 million in fourth quarter 2019. Fourth quarter endpoint IC revenue was $28.5 million, up 32.1% sequentially compared with $21.6 million in third quarter 2020 and up 10.8% year-over-year from $25.7 million in fourth quarter 2019. Our assumptions about holiday demand and carryover spring apparel inventory proved conservative. Revenue from turns orders also significantly outpaced our assumptions entering the quarter. Year-over-year revenue growth returned despite continued headwinds facing retail apparel as RAIN adoption proliferated. Looking forward, we expect first quarter 2021 endpoint IC revenue to grow sequentially.

Fourth quarter systems revenue was $7.9 million, up 19.9% sequentially compared with $6.6 million in third quarter 2020 and down 47.4% year-over-year from $15.1 million in fourth quarter 2019. Systems revenue exceeded our expectations. Both reader and reader IC revenue increased sequentially, while gateway revenue declined. On a year-over-year basis, reader IC revenue increased, while both reader and gateway revenue declined. Gateway revenue faced a difficult comparison with the first large North American supply chain and logistics project transitioning to its operational phase. We expect first quarter 2021 systems revenue to follow typical seasonality trends and declined sequentially.

2020 revenue was $138.9 million, down 9.1% year-over-year compared with $152.8 million in 2019. Endpoint IC revenue grew 4.8% year-over-year driven by strength in omnichannel fulfillment, apparel market share gains by retailers that have deployed RAIN, the expansion of existing deployments and by new deployments, the latter including at a notable North American retailer. 2020 systems revenue declined 33.7% year-over-year, with declines in gateway and reader revenue partially offset by growth in reader IC revenue.

Fourth quarter gross margin was 50.4% compared with 50.1% in third quarter 2020 and 50.6% in fourth quarter 2019. The quarter-over-quarter increase was driven by leverage against indirect costs offset by product mix. The year-over-year decrease was driven by revenue mix, partially offset by lower E&O charges. Full year 2020 gross margin was 49% compared with 50.2% in 2019, with the decline due primarily to revenue mix and, to a lesser extent, slightly higher E&O charges.

Total fourth quarter operating expense was $21.5 million compared with $20.4 million in third quarter 2020 and $19.6 million in fourth quarter 2019. The sequential increase was primarily due to increased engineering spend. Research and development expense was $10.1 million. Sales and marketing expense was $6 million. General and administrative expense was $5.4 million. 2020 operating expense totaled $79.6 million compared with $75.1 million in 2019.

Fourth quarter adjusted EBITDA was a loss of $3.1 million compared with a loss of $6.2 million in third quarter 2020 and a profit of $1 million in fourth quarter 2019. 2020 adjusted EBITDA was a loss of $11.5 million compared with a profit of $1.6 million in 2019.

Fourth quarter GAAP net loss was $15.7 million. Fourth quarter non-GAAP net loss was $3.5 million or $0.15 per share, using a weighted average diluted share count of 23.2 million shares. 2020 GAAP net loss was $51.9 million. 2020 non-GAAP net loss was $12.8 million or $0.56 per share, using a weighted average diluted share count of 22.8 million shares.

Turning to the balance sheet. We ended the fourth quarter with cash, cash equivalents and short-term investments of $106.1 million compared with $105.1 million in third quarter 2020 and $116.5 million in fourth quarter 2019. Inventory totaled $36.3 million, down $1.7 million from the prior quarter.

Fourth quarter net cash used in operating activities was $3.3 million. Property and equipment purchases totaled $700,000. Free cash flow was negative $4.1 million. For the full year, net cash used in operating activities was $11.5 million. Property and equipment purchases totaled $3.1 million. Free cash flow was negative $14.6 million. As a reminder, we excluded from full year net cash used in operating activities and free cash flow the $5.4 million cash outflow associated with the settlement of our shareholder class action lawsuits.

Before I turn to our first quarter guidance, I want to highlight a few items that were unique to the fourth quarter. I also want to give an update on a few of our strategic initiatives.

First, fourth quarter deferred revenue increased $5.9 million sequentially driven by the customer prepayment related to our ongoing development of a retail loss prevention engine. We expect to incur incremental nonwage engineering operating expense related to that project in first quarter 2021. Then, we expect to substantially ship the products and recognize the associated deployment revenue in second quarter 2021.

Second, the strong endpoint IC bookings that began in third quarter 2020 accelerated in the fourth quarter, resulting in a record bookings quarter. Given the ongoing COVID-19 demand crosscurrents and the supply constraints impacting the semiconductor industry, we elevated our practice of vetting backlog and working with partners to verify end customer demand behind every order. Similar to our fourth quarter guidance, we embedded a lower turns assumption into our first quarter 2021 revenue guidance than in a typical quarter. However, in first quarter 2021, that assumption is based on enhanced visibility stemming from our backlog vetting and the bookings duration. That dynamic, as well as us navigating the crossover between our declining 200-millimeter inventory and our ecosystem's efforts to ramp the M700, may dampen the traditional seasonal endpoint IC revenue growth in the second quarter.

Third, we are experiencing long packaging lead times for our high-margin reader ICs. Those long lead times may limit first quarter 2021 deliveries. Our guidance assumes the packaging lead times do not resolve until after the first quarter.

Fourth, capital expenditure will increase in 2021 as we accelerate our investment in 300-millimeter endpoint IC wafer post-processing flow and capacity. This investment will begin paying dividends in 2022 in the form of shortened product lead times and improved operations flexibility.

Fifth, we remain committed to returning to adjusted EBITDA breakeven on the other side of COVID-19. Looking ahead, as COVID-19 headwinds remain, we will balance our desire to press our market advantage against our desire to drive operating leverage.

Turning to our outlook. We expect first quarter revenue to be between $41 million and $43 million, a 15.4% increase quarter-over-quarter at the midpoint of the range compared with $36.4 million in fourth quarter 2020. We expect an adjusted EBITDA loss between $3 million and $1.5 million. On the bottom line, we expect a non-GAAP loss between $3.5 million and $2 million, reflecting a non-GAAP loss per share between $0.15 and $0.08 on a weighted average diluted share count between 23.8 million and 23.9 million shares.

In closing, I want to thank our Impinj team, our customers, our suppliers and you, our investors, for your ongoing support.

I will now turn the call to the operator to open the question-and-answer session.

(Operator Instructions) Our first question comes from Craig Hettenbach with Morgan Stanley.

Appreciate all the color. I guess just starting, Cary, you walked through some of the dynamics around the 200- to 300-millimeter transition. And any other context you could provide in terms of does that help a little bit in Q1. And you mentioned perhaps dampened seasonality in Q2, just kind of the quarter-to-quarter expectations there.

Take it, Cary.

Yes. Okay. Craig, thanks for the question. So on the 200-millimeter, we entered the year with strength in bookings. And the way the bookings pace accelerated, it was -- so I'd say it was mild in October and then really accelerated in November and December, and that pace has continued into the first quarter and as evidenced on our strong guide for Q1. Now what we're seeing with the bookings is customers booking further into the future. So the normal lead times -- or customer request times, I should say, have extended beyond what is typical for us. And as a result, we anticipate fewer turns in the quarter.

Okay. And then maybe a follow-up for Chris. Thinking through the impact of the pandemic, and particularly the influence on omnichannel, in terms of some of the things that you're seeing in your business and any kind of pluses and minuses around retail versus omnichannel as you see it through this year.

Yes. Thanks, Craig. So as I noted in the prepared remarks, we do see the pandemic driving retailers and brand owners towards omnichannel fulfillment, and we continue to believe that RAIN is a differentiator in their ability to deliver against those omnichannel needs. I'll note that if you -- our endpoint IC revenue from the year was up 4.8%, but the U.S. Census Bureau had U.S. store receipts down 26%, these are retail store receipts, down 26% in 2020. So clearly, RAIN is a differentiator for these retailers in terms of their ability to sell. And looking forward, we continue to see that differentiation as we talked about the loss prevention and self-checkout opportunity.

The benefit of self-checkout is it's essentially a touch-free self-checkout. Our consumer can check themselves out, leaving store associates to spend time either with the consumer during the shopping experience or essentially maintaining the store. And so we continue to see RAIN as an accelerant in the future for more efficient stores and, again, to drive differentiations associated with COVID-19. So overall, we believe RAIN will be -- is already today and will continue to be a key aspect of the leading retailers' positioning today and in the future.

Our next question comes from Harsh Kumar with Piper Sandler.

Chris, Cary, and everybody else from the Impinj team, congratulations. These are tremendous results. Chris, I had one for you. The growth in the December quarter that you saw, particularly in endpoint IC, that I think Cary mentioned you guys are continuing to see that in 1Q, is that from your supply chain end market? Or is that from your retail end market? I guess what all of us are trying to figure out is how sustainable this is and how does this -- so I get the near-term commentary of customers facing lead time -- longer lead time orders, but is this something that can happen -- continue to happen for you in the second half and foreseeable future? Or is there some sort of an implementation that is going on?

Yes. So Harsh, that's a difficult question to answer with real certainty. I will say that the holiday season was better for retailers than we had anticipated, and so there was strength associated with the holiday season. There's less carryover in the spring inventory, and so we see some benefits there as well and, of course, the omnichannel strength. Of course, we guide only 1 quarter at a time, and we're looking towards where we are today and where we're going to be in the first quarter. And we do see strength right now. And it's our hope that, that strength continues, a lot of it being driven by retail. A lot will be dependent on COVID-19, the pandemic, and how the U.S. comes out the other side of the pandemic as well as the rest of the world.

Okay. So my second question was -- I think when you were describing your first customer in the supply chain side, the term transitioning towards operational was used. I'm trying to understand what that means. Does that mean that, that particular customer, the first supply chain customer, is now getting to a point where they're very comfortable with the results of the trial that they were conducting and then they are kind of sort of getting ready to actually implement this process? Or is this just sort of a nomenclature that you are using as you continue to test the systems?

Yes. I think it's going to be helpful to provide some more color around how any of these large customers go live because answering the question now will also set the stage for future questions along the same lines associated with other end customer deployments. We believe when an end customer rolls out, the first thing they do is they do a pilot and proof of concept. And once you get past that phase, then they begin rolling out to, in many cases, a significant number of stores or operational facilities. Once they're sufficiently rolled out, they then run these systems side-by-side with the existing systems. So they rely on the existing systems, and they monitor the RAIN-based system to see how it's performing. And they run it as though it was live, but it's not live.

After they have the kinks worked out and they're confident in the data, they're confident that they can -- their business can rely on the new system, then they go to the cutover. The amount of time it takes for any particular end customer to get comfortable enough to flip that switch depends on the results they're getting, their level of caution or aggressiveness, their own internal needs and, again, just kind of the results they're seeing. So when we say transitioning to an operational phase, they are in that stage of transitioning over. Even when they do so, oftentimes, they don't go fully live all at once across the entire facility. They flip over some and then, okay, watching, it continues to work, and then they flip over other stores and facilities. So that's where we stand in the transition to operational phase. And of course, success in that transition is a prerequisite for further deployments and further opportunities.

Our next question comes from Mike Walkley with Canaccord Genuity.

I hope everybody on the call is healthy and well. And Chris, congratulations on the 50 billionth endpoint shipping. I'm sure that was a nice gong banging celebration for your company.

Indeed. If we were in the office, we would have been. But thank you, Mike, and I hope you are healthy and safe as well.

Hopefully, there is a symbolic gong. Just Cary, thanks for the guidance and all the clues on it. I just want to dig in a little more. Just for those of us who've tracked you guys for a long time, Q2 has historically been a seasonal improvement quarter, excluding last year. I just want to kind of dig in a little bit on some of the clues for Q1 and into Q2. Are you just suggesting maybe less-than-normal seasonality? Or is this year has a bigger dip in Q2, maybe like we saw last year? I'm just trying to understand your commentary a little better about the puts and takes. I don't want to force guidance but -- after Q1. But directionally on your bookings, is Q2 similar to Q1 or even higher?

Yes. Mike, thanks for the question. So it's too early to forecast Q2, but there are definitely changing dynamics that we wanted to highlight. So we have had super seasonality on endpoint IC in Q4 and then, again, we're signaling in Q1. And that's been on the basis of strong bookings, the customers' booking further out into the future. And we're not sure that, that seasonality can -- that level of seasonality can hold once we get into Q2. And combine that with our need to migrate the industry from 200-millimeter to 300-millimeter M700, and we think that seasonality could be dampened in the second quarter at this stage and, obviously, we'll learn a lot more as we move throughout the quarter. That's as it relates to endpoint IC.

On the systems side of the house, the large European retailer that's deploying loss prevention, the $6 million prepayment that Chris mentioned, that will be substantially shipped in Q2. So you will have that incremental revenue on the systems side for that deployment, assuming we substantially ship it in the second quarter, benefiting Q2 revenue and also benefiting Q2 gross margin because our systems gross margins, as you know, are higher than our corporate average.

And then, finally, as you're thinking of gross margin going from Q1 to Q2, Q1 gross margin will be depressed because we're unable to ship, or at least we're forecasting an inability to ship, reader ICs, our highest-margin product. We expect that to correct to back to normal reader IC levels in Q2. So you'll see a little bit of buoyancy from -- going from Q1 to Q2 on the gross margin side as a result of that dynamic as well.

Great. Thanks for clarifying that. And then on the endpoint side, with the strong bookings, given the supply constraints and your guys' smart choice to build inventory of the wafers, do you think you've gained even more share? Or is this the whole industry kind of coming back? Just curious if your competitors are able to ship like you've been able to ship.

Yes, we've been seeing strong order momentum at the end of last year and the beginning of this year. And part of that strength is the result of our inlays electing to book orders further into the future. That behavior could be driven by a number of factors. It could be the supply constraints in the semiconductor industry. It could be a variety of things. We're doing our best to service those customers and their demand in the near term. And we will continue to evaluate if these changes are temporary or more structural in nature. From a share perspective, we don't evaluate share until the end of the year when we get the RAIN Alliance data for the preceding year.

Got you. Last question for me, and I'll pass it on. Chris, despite the challenging macro, you made the decision to really focus and execute on the road map, and a lot of interesting new products came to market in the past year. How are you thinking now with some of the commentary about balancing investment for this big growth opportunity versus profits? And then second question for you, Chris, is just any hints on areas investors should focus on for what's next for Impinj in terms of what you might be investing in or maybe new markets you think that are already across the chasm, like supply chain and logistics did in the last 2 years?

So yes, Mike, I think I'm going to take the latter part of the question first and then ask you to remind me of the former part when we get back to it, but I do want to hit on the latter part. So the marquee win that we talked about in loss prevention and self-checkout is an area where we're really focused, and I would encourage others to focus on it as well. It is, I believe, a very significant opportunity. If I go back in time, I think in 2008, I was part of a team that led some requirements-gathering groups under GS1 EPC Global that included literally dozens of the largest retailers in the world. And we collected requirements on loss prevention from those retailers and actually codified them in a set of requirements. That actually led to further requirements-gathering efforts that spanned 2 years.

And there were many retailers involved, and what they identified at that time was that loss prevention opportunity enabled self-checkout, and self-checkout really drove the kind of their future vision of retail even back then. And it was their #1 ask after inventory visibility. And we collected those requirements back then but couldn't deliver against it because nobody knew how to solve the problem. So Impinj rolled out Protected Mode to enable embedded endpoint ICs in garments and still protect consumer privacy. That was the first step in our journey to solve that problem.

The second step now is rolling out a loss prevention engine to identify items leaving a store as well as enable our partners to do the self-checkout portion of the solution. I believe that, that opportunity will speak for us from a systems perspective to kind of rethink how stores run and use RAIN RFID and our systems in the stores and also, as I noted in the prepared remarks, drives 100% tagging because you need to get 100% tagging if you're going to be doing self-checkout based on RAIN. So that's the one core area where I'm particularly focused, the company is focused, and I think it would be helpful just for the -- for our investors to focus as well.

So back to the first part of your question, which I have subsequently forgotten, if you could remind me what you asked.

Yes. Just in the pandemic with the business, so you decided to go all in on investing for the growth opportunity, which seems to be paying off. But there was some commentary in the script about maybe balancing growth and profit, so I just wanted to maybe clarify that and get your thoughts on future profitability or how you're going to balance maybe growth and profits now.

Go ahead, Cary.

Mike, this is Cary. So prior to the pandemic, we had strung together 4 quarters in a row of breakeven or better adjusted EBITDA. It is our goal and our commitment to get back to that on the other side of COVID-19. We are balancing that desire with this massive opportunity in front of us and investing into that. And I think you're right, I think the decisions we made to invest into the COVID headwinds have positioned us well as we enter 2021. And we're going to continue balancing that -- those 2 dynamics as we go forward.

And we will, of course, continue investing across our entire platform. It's the future. As I talked about the big opportunity in front of us, we are investing for that future.

Got it. That's helpful. Congrats again on the good results.

Thank you.

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

So a question just on the IC constraints. I'm wondering if you can anticipate potentially incurring any additional costs as a result of these supply chain issues, whether we're talking about expedited costs. Or what are you hearing also from your foundry partners with respect to supply and, in the case of the M700, the ability to maybe accelerate the transition?

Cary, why don't you take the first part, I'll take the second part.

Okay. So Jim, thanks for the question. In terms of incremental cost, really, we're very small incremental cost as we navigated. Yes, we're paying a little bit on expedites here and there. We have definitely accelerated capital spend to increase capacity, but we're not seeing any price increases from any of our suppliers at this point. Like us, they seem to be playing the long game on this.

And then, Jim, to the second part of the question, 200-millimeter wafer supply is tight and the older process geometries are tight. So even if you have an older process geometry in a 300-millimeter wafer, the capacity is still tight. So it is our desired goal, actually, need to drive into the M700, which is in a more advanced process node in a 300-millimeter wafer. At the same time, we get 4x as many die per wafer on it, for our M700, as we did for Monza R6. The wafer goes from 200-millimeter to 300-millimeter that, squared, it gives you roughly twice as many die per wafer, and the die is half the size. That's 4x as many die per wafer on M700. So we're focused on that M700. We're focused on driving the growth and opportunities for the M700. Yet, at the same time, we're working with our partners to accelerate their adoption of the M700.

It's difficult ramping a new product in a pandemic. It's also difficult ramping a new product that is so advanced and so differentiated. It's half the size of our prior products. So our partners are still getting comfortable with using it, assembling it and basically bringing it to market. So those 2 factors, the small die size and launching in a pandemic, have made the transition a bit slower than we had originally hoped. Yet, at the same time, we need to make the transition, which is why we had the commentary about us needing to drive that transition to the M700, and we're going to make it happen.

Got it. And Chris, I don't recall, in past years, when we've seen tightness in IC supplies, was it an issue for you? Or were we still too early, frankly, in the adoption of RAIN where it had less of an impact?

Previously, during prior cycles, we, like others, had difficulty getting sufficient number of wafers. And so yes, we're not immune to the trends that are going on in the industry. We are guardedly optimistic that the fact is -- the fact that RAIN and our products are so widely deployed. They're so important to the -- essentially to the global economy. They're used everywhere. And they're used in tracking personal protective equipment, at vaccine distribution and other things. We're guardedly optimistic and confident that, that -- those facts put us in a good position with respect to asking for additional wafer upside. But as the industry goes into tightness, we have to work to get wafers just like everybody else does.

And Jim, living through that history factored into our decision last year to build 200-millimeter inventory even as our sales were going down. So we tried to get us in front of it as much as we could.

Yes. We saw it coming, and we built what we could back then.

Got it. The last question for me is just I'm wondering if you -- if there's -- you can characterize just how some of the price negotiations that you normally go through, how that evolved as you went through all this.

Jeff, can you take that one?

I'll take that one. Thanks, Jim. This is Jeff. We successfully concluded our pricing negotiations with our inlay partners during 4Q 2020 and 1Q '21. I characterize the outcome of our partner discussions as in line with our expectations. And so we experienced year-over-year pricing scenario, which is typical of our past years' experiences.

And I don't know if you could just remind us of, if you would be willing to, just the type of pricing erosion or decline you normally would see.

Jim, what I would say is that it's typically single -- low single digits percentage decline in overall average selling price. And again, our pricing negotiations entering 2021 were in line with our expectations.

And Jim, from a seasonality perspective, it's that small pressure on ASPs that typically drive the endpoint IC revenue lower in the first quarter. We're not experiencing that. We're not signaling that for this first quarter because, as Jeff said, the ASP price negotiations were where we'd expected them to land. We're just seeing increased unit volume enough to offset that in Q1.

Got It. That's helpful. Congratulations.

Thank you, Jim.

Thanks, Jim.

Our next question comes from Derek Soderberg with Colliers Securities.

I want to start with reader ICs. You guys have refreshed the tag IC and reader products. I'm wondering if you could provide an update on the product road map there and if there's anything you guys need to add in terms of technologies. And then I think you had some excess inventory recently in reader ICs. As brick-and-mortar retail comes back online, I'm wondering if you can provide an update on inventory levels, what you're seeing there.

Okay. Thanks, Derek. This is Chris. I'll start the answer, and then I'll hand it off to Cary associated with the inventory part of the question. Regarding reader ICs and kind of where we're investing, as the market's innovator and leader, you could expect us to continually advance our product line. We're going to introduce new products as they become available and when the time is right. So we obviously can't preannounce anything that we may or may not be doing, but we'll note that -- I also spoke in the prepared remarks about extending our software to include services that enable our partners to kind of drive compelling experiences for businesses and for people.

And that statement was really pointed at our vision of digital life to everything, our vision of digital twins in the cloud, our vision of being able to authenticate items as being genuine. And so that's another area where I think you should be looking because it's a greenfield opportunity for us, for our industry, and it really represents the future of what RAIN offers. We're not just associated with connecting things directly from an item to a reader but really in enabling the back end where the item is connected to an information store about the item in the cloud, in the network. And we can provide some essential services around that connectivity that drive additional value. On to the second part, Cary?

Yes. Derek, thanks for the question. In terms of the inventory for reader IC, we are experiencing right now packaging delays for our reader ICs. So that will impact our Q1 revenue. We'll sell through the existing inventory we've got, and then we will be unable to fulfill orders that we've received for reader ICs in the first quarter. From a sizing perspective, you can think an order of magnitude of maybe north of $1 million impact in Q1 and 100 basis points to our gross margin. That -- we expect that to correct in the second quarter and then go back to a more normalized reader IC volume level in the second quarter.

Got it. And just building off an earlier question on pricing negotiations, I was wondering if you can remind us what you have said in the past on the M700 gross margin and then I'm wondering if anything has changed there with the pricing negotiations, I know you've kind of said sort of in line with your expectations. And then, if you could, what's the M700 product mix shipped today compared to older tags?

Okay. So from a price negotiation, the M700, as Jeff said earlier, landed about where we wanted -- or where we expected as did the rest of our price negotiations. From a gross margin perspective, the M700 will be accretive to our overall gross margin as we increase the mix of that. Now the ramp of the M700 was slowed by the pandemic. We shipped 100 million M700 units in Q3. We more than doubled that in Q2 -- or excuse me, in Q4. But that -- even though that sounds like a big number, that's a pretty small percentage of our mix. So it will ramp in Q1, it will ramp again in Q2 and then in the back half of the year as well. I would anticipate starting to see some of that gross margin accretion] in the back half of the year.

Our next question comes from Toshiya Hari with Goldman Sachs.

Congrats on the strong results and guidance. I just had one question on how to think about profitability going forward. As you guys pointed out, I guess, the expectation right now is to return to EBITDA breakeven post-COVID. I guess my first question is, is that a calendar '22 statement? Is it more second half '21? If you can kind of provide a little bit of granularity there, that would be helpful. And then secondly, and probably more importantly, once you're back to breakeven, how should we think about the trajectory there onward? Should we expect you to sort of hang out around EBITDA breakeven? Or can we go ahead and extrapolate the positive trajectory and expect you to grow EBITDA dollars? I guess it really depends on how you think about profitability versus investing in the business.

Yes, Toshiya, this is Chris. While Cary is thinking of the answers to those questions, I'm just going to make a comment as I think about the future and when we're going to come out the other side of COVID. I'm still waiting to get my first COVID shot. And so obviously, the future associated with COVID-19 is hugely uncertain. And so it's very difficult for us to predict anything associated with COVID-19, much less predict the future overall. So the COVID dynamic creates significant uncertainty that will factor into how we think about the future and how Cary is thinking about how we're going to be guiding the business. And Cary?

Yes. So thanks, Chris. And I would just echo that. I can't put a timing on returning to breakeven just because we don't know how long COVID-19 is going to hang around. It's certainly going to be here for a good part, if not all, of 2021. As you look at the business -- we haven't provided a long-term model yet. COVID-19 has delayed that. But as you look at the business, we did pretty a meaningful investment hiring last year. And that was substantially completed in Q3, and then we felt the full impact of that in our Q4 OpEx. There will be additional investment this year but not at the scale it was last year. I signaled that, for Q1, we have incremental and nonwage engineering expense related to the loss prevention win that Chris announced. So we'll have some nonwage spend spike in Q1, and then we'll kind of go back to a more normalized level in the near term. The levers that we have to play with is really our gross margin and, specifically, it is the M700 adoption. M700 will lead to gross margin accretion. And we think this model -- over time, this model has leverage in it. We're just not in a position yet to say when to expect that.

Congrats again.

Thank you, Toshiya.

(Operator Instructions) Our next question comes from Scott Searle with ROTH Capital.

Congrats on the nice quarter, guys, and I hope you, your family and your teams are safe and sound and doing well.

Thank you, Scott. I hope the same for you as well.

So just to clarify, on the 2Q dynamics, it sounds like less-than-normal seasonality on the IC front, but that's being offset by the rev rec related to this loss revenue opportunity on the systems side. Is that correct? And then the magnitude of that deferred revenue, I think you said, was a little under $6 million. Does all of that or most of that get recognized in the second quarter? Or is it split over a couple of quarters? So just kind of help me frame it and how you're thinking about where systems goes as we get into the third quarter because it sounds like IC revenue then should start to pick up again in the third quarter with traditional seasonality.

Yes, Scott, this is Cary. Thanks for the question. On the loss prevention win -- our loss prevention engine win, I should say, yes, that was a $6 million win for that deployment. We expect to substantially ship it in Q2. So that's kind of what we included in our prepared remarks. It is -- just given the changing dynamics right now, it's too early for me to comment on Q3. We tried to provide all the dynamics that we know of right now that are impacting Q2 because it is different than in years' past.

Got you. And just to clarify, Cary, the loss prevention, is there any recurring software or other revenue associated with that once it gets deployed?

No. Think of this as an R700-based win and our loss prevention algorithms embedded into the R700 solution.

But I want to add, Scott, as I mentioned in some of the remarks just a little while ago, the M700 endpoint IC is critical to some of these opportunities and, we believe, many of them going forward because its Protected Mode allows you to make a tag invisible at point-of-sale, so the exit gate doesn't see the tag. And so a consumer that's bought an item can basically walk out the store, and the gate doesn't see the item. At the same time, it protects consumer privacy and, thereby, allowing embedded tags. So the first step that we did in loss prevention was to introduce that M700 with that Protected Mode in it, even as we were developing the loss prevention engine. And so what we've just signaled is our first significant win built on that loss prevention engine, but it follows on the heels of us introducing M700 with Protected Mode.

Okay. Very helpful. And then maybe, Chris, to follow up on that front, as it relates to the M700, what are you seeing -- or what are your expectations from a share perspective? At least when you're getting into your customers, right, the business used to get split between you and NXP in certain cases. Is the M700, really -- are you seeing concrete share shifts based on what you're able to show and demonstrate for customers?

Yes, Scott, it's too early to say anything with respect to share. We really don't have good visibility into share, at least not good visibility that we can feel confident in until we get the RAIN Alliance results at the end of every year. We continue to believe that M700 is a very differentiated product, the fact that many people were saying you couldn't migrate down Moore's Law with a RAIN endpoint IC, and we did so. We shrunk the die by basically almost a factor of half compared to Monza R6, improved the performance, improved the read speed and added some of these features like Protected Mode, with the ability to add more features in the future because, as you migrate down Moore's Law, the cost of digital goes down. It's the fastest decrease in kind of overall silicon real estate, so we can add more of those logical features on a chip. We believe M700 represents the future for us and for the industry. And we're going to be driving it and its successors as hard as we can.

Got you. And lastly, if I could, just to wrap up and maybe a little bit of an unfair question as it relates to the COVID backdrop and lack of visibility on that front. But from a system IC standpoint or systems standpoint, we've troughed out, you've cleared inventory out of the channel, starting to come back, you've got a big win that comes back in the second quarter. When do you think you can get to a sustained level of revenue that you saw with some of the larger deployments in 2019? I guess a long-winded way of saying are there some other big wins out there in RFPs that you're seeing. And then on the IC front, endpoint ICs, I guess, have been growing somewhere in the ballpark of around 25% a year for the past couple of years, give or take. Are we at the front end now of an inflection? Are you able to see that? Or what's the range of outcomes in terms of thinking about how this market is going to grow over the next several years?

Yes. So let me try with -- answer that question with kind of a general broad-brush picture, and then I'm going to let Jeff fill in some of the gaps. If you think about where we are today, the vast majority of endpoint IC volumes derive from handheld-driven retail inventory, a person carrying a handheld in a store to do inventory visibility or in a fulfillment center now. And it's been handhelds that have been driving the endpoint IC volumes significantly. We estimate roughly, call it, 2/3 of the endpoint ICs go into retail, and those are driven by handhelds. But there aren't that many use cases that are amenable to handheld reading. Certainly, loss prevention wasn't. Locked doors aren't. Conveyor belts aren't. And in the future, we believe the vast majority of endpoint IC volumes are going to be driven by fixed reading. So we are right now in the process of inventing that future.

We've got solid successes in the 2 large supply chain and logistics customers. Now a key win in self-checkout and on loss prevention and another win in just self-checkout with a major Asian brand. So we believe that -- at least we feel that these wins are indicative of a change in the industry that I believe just really needs to happen, which is not to get rid of handheld reading, it will continue, of course, but basically to drive the future, which is fixed reading, to open up all these other opportunities. And that's our vision for the future, and we're driving it as hard as we can. I can't tell you it's going to happen this year or next year or how fast it's going to happen, but it's something we've been focused on for a long time, and we want and need to make it happen. Jeff, anything you would add?

Yes. I think I would add that last quarter, we talked about what we saw as the impact of COVID-19 on end customer deployments as existing deployments as well as the pace of testing or other proof-of-concept investments, and that it had an impact on those. But since then, our partners, end customers and Impinj have continued to adapt. And so we're beginning to see a modest increase in the -- in on-site deployments and testing, and our pipeline of opportunities continues to grow. So while COVID-19 impact or headwinds remain, we are seeing signals of adaptation that give us some reason to feel the year ahead could progress toward post-COVID-19 dynamic in the marketplace.

Congratulations on the quarter.

Thank you.

Thank you, Scott.

Thanks, Scott.

Our final question will come from [Troy Jensen] with Lake Street Capital.

Congrats on the great results.

Thank you, Troy.

Thanks, Troy.

Thanks, Troy.

So maybe to follow up on some of the other questions about just the IC growth in Q4 and kind of guided for Q1. How much of that is due to the big logistics customer, the first big logistics customer? Or is it purely just kind of channel inventory back to normal and retail being strong?

A relatively small amount from the first supply chain and logistics customer because, as we noted previously, that use case is associated with tracking pallets. And so the total number of pallets that are tracked is a relatively small number compared to our overall endpoint IC volumes, at least for these initial opportunities. Going forward, the number of pallets shipped worldwide is quite large. But with just the first deployment with the first large end customer, the endpoint IC volumes are modest.

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

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

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