Impinj - Q4 2023

Executive Summary

• Q4 2023 revenue of $70.7M, up 9% q/q and above the January preliminary “> $70M” update and prior Q4 guidance range of $65.5–$68.5M; non-GAAP EPS was $0.09 and adjusted EBITDA was $3.0M, both ahead of initial guidance.
• Gross margin expanded to 50.9% (from 50.5% in Q3), with CFO guiding sequential gross margin improvement into Q1 2024 as mix normalizes and inventory dynamics ease.
• Management guided Q1 2024 revenue to $72–$75M, adjusted EBITDA to $3–$4.5M, and non-GAAP EPS to $0.08–$0.13, citing further endpoint IC growth, healthier inlay partner inventories, and litigation expense decline; OpEx will increase sequentially on payroll/bonus resets.
• Catalysts: accelerating M800 endpoint IC adoption (priced below M700 and targeted ~300 bps gross margin accretion at full ramp), normalization of retail destocking, and logistics/general merchandise programs progressing; company streamlined the org with ~10% headcount reduction to focus on silicon and enterprise solutions.

What Went Well and What Went Wrong

What Went Well

• “We exited 2023 on an upswing,” with Q4 revenue and profitability beating Q3 and Q4 guidance; endpoint IC revenue exceeded expectations and systems held firm on test & measurement strength.
• Strong customer feedback and early production shipments for M800; when fully ramped, management expects ~300 bps gross margin accretion, and pricing set slightly below M700 to accelerate adoption.
• Nine consecutive quarters of positive adjusted EBITDA, improved inventory normalization, and sharpening focus on silicon and enterprise solutions (including Voyantic integration).

What Went Wrong

• Retail apparel destocking depressed H2 revenue; some smaller inlay partners still carry elevated endpoint IC inventory, constraining shipments vs demand.
• Macro headwinds in China pressured reader IC demand; continued transition from older Indy product line to eFamily and EOL timing created near-term friction.
• Litigation expense of $3.8M elevated G&A; free cash flow was negative in Q4 (–$1.2M) and FY 2023 (–$68.0M) due to inventory rebuild, though management targets consistent FCF generation ahead.

Transcript

Operator (participant)

The Impinj Q4 andFull year 2023 Financial results earnings conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Andy Cobb, Vice President Strategic Finance. Please go ahead.

Andy Cobb (VP of Strategic Finance)

Thank you, MJ. Good afternoon, and thank you all for joining us to discuss Impinj's Q4 and Full year 2023 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 Q4 and full year 2023 financial results and Q1 2024 outlook. We will then open the call for questions. Jeff Dossett, Impinj's CRO, will join us for the Q&A. You can find management's prepared remarks plus trended financial data on the investor relations section of the company's website. We will make statements in this call about financial performance and future expectations that are based on our outlook as of today. Any such statements are forward-looking under the Private Securities Litigation Reform Act of 1995.

Whereas we believe we have a reasonable basis for making these forward-looking statements, our actual results could differ materially because any such statements are subject to risks and uncertainties. We describe these risks and uncertainties in the annual and quarterly reports we file with the SEC. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements except as required by law. On today's call, all financial metrics except for revenue or where we explicitly state otherwise are non-GAAP. Balance sheet and cash flow metrics are GAAP. Please refer to our earnings release for a reconciliation of our non-GAAP financial metrics to the most comparable GAAP metrics.

Before returning to our results and outlook, note that we will participate in Susquehanna's 13th Annual Technology Conference on February 29th in New York, Loop Capital's Sixth Annual Investor Conference on March 11th, and the 36th Annual Roth Conference on March 18th in Dana Point. We look forward to connecting with many of you at those events. I will now turn the call over to Chris.

Chris Diorio (CEO)

Thank you, Andy, and thank you all for joining the call. We exited 2023 on an upswing, with Q4 revenue and profitability above both our Q3 results and Q4 guidance. Our focus on silicon and enterprise solutions paid dividends in strong Q4 endpoint IC volumes led by our two strategic verticals, retail and supply chain and logistics. We will sharpen that focus as we enter 2024, increasing our investment in silicon and enterprise solutions while streamlining our organization to accelerate our pace and improve our profitability. Every January, we kick off the year with the National Retail Federation Trade Show in New York. This year, RAIN RFID felt like the bell of the ball. Solution providers across the show touted use cases from inventory visibility to self-checkout. End users cited delighting customers with Just Walk Out and retail necessities like loss identification.

Coming off the significant retail inventory destocking that characterized 2023, the excitement at NRF was palpable. Although I still feel it is premature to call the retail downturn over, the green shoots I cited last quarter feel a shade greener post-NRF, buoyed by secular growth opportunities in supply chain and logistics, retail general merchandise, apparel, and a long tail of other applications. From my perspective, Impinj stood out as the leading RAIN silicon provider and enterprise solutions enabler, which is precisely where we want to be. Turning to silicon, our 2023 endpoint IC unit volume growth exceeded our industry's historical 29% CAGR, with opportunity expansion and inlay partner inventory rebuilds more than offsetting the retail destocking headwinds. Q4 endpoint IC revenue exceeded our expectations as growth in retail demand outpaced headwinds from some inlay partners still dialing in their inventory levels.

Looking forward, we anticipate Q1 to again deliver modest endpoint IC unit volume growth. For reader ICs, our revenue held firm despite continued macroeconomic headwinds in China as partners transitioned from older Indy-based products to new E-family designs. Q4 also showed strong test and measurement product deliveries to our inlay partners as they expand their inlay manufacturing capacity. We believe those capacity expansions bode well for the long-term endpoint IC opportunity. Before we turn to solutions, I would be remiss and not against citing our multiple intellectual property trial wins against our primary endpoint IC competitor, NXP. With steadfast determination, we intend to pursue the dispute to a long-term successful outcome. Moving to solutions, the visionary European retailer's ongoing rollout of our self-checkout and loss prevention solution contributed strong Q4 gateway revenue.

We expect this deployment, their third today, to conclude in the Q2, even as it accelerates their embedded tagging ramp. We anticipate future self-checkout and loss prevention opportunities with this retailer and other brands and geographies. In general merchandise, the large North American retailer continued their rollout, albeit at a slower pace than they and we originally expected, primarily due to the breadth of their supplier base and large diversity in the products being tagged. Regardless, they continue making progress. Finally, in supply chain and logistics, we expect the second large North American supply chain and logistics end user to increase their label volumes in 2024. We expect all these projects to provide a tailwind to our 2024 endend IC revenue. On the product front, Impinj M800 deliveries are poised to ramp as our inlay partners finish their quals and begin shipping production inlays.

The M800 is our best performing and most feature-rich endpoint IC ever, and so far, customer feedback has been very positive. Although we are assuming the M800 will follow a typical multi-year ramp, we remain hopeful that our hard work on product performance and market readiness will accelerate that ramp. We also continue shifting our focus away from channel readers and gateways to our reader ICs and enterprise solutions. The former as partner products built on those ICs become increasingly able to unlock channel opportunities and the latter, leveraging our readers and gateways as indispensable elements of whole-platform solutions. Turning to new market drivers, late last year, the European Commission and European Parliament provisionally included the Digital Product Passport, or DPP, in the EU's revised sustainability product legislation. DPP will provide information about a product's sustainability and traceability and help consumers and businesses make informed purchasing decisions.

We expect a phased introduction, including apparel, to start in 2027, and we already see leading European retailers planning for and investing ahead of it. We believe DPP is a pivotal opportunity for us because RAIN, already used extensively in retail apparel, can provide the information required by DPP. We also believe DPP can be the impetus for post-purchase consumer RAIN use cases. We began investing in DPP-related R&D in 2023 and will continue doing so in 2024. In closing, 2023 was another year of solid growth despite market headwinds, with annual revenue crossing the $300 million threshold for the first time. We delivered four quarters of positive Adjusted EBITDA, successfully defended our IP, introduced market-leading new products, and are well down the path to normalizing our inventory levels. Looking forward, we are sharpening our strategic focus to improve our profitability and increase our competitiveness.

As we continue driving our bold vision to connect every item in our everyday world, I remain confident in our market position and energized by the opportunities ahead. I will now turn the call over to Cary for our financial review and Q1 outlook.

Cary?

Cary Baker (CFO)

Thank you, Chris. Good afternoon, everyone. 2023 was another year of strong revenue growth driven by our enterprise solution wins and end-market diversification into supply chain and logistics and retail general merchandise. That said, we also navigated a fluid retail environment marked by significant retail apparel inventory destocking that elevated our first half revenue and depressed our second half revenue as our inlay partners first overbuilt endpoint IC inventory and then adjusted stock back to healthier levels. Despite those fluctuations, our team executed well, delivering non-GAAP profitability in each quarter of the year. Another 2023 highlight was our Voyantic acquisition, which extends our solutions to include inlay test and measurement. The cultural and financial fit between the companies is fantastic, and the integration is proceeding as planned.

The Voyantic test and measurement systems used by both our inlay partners and end users are a key element of our focus on silicon and enterprise solutions. Q4 revenue was $70.7 million, up 9% sequentially compared with $65 million in Q3 2023 and down 8% year-over-year from $76.6 million in Q4 2022. Q4 endpoint IC revenue was $53.9 million, up 11% sequentially compared with $48.6 million in Q3 2023 and down 8% year-over-year from $58.7 million in Q4 2022. The sequential endpoint IC revenue growth exceeded our expectations, especially when compared to typical Q4 declines. Looking to the Q1 we again expect sequential endpoint IC revenue growth now that our large inlay partner inventory levels are relatively healthy.

Q4 systems revenue was $16.8 million, up 2% sequentially compared with $16.4 million in Q3 2023 and down 6% year-over-year from $17.9 million in Q4 2022. The sequential increase overcame our expectation of a decline due to strength in test and measurement. Looking to the Q1, we expect similar systems revenue to Q4. Total 2023 revenue was $307.5 million, up 19% year-over-year compared with $257.8 million in 2022. Endpoint IC revenue grew 22% year-over-year with enterprise solution wins and inlay partner inventory rebuilds more than offsetting retail apparel destocking headwinds. Systems revenue grew 10% year-over-year with test and measurement and gateway strength more than offsetting weakness in our partner-led reader business. Q4 gross margin was 50.9% compared with 50.5% in Q3 2023 and 53.8% in Q4 2022.

The year-over-year decline was driven by higher indirect costs against lower production volumes. Full-year 2023 gross margin was 51.9% compared with 55.5% in 2022, with the decrease due primarily to lower endpoint IC product margins from less specialty and industrial ICs as well as mix within those specialty and industrial ICs. Looking to Q1 2024, we expect gross margin to sequentially increase. Total Q4 operating expense was $33 million compared with $32.6 million in Q3 2023 and $29.5 million in Q4 2022. Research and development expense was $15 million. Sales and marketing expense was $7.7 million. General and administrative expense was $10.3 million, including litigation expense of $3.8 million. 2023 operating expense totaled $137.8 million compared with $114.2 million in 2022. We expect total Q1 2024 operating expense to increase sequentially, driven by annual payroll tax and bonus accrual resets.

We expect Q1 litigation expense to decline sequentially. Q4 Adjusted EBITDA was $3 million compared with $300,000 in Q3 2023 and $11.8 million in Q4 2022. Q4 Adjusted EBITDA margin was 4.2%. 2023 Adjusted EBITDA was $21.8 million compared with $28.9 million in 2022. 2023 Adjusted EBITDA margin was 7.1%. Q4 GAAP net loss was $15.2 million. Q4 non-GAAP net income was $2.5 million or $0.09 per share on a fully diluted basis. 2023 GAAP net loss was $43.4 million. 2023 non-GAAP net income was $19.8 million or $0.70 per share on a fully diluted basis. Turning to the balance sheet, we ended the Q4 with cash, cash equivalents, and investments of $113.2 million. Inventory totaled $97.2 million, down $9.6 million from the prior quarter, with the decrease coming primarily from endpoint ICs.

Q4 net cash provided by operating activities was $1.4 million. Property and equipment purchases totaled $2.6 million. Free cash flow was negative $1.2 million. For the full year, net cash used in operating activities was $49.4 million. Property and equipment purchases totaled $18.6 million. Free cash flow was negative $68 million driven by our endpoint IC inventory rebuilds. Before turning to our guidance, I want to highlight a few items unique to our results and outlook. First, in Q4, our inlay partners made further progress reducing their endpoint IC inventory, and our large partners exited the year relatively healthy, leaving them well positioned to ramp M800 volumes. Some of our smaller partners still hold elevated inventory, which we expect them to bleed down as their project-based demand returns.

Second, as we conclude our E-family reader IC transition, we will end of life our prior generation Indy product family with last-time shipments scheduled in first half 2024. Turning to our outlook, we expect Q1 revenue between $72million-$75 million compared with $70.7 million in Q4 2023, a 4% quarter-over-quarter increase at the midpoint. We expect Adjusted EBITDA between $3million-$4.5 million. On the bottom line, we expect non-GAAP net income between $2.2million-$3.7 million, reflecting non-GAAP fully diluted earnings per share between $0.08-$0.13. In closing, I want to thank the Impinj team for your outstanding execution this quarter. We have delivered nine consecutive quarters of positive Adjusted EBITDA even as we continued investing in our business. We now turn our focus to the next goal, generating consistent free cash flow.

I believe our efforts to streamline our organization will accelerate progress towards that goal. With that, I will now turn the call to the operator to open the question and answer session. MJ?

Operator (participant)

Thank you very much. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, you may press star then two. As a courtesy to others, we ask that you limit yourself to one question and one follow-up. If you have additional questions, please re-queue, and we will take as many questions as time allows. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Harsh Kumar with Piper Sandler. Please go ahead.

Harsh Kumar (Managing Director and Senior Research Analyst)

Yeah, hey guys. First of all, congratulations. You guys are back to beat and raise, which is fantastic. And Chris, you sound fantastic about the prospects of the business. We appreciate that. So on that note, Chris, my first question to you is, historically, you've had endpoint IC unit growth, call it 20-25%. You're coming off of a pretty healthy inventory correction, but your end markets are all looking nicely up. Is it fair for us to think about endpoint IC unit growth in the 25% range for 2024 year?

Chris Diorio (CEO)

Well, first, I'm going to say thank you for your kind words, Harsh. We guide one quarter at a time, as you know, and making predictions at this point in time relative to overall 2024 is quite difficult. You've probably heard some of our partners talk about 2024 overall and say they potentially see some macro pickup in the back half of the year. If that macro improvement actually happens, then we see strength in the back half of the year as well and the potential for gains as we have seen in other years. But a lot depends on what happens in the macro environment.

I'm not willing to call yet that we're going to see that pickup in the back half of the year because, as I said in my prepared remarks, it's a bit too early for us to call the downturn over, but I'm guardedly optimistic for the back half of the year. And if it picks up, we're going to see it in the endpoint IC volumes.

Harsh Kumar (Managing Director and Senior Research Analyst)

Fair enough.

Chris Diorio (CEO)

As I said, green shoots. Green shoots look greener, so let's hope those green shoots continue growing. We're going to do our best to water them.

Harsh Kumar (Managing Director and Senior Research Analyst)

That's great. For my follow-up, I wanted to clarify on what you call as your second logistics customer. Now, they do, I think, $6 billion, some odd shipments a year. Is it fair to think that you are now fully penetrated in 2024 with that sort of $6 billion sort of shipment number, or do you think that the endpoint IC installation within that particular customer will continue to ramp not just for 2024 but possibly into 2025?

Chris Diorio (CEO)

I think you meant $6 billion units rather than $6 billion in terms of the total number of products they ship. Harsh, it's difficult for me to speak to the pace and timing of an end customer ramp. What I said in my prepared remarks is we see increases in volumes in 2024. That said, that end user has diverse operations. And so I think it's probably fair to say that there will be opportunities for continued gains with that end user, and we will do our best to support them at every opportunity to support their deployment and make it successful. In terms of the pace and timing at which they ultimately go, I think I'm going to have to defer to them and the remarks that they often make in their earnings calls.

Harsh Kumar (Managing Director and Senior Research Analyst)

Fair enough, Chris. I'll get back in line. Thank you and congratulations, guys.

Operator (participant)

Thank you, Harsh.

Chris Diorio (CEO)

Thank you.

Operator (participant)

Thank you. The next question is from Toshiya Hari with Goldman Sachs. Please go ahead.

Toshiya Hari (Managing Director and Equity Analyst)

Hi, good afternoon. Thank you so much for taking the question. I had two questions as well. The first one is on the M800. I think it was you, Cary, toward the end of your remarks, you talked about your large partners being in a pretty good spot from an inventory position perspective and how they're well positioned to ramp the M800. As the M800 kind of comes into your mix, how should we think about the penetration rate exiting the year, and how should we think about the impact that could have on both ASP expansion as well as your gross margins? And then I have a follow-up.

Cary Baker (CFO)

Okay. Thanks, Toshiya. This is Cary. Customer feedback on the M800 has been overwhelmingly positive. Our partners are moving forward with their calls, and we expect some initial production shipment volumes this quarter. Historically, however, new endpoint IC ramps have taken multiple years. We're optimistic that the excitement around the M800, we can accelerate that historical product ramp, but it's too early to predict the pace of the ramp at this point. I would add, in addition to the performance and manufacturability gains, the M800 also carries a significant cost advantage for Impinj given the die strength that's built into that endpoint IC. When fully ramped, we expect the M800 to deliver approximately 300 basis points of gross margin accretion.

Given how early we are on the product ramp, however, I do not think I'll see or we will see the M800 impacting gross margin in the first half of this year. Give us another six months, and we'll see how that ramp goes. But we're very encouraged by what we've seen so far.

Toshiya Hari (Managing Director and Equity Analyst)

Great. That's helpful. And then as my follow-up, Chris and Cary, I think you both mentioned something about streamlining your organization. You've generated positive EBITDA on a consistent basis. You talked about being focused on generating consistent free cash flow. When you say streamlining your organization, what do you mean? What are you doing today internally, and what kind of cost reductions or efficiencies can we expect and model going forward in 2024 and beyond? Thank you.

Cary Baker (CFO)

Thanks, Toshiya. This is Cary again. I'll take that one. We are streamlining and adjusting our channel reader investment to better align that portion of our reader business to its revenue profile. We're not exiting the channel reader business, and we continue supporting our partners in the market. This move will allow us to do that and support our partners in a more profitable fashion. This change is a natural progression of our strategy as our partner designs with E-family are increasingly able to unlock that channel reader business, and we are, therefore, able to focus our efforts on the enterprise solutions. We remain focused on our three financial goals that we outlined last year at the Investor Day or the Analyst Day: long-term revenue growth, profitability, and free cash flow.

Toshiya Hari (Managing Director and Equity Analyst)

Thank you and congrats.

Cary Baker (CFO)

Thank you.

Chris Diorio (CEO)

Thank you.Thank you, Toshiya.

Operator (participant)

Thank you. Your next question comes from Christopher Rolland with Susquehanna. Please go ahead.

Matt Myers (Equity Research Asscociate)

Hey guys, this is Matt Myers. On for Chris. So first off, congrats on the quarter, but also just wanted to get some more clarity around the inventory dynamic you guys have been seeing. So is this largely over now for you? Do you still see much excess inventory on the endpoint IC side, or is it on the reader side? And I know you mentioned smaller partners that still have some elevated inventory. How incremental is this? And are there any inventories still with your inlay partners?

Cary Baker (CFO)

Hey Matt, this is Cary. I think I could take a shot at that. In the Q4, our inlay partners made further progress reducing their endpoint IC inventory, and the large partners exited the year relatively healthy. So they're now able to ramp the M800 as the production volumes increase. Think of our inlay business as an 80/20 rule with a handful, maybe six or so inlay partners driving the bulk of that volume. There are smaller partners whose inventory levels remain a little elevated. We're not as concerned about that. Their demand has historically been project-based, and as that project-based demand comes back, they'll get healthy again. But we're feeling pretty good about where we are at this point.

We think in the Q1, we'll be shipping closer to demand, whereas the last couple of quarters, we've been pulling down channel inventory and, as a result, undershipping demand.

Chris Diorio (CEO)

I guess I'll say a tiny bit more there. As you look at the overall market, we do see the retail inventory destocking at the end user level starting to taper, but sales out still exceeds imports. So it's not clear how long that destocking is going to go on. At some point, it has to end. We're seeing it tapering now, and as that destocking ends and assuming demand stays healthy, then we expect to see accelerating retail demand on the other side.

Matt Myers (Equity Research Asscociate)

That's great, Color. Thanks, guys. As a quick follow-up too, I know you had talked about your second logistics customer, but curious if there were any updates around your first customer here.

Chris Diorio (CEO)

No, Matt, I don't think that there have been any public comments from that customer, and I don't think we've got anything that we can add at this point in time. Sorry about that.

Matt Myers (Equity Research Asscociate)

No problem. Thanks, Chris.

Operator (participant)

Thank you. The next question is from Jim Ricchiuti with Needham & Company. Please go ahead.

Jim Ricchiuti (Analyst)

All right. Thanks. Good afternoon. I may have missed it, and I joined the call a little bit late, but can you elaborate just on some of the restructuring that you're doing, to what extent that's impacting OpEx, Cary?

Chris Diorio (CEO)

I think Cary and I are going to share this one a little bit. As part of sharpening our focus, and as Cary mentioned in answer to one of the prior questions, kind of adjusting our spend and normalizing our spend in our reader and gateway channel business, we have reduced our headcount by about 10% and refocused our company along the lines of our silicon and enterprise solutions. We believe that refocusing will drive both our profitability and our success, kind of our focus going forward, and the growth opportunities for the company. So although it's painful, it's very painful to go through a headcount reduction, and it's not something we take lightly or easily. It's something that we felt we needed to do. In refocusing the company, we're going to be focusing on growth, on accelerating our growth even as we drive profitability.

So we're aligning to our strategy, and I think you'll see us tighten that alignment as we go forward, not in terms of further headcount reductions, but just in terms of how we're really focusing on the opportunity in front of us. Cary?

Cary Baker (CFO)

Chris, I think you did a fine job answering it. Jim, I would just reiterate that this is the natural next step in our strategy. You've heard us talk about enterprise solutions for the last several quarters at this point. This is allowing us to do that in a better way while also running our channel reader business in a more profitable fashion. As I think about OpEx in the Q1, I still expect OpEx to step up, though not as much as you've seen in the last couple of years in Q1. We still have the annual payroll tax resets. We still have the bonus accrual reset, but muting that will be a little bit lighter on labor or wage-related spending and a little bit lighter litigation spend.

Jim Ricchiuti (Analyst)

Got it. Thank you for that. My follow-up question. Cary, in the past, when you've given guidance, you've given a little bit more color around endpoint IC revenue growth. I'm wondering, is this quarter a little bit more challenging to forecast it? What are some of the puts and takes as we think about the sequential growth that you're anticipating in endpoint IC revenue? Is there any color as we think about Q2?

Cary Baker (CFO)

Jim, I think the color's about the same. Maybe I'll provide a little more here. Q4 is seasonally our softest quarter as we typically ship in front of the holiday season. We bucked that seasonality this Q4, and we were able to deliver 11% sequential Endpoint IC revenue growth even as we took down more channel inventory in Q4 than we did in Q3. Looking to the Q1, we again expect sequential Endpoint IC revenue growth now that our large inlay partners' inventory levels are relatively healthy. And our shipments, as I mentioned previously, are going to more closely match the underlying demand in the Q4. We are very pleased that we are now modeling our Q3 in a row of sequential demand increase.

The upticks, however, have been modest, and I don't think reflective of the snapback that I would expect when the broader retail recovery occurs. While some of our partners have signaled expectations of a retail recovery in the second half of the year, and as Chris mentioned, some of our green shoots are greener this quarter than they were last quarter, we're a couple of steps removed away from end-customer demand, and I don't think it's our place to call the timing of a retail recovery. We're very encouraged by the progress that we're seeing in demand and the improvements that we're seeing, but at this point, I'm not modeling a retail rebound in the first half of the year.

Jim Ricchiuti (Analyst)

Got it. Thank you.

Chris Diorio (CEO)

Thank you, Jim.

Operator (participant)

Thank you. The next question is from Mike Walkley with Canaccord Genuity. Please go ahead.

Julian Rajan (Equity Research Senior Associate)

Hi. This is Julian Rajan on for Mike. Thank you for taking the question, and congrats on the strong performance. So for Chris, Impinj has strong intellectual property. Can you discuss how you are protecting your IP and update us on the status of your ongoing lawsuits with NXP? And also, with the potential for a monetary award given your recent wins, how should we think about a potential amount, or could a royalty type of arrangement happen with NXP? Thank you.

Chris Diorio (CEO)

Julian, thank you. The answer to that question could take more time than I think we have here. We'll say that we have gone through three separate trials with NXP, one in Washington, one in California, one in Texas, and we have prevailed in all three of those trials. In addition, NXP sued us in three separate trials in China and subsequently dropped all three of those trials. So I feel good about where we are to date. There have been jury awards, both in terms of damages and lost profits, as well as ongoing royalties, but the final judgments haven't yet been entered by the courts. So it's a bit and there's motions back and forth and a lot of the other things that go on on a legal front. So it's too early for us to call where we will net out.

As I said in my prepared remarks, we're prepared to take this litigation through to its successful completion. We feel that we need to defend our leadership position in the market, our intellectual property that we spent so much effort to develop as the market creator against people who copy our products and infringe our IP. So you should expect us to continue pursuing that litigation. Settlement takes two parties. To date, we haven't been able to reach a settlement with NXP. I don't know if we will or we won't. Either way, we feel that it's our obligation to protect our company, protect our IP, protect against people who copy it. So expect us to do our best here going forward and, like I said, pursue this litigation to a successful outcome.

Julian Rajan (Equity Research Senior Associate)

Thank you.

Chris Diorio (CEO)

Thank you, Julian.

Operator (participant)

Thank you. Your next question comes from Chris Kapsch with Loop Capital Markets. Please go ahead.

Chris Kapsch (Managing Director and Senior Equity Research Analyst)

Hi. Good afternoon. My questions are focused around the M800 offering. So I understand the manufacturing yield benefits that you'll get with that chip being produced at an advanced technology node given the much greater die per wafer for yield. I appreciate the gross margin tailwind that you mentioned, the 300 basis points of upside as that transition happens. I'm just curious if any of that IC unit cost improvement accrues to your inlay customers as well. I'm asking because I was wondering if that might be an incentive for them to ship more of their inlay footprint or production to inlays based on your chips. I'm going to have to follow up.

Chris Diorio (CEO)

Yeah, Chris. Got it. Thank you. Good question. So the M800 has roughly 25% greater read range than the M700. That's with the same size antenna. Or said another way, if you shrink the size of the antenna and save money on the inlay cost, you can get the same effective read range as the M700. So our inlay partners have the opportunity to either get that greater range for applications that need it or, as is often the case, reduce their inlay costs, their antenna costs, their PET costs, other costs, and achieve the same performance that they've been able to get in the market. So there is definitely an incentive for our inlay partners to move forward with the M800. It's just overall goodness for them, for us, an incredible product, and they will see a benefit from it.

Cary Baker (CFO)

And then, Chris, this is Cary. I would add that from a pricing perspective, we made the conscious decision to price the M800, even though it is more performant and more manufacturable, slightly below the M700 to accelerate that adoption. As I mentioned earlier, the typical adoption ramp is multiple years. We want to do that much quicker than that. We'll know more if we're successful in accelerating this adoption in another six months, but that is our goal. At this point, I'm not modeling a visible gross margin impact in the first half of the year. Like I said, I'll know more in six months.

Chris Kapsch (Managing Director and Senior Equity Research Analyst)

Got it. That's very helpful color. And then separately, you mentioned one feature, the greater read range. And I believe there's other features that are imparted into the M800 chip design. And just curious if those benefits are in and of themselves enough for the market to see impetus to embrace adoption of a program based on the capabilities of this new product? And just curious because if that's the case, it would also be something that helps extend your IP moat as the industry continues to grow and mature. Thank you.

Chris Diorio (CEO)

Yeah. Good question. Thanks, Chris. The answer to your question is yes. Absolutely yes. We've talked about at least one feature on our products, our protection mode, which allows a retailer to make the tag invisible at point of sale to protect consumer privacy. We believe that feature will have value in DPP going forward. We have introduced other features in the M800 that we haven't spoken to publicly yet, but we will over time, that we think will drive enhanced performance in enterprise solutions, make those solutions work better, and drive preference for Impinj endpoint ICs. That's about all I can say on that topic at this point in time. Just know that as we migrated to a more advanced process node, the cost of digital logic came down.

We took advantage of that effective savings to introduce features in the IC that we believe will solve previously unsolvable enterprise problems, as well as going forward give us an opportunity to address DPP as we said in our prepared remarks.

Chris Kapsch (Managing Director and Senior Equity Research Analyst)

I appreciate the color.

Chris Diorio (CEO)

Thanks, Chris.

Operator (participant)

Thank you. The next question comes from Scott Searle with Roth MKM. Please go ahead.

Scott Searle (Managing Director and Senior Research Analyst)

Good afternoon. Thanks for taking the questions. Congrats on the quarter, and nice to see the inventory in the channel normalizing at this point in time. Hey, I apologize. I joined the call late, but on the systems front, I was wondering if you could provide a little bit of color looking into 2024, what you're seeing from a pipeline opportunity perspective and linearity perspective. I think there were some larger contracts or projects that were reaching a conclusion or at least a phase of conclusion. I'm wondering what the visibility on that front is and how that pipeline is shaping up.

Cary Baker (CFO)

Yeah. Hey, Scott. This is Cary. I can take a start at that, and then Jeff can jump in. So looking to the Q1, we expect similar systems revenue the Q4.

Looking a little bit further out than that, first half systems revenue benefits from the Indy Reader IC last-time shipments related to that product's end of life. Additionally, phase three of the visionary European retailer's Loss Prevention deployment will conclude in the Q2. So we've got some benefit in there. There is more opportunities beyond phase three, but we're taking a conservative approach right now because they may not line up perfectly phase four, that is, may not line up perfectly with the conclusion of phase three. We had the similar situation back when we knew phase two was completing, but we didn't know when phase three would kick off. Then I would just add maybe a final thought on the systems outlook. We've historically seen that after economic downturns, our endpoint IC business recovers before our systems business.

Scott Searle (Managing Director and Senior Research Analyst)

Good color on the first half of the year. We're in kind of a little bit of a wait-and-see mode to see how systems recovers in the back half of the year. Great. Very helpful.

Jeff Dossett (CRO)

This is Jeff.

Cary Baker (CFO)

Go ahead, Scott.

Chris Diorio (CEO)

Oh, no, no. Please continue, Jeff. Thanks.

Jeff Dossett (CRO)

Thanks very much. I was just going to add that our systems pipeline remains strong. I think what's encouraging to me and our team is that we and our partners are seeing increased sales activity, increased detailed project planning, increase in the number of proof of concepts that are reactivating at this time. And really, it's in the context of our customers and our partners increasingly understanding the importance of end-to-end supply chain visibility and process digitization, that ability to sort of digitize and optimize the entire flow of everything they manufacture, transport, sell, and even process back into their business in returns or other forms of circularity. So we're encouraged, but the pace and timing of these deployments is always determined by the individual end customer. So as we get more visibility, we'll integrate that into our guidance each quarter.

Scott Searle (Managing Director and Senior Research Analyst)

Great. Very helpful. And if I could for a follow-up on the DPP front, it sounds like you had some comments, so I apologize if this is redundant and could take it offline. But I thought the initial discussion was contribution may be starting in 2025, not in 2024, but the opportunity to spread to not only different categories but other geographies. So I'm wondering if you framed it at all in terms of the opportunity as we start to go into 2025 and 2026, kind of permeating not just within the EU but into other geographies. Thanks.

Jeff Dossett (CRO)

Yeah. So, Scott, we did say some words about DPP, and I personally am very excited about DPP, what it means for our business going forward. There's two aspects that I would really focus on for DPP. Number one, requirement for retailers initially and other enterprises and other markets going forward to provide true traceability to a product's lifecycle from really initially at the time of manufacturing through point of sale, what that visibility requires, what the laws are going to require, what those customers need to be able to show and do, and the fact that I believe RAIN RFID can provide all the data they need, and we can do it in a proper way. Second aspect and actually, we see retailers already today, and we're going to see it more from other customers as well.

We see retailers today already planning for DPP, speaking with us about it, talking about integration, talking about their needs. So it truly is an opportunity for us. The second aspect that I find very exciting is that DPP doesn't end at point of sale. It ends at an item's end of life. So how does it end at an item's end of life? It will, I believe, open up the opportunity for us in post-purchase consumer use cases. Initially, focus on recyclability at end of life, but there's more. Because when you have an IC that lasts for the life of an item, it's embedded in the item and becomes part of the item for recycling at end of life. It opens up consumer use cases that today our market and our industry hasn't touched.

We as a company have been very excited about the opportunity for consumer use cases. It's very early to say anything about them. In fact, I can't say anything about them or how they materialize. But I believe DPP will be the impetus for those consumer use cases over the next couple of years and expect us to put some effort into it because it's just an exciting opportunity for us overall.

Scott Searle (Managing Director and Senior Research Analyst)

Hey, Chris, maybe just to follow up quickly, when do you expect I'll call it a "meaningful impact," right? I think some of the initial deployments are around things like tires, etc., but not necessarily high-volume items. Is this 2025, does it become meaningful, or is it beyond that, and we've just got a lot of infrastructure that's starting to go out the door in the next 12-24 months to support this deployment?

Chris Diorio (CEO)

As I said in my prepared remarks, the real opportunity is further out in time. We already see retailers and others planning for DPP, but the regulations on the apparel side, I believe, at least with the current timeline, effectively come into force in 2027. So you'll see planning. You'll see work going on. You'll see us doing some investments. You'll see us working directly with enterprises as we prepare for that timeline. So DPP is a long-term, not short-term opportunity, and it's a long-term gain for us. So think about it in the same timeframe as we think about these large enterprise opportunity wins. They don't happen in a month. They don't happen in a quarter. They don't even happen in a year. They take time. But as they roll in, they're really meaningful for our business.

I view DPP in that same light, except much larger than any single enterprise end customer.

Scott Searle (Managing Director and Senior Research Analyst)

Great. Thanks so much.

Chris Diorio (CEO)

Okay. Thank you.

Operator (participant)

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

Chris Diorio (CEO)

Thank you, MJ. I'd like to thank you all for joining the call today, and especially to thank you for your ongoing support.

Operator (participant)

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