PI - NASDAQ

Welcome to the Impinj call and webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Andy Cobb, Vice President, Strategic Finance. Please go ahead.

Thank you, MJ. Good afternoon, and thank you all for joining us to discuss Impinj’s third quarter 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 third quarter 2023 financial results and fourth quarter outlook. We will then open the call for questions. Jeff Dossett, Impinj’s CRO, will join us for the Q&A. You can find management's prepared remarks plus trended financial data on the company's Investor Relations website. We will make statements in this call about financial performance and future expectations that are based on our outlook as of today. Any such statements are forward-looking under the Private Securities Litigation Reform Act of 1995. While we believe we have a reasonable basis for making these forward-looking statements, our actual results could differ materially because any such statements are subject to risks and uncertainties. We describe these risks and uncertainties in the annual and quarterly reports we file with the SEC. We do not undertake, and expressly disclaim, any obligation to update or alter our forward-looking statements except as required by law. On today’s call, all financial metrics except for revenue, or where we explicitly state otherwise, are non-GAAP. Balance-sheet and cash-flow metrics are GAAP. Please refer to our earnings release for a reconciliation of non-GAAP financial metrics to the most comparable GAAP metrics. Before turning to our results and outlook, note that we will participate in Baird's Global Industrial Conference on November 9th in Chicago. We look forward to connecting with many of you there. I will now turn the call over to, Chris.

Thank you, Andy. And thank you all for joining the call. As I reflect on our results, while I am disappointed that 2023 has been far more challenging than we anticipated entering the year, I am pleased with our execution this quarter. We beat our revenue guide midpoint and exceeded our profitability guide. Looking forward, we see green shoots in the fourth quarter, expect our full-year 2023 endpoint IC volumes to be consistent with our industry’s historical 29% unit-volume CAGR, anticipate a market rebound in 2024 and remain a growth leader despite the difficult macro. We also continue improving our demand forecasting and inventory management. To quote Winston Churchill, we are not letting a good crisis go to waste. Challenging periods have always made us a stronger company, and I have no doubt this one will as well. Focusing first on endpoint ICs, third quarter revenue slightly exceeded our expectations but declined sequentially. Weakness in the overall retail apparel market and softness in the general merchandise ramp at the large North American retailer eclipsed strong unit volume growth at our second large North American supply chain and logistics customer. And while IC inventory at many of our inlay partners declined, the aggregate decline was less than we had anticipated. Looking to the fourth quarter, green shoots in retail apparel are driving improving demand at our inlay partners. While it is too early to call a bottom, it appears that, at least in North America, the worst of the retail inventory destocking is behind us. That said, we expect our inlay partners to continue reducing their IC inventory in the fourth quarter even as they deliver into that improving retail demand. Looking into 2024, we see secular growth in both parcel tracking and retail, the latter buoyed by self-checkout driving 100% tagging and a general merchandise expansion. Turning to systems, third quarter reader and gateway revenue was slightly below our expectations, due primarily to macro headwinds slowing partner-led deployments. Our enterprise engagements continued to be a bright spot, led by expanding parcel tracking at the second supply chain and logistics end user, self-checkout and loss-prevention at the visionary European retailer and a successfully concluded self-checkout deployment at the Asia-based global retailer. Looking to the fourth quarter, we expect a sequential decline in reader and gateway revenue due to continued weakness in our partner-led reader deployments and unfavorable delivery timing to our enterprise end users. Looking farther out, we will continue investing in solutions that leverage our entire platform, working hand-in-hand with lighthouse enterprises to solve their previously unsolvable business problems. Those efforts paid dividends in 2023, both in systems and recurring endpoint IC volumes, and we expect that trend to continue in 2024. I remain confident that our focus on enterprise solutions will yield further dividends in the years ahead. Third quarter reader IC revenue declined as we expected, due primarily to weak macro demand in China and our partners continuing their transition from our older Indy product line to our new Impinj E-family. Looking to the fourth quarter, we see similar reader IC revenue to third quarter, with China demand remaining soft and our partners focused on selling down their Indy-based product inventory before fully ramping sales of E-family-based designs. That said, we are pleased with the pace of our E-family design wins and our traction with emerging opportunities. Turning to our intellectual property dispute with NXP, we prevailed in Washington, California and China. The California Court issued post-trial rulings instructing the parties to agree on a monetary award to Impinj, upholding the jury verdict in our favor on one patent but denying our request for an injunction, and ordering a retrial on a second patent’s validity while upholding its infringement and willfulness verdicts in our favor. We appealed the injunction denial, requested an ongoing royalty and are pursuing further damages from NXP’s Dutch affiliate. The first of three Texas trials, involving three Impinj patents versus two patents NXP recently licensed from a third party, starts next week. Overall, we remain confident in our position and anticipate seeing the litigation through to a successful outcome. In closing, despite the macro headwinds impacting our fourth quarter outlook, we see signs of retail demand improvement, expect strong annual endpoint IC unit-volume growth and remain optimistic for the future. As I said earlier, we as a company have been through industry cycles before and have come through each of them stronger. With excitement for the future, our leading market position and the strength of our platform and strategy, I have no doubt we will do so again. Before I turn the call over to Cary, for our financial review and fourth quarter outlook, I’d like to again thank every member of the Impinj team for your constant effort driving our bold vision. I feel honored by my incredible good fortune to work with you. Cary?

Thank you Chris, and good afternoon everyone. On today’s call, I will review our third quarter financial results and fourth quarter financial outlook. Third quarter revenue was $65 million, down 24% sequentially compared with $86 million in second quarter 2023 and down 5% year-over-year from $68.3 million in third quarter 2022. Third quarter endpoint IC revenue was $48.6 million, down 25% sequentially compared with $64.9 million in second quarter 2023 and down 5% year-over-year from $51.2 million in third quarter 2022. Looking forward, while we typically see fourth quarter endpoint IC revenue decline sequentially, this year we expect improving inlay partner demand to drive an increase. Third quarter systems revenue was $16.4 million, down 22% sequentially compared with $21.1 million in second quarter 2023, and down 4% year-over-year from $17.1 million in third quarter 2022. Third quarter systems revenue was slightly below our expectations, driven by weakness in our Speedway reader business. On a sequential basis, revenue decreased across all product lines. On a year-over-year basis, gateway revenue increased while reader IC and reader revenue decreased. Looking ahead, we expect a sequential decline in fourth quarter systems revenue, led by weakness in our partner-led reader business. Third quarter gross margin was 50.5%, compared with 53.3% in second quarter 2023 and 56.9% in third quarter 2022. The sequential decrease was driven by lower revenue on fixed costs. The year-over-year decrease was driven by lower endpoint IC product margins, specifically a smaller specialty and industrial IC mix, and lower systems product margins driven by increased costs. Looking to the fourth quarter, we expect our gross margin to increase. Third quarter operating expense was $32.6 million, compared with $35.9 million in second quarter 2023 and $29 million in third quarter 2022. Effective spend management across all major functions drove the lower-than-expected operating expense. Research and development expense was $15.5 million. Sales and marketing expense was $7.3 million. General and administrative expense was $9.7 million, including litigation expense of $3.4 million. We expect a sequential increase in fourth quarter operating expense, due in part to increased litigation spend. Third quarter adjusted EBITDA was $300,000, compared with $10 million in second quarter 2023 and $9.8 million in third quarter 2022. Delivering positive adjusted EBITDA despite the significant revenue headwinds this quarter is a testament to both the strength of our business model and the execution of our team. Third quarter GAAP net loss was $15.8 million. Third quarter non-GAAP net income was $100,000 or zero cents per share on a fully diluted basis. Turning to the balance sheet, we ended the third quarter with cash, cash equivalents and investments of $113.2 million, compared with $114.9 million in second quarter 2023 and $201.1 million in third quarter 2022. Inventory totaled $106.8 million, down $5.5 million from the prior quarter. Third quarter net cash used by operating activities was $1.7 million. Property and equipment purchases totaled $2.8 million. Free cash flow was negative $4.5 million. Before turning to our fourth quarter guidance, I want to highlight a few items unique to our results and outlook. First, as Chris mentioned, our partners made progress reducing their endpoint IC inventory in third quarter. We expect them to continue reducing their endpoint IC inventory in the fourth quarter. That reduction will position us well to capitalize on the large number of partner M800 inlay designs currently in certification and to begin ramping M800 in 2024. Second, our third quarter inventory decreased, with lower endpoint IC inventory more than offsetting higher systems inventory. Looking to the fourth quarter, we anticipate further reducing our overall inventory, again with declining endpoint IC inventory more than offsetting a small increase in systems inventory. We are confident inventory will normalize as demand recovers. Finally, we recently launched our first ESG materiality assessment, surveying a cross-section of our investors, customers and employees on ESG matters that are important to them. Impinj is strongly committed to ESG. At the same time we view our journey as a partnership with all our stakeholders to build a strong ESG roadmap for the future. Turning to our outlook, we expect fourth quarter revenue between $65.5 million and $68.5 million, compared with $65 million in third quarter 2023, a 3% quarter-over-quarter increase at the midpoint. We expect adjusted EBITDA between a loss of $900,000 and a profit of $700,000. On the bottom line, we expect non-GAAP net income between a loss of $1.2 million and a profit of $300,000, reflecting non-GAAP fully diluted earnings per share between a loss of $0.04 and a profit of $0.01. In closing, I want to thank the Impinj team, our customers, our suppliers and you, our investors, for your ongoing support. I will now turn the call to the operator to open the question-and-answer session. MJ?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Harsh Kumar with Piper Sandler. Please go ahead.

Yes. Hey, Chris, Gary and the team at Impinj. You guys sound a lot better this time around. Looks like looks like progress is in site. Had a quick question.

Thank you, Harsh.

Thanks, Chris. Had a quick question. Could you give us, I know you guys were working on destocking your inventory at the Inlay partners, and I know you talked about it in the script. But could you give us a sense of how much is left in the system and how much do you think you might have left in the December quarter? How much you want to take out in the December quarter? In other words, if none of this had happened, where would your real revenues have been in the December quarter?

Yes. Hey, Harsh. Thanks for the question. This is Cary. I think I'll take that one. Our progress in burning down channel inventory in Q3 was mixed. We had some partners on-track or ahead of schedule and some behind. In aggregate though, we burned down less than I expected going into the quarter. Based on our estimated demand, we will take out more channel inventory in Q4 and anticipate our large partners exiting the year reasonably healthy, our smaller partners, however, may take a little more time to get healthy. We're not giving a specific number of weeks of channel inventory, because those are based on our estimates of demand. And that demand environment remains very fluid at this point. So but at the end of the day, we're making good progress on reducing channel inventory.

Great. Thank you. And it's good to hear you. You think it'll be done by December, which is the original plan. And then I had a second one. Your largest -- one of your largest customers reported this afternoon, and they also seem to imply that we're close to bottom in the retailer panel issues and things are actually starting to look up just kind of like you mentioned. But I was curious, I can get you thoughts on the topic, how believable do you think this is, this time around using independent validation of this outside of what your partners are telling you. And then also they seem pretty excited about food as a category as well. Could you also comment on that? And I'll get back in line.

Yes. Thanks, Harsh. So we and our largest customer are seeing roughly the same thing. We obviously talked to our direct Inlay partners, but we also talked to end users. I was just at a wireless IoT event in Germany last week, met with several of our end users. And although, although the macro environment is still difficult, and as we said in our prepared remarks, it's still too early to call bottom. We do see improving demand out there. Our direct -- our end users are starting to stimulate. They see things picking up at a little, import data and sales out data at least in the U.S. are starting to normalize. And so we're feeling those green shoots. So like we said, it’s too early to call bottom. I guess I'd like to add that, North America seems to be a well ahead in terms of the correction. Europe feels behind and certain parts of Asia are mixed, obviously, because Asia is large, but China is behind as well. So, time will tell, but I'm personally feeling pretty good that, that things are improving out there in the market. On the food side -- yes.

Okay.

Go ahead. I'm sorry.

No. No. No. That was it.

Okay. On the food side, we do see food as an opportunity. There are two aspects to food. One is, one is tracking items at the pallet, carton and case level. And we have been categorizing those food opportunities in what we call supply chain and logistics because it's primarily moving the food items around. There are also food opportunities in direct item tagging. And those opportunities are moving forward. I -- we have not commented on them directly on our calls because I personally feel it's a little bit premature to be citing some of these opportunities when they're just starting to get going, but they are certainly out there. And as they come forward, I can guarantee that some of them are going to be quite large. But our preference is to focus right now on where we actually see the movement, which is on the, on pallet, carton and box. And, it kind of keep our powder dry on the individual food opportunities, which, of course, like I said, can be much larger, but I think it's premature.

Thanks, Cary and Chris. Thank you.

Thank you.

The next question comes from Toshiya Hari with Goldman Sachs. Please go ahead.

Hi, good afternoon. Thank you so much for taking the question. I wanted to follow-up on how to think about inlay partner inventory and I guess, your selling going forward. Cary, I think you mentioned that, you expect your large partners to exit the year with relatively healthy inventory, but perhaps some of your smaller partners, to have maybe excess inventory at the end of the year. Did I catch that right, first of all? And then second of all, assuming your large partners exit the year, in a healthy spot, and you're selling into, I guess, sell through starting Q1. How should we think about the sequentials in your endpoint IC business in Q1? And I guess any preliminary thoughts on 2024, for your endpoint IC business, would be super helpful as well.

Yes. Thanks, Toshiya. This is Cary. So, yes, you got it right. The larger inlay partners, we expect to exit the year reasonably healthy, the smaller inlay partners are going to take a little bit more time. As I think about the first quarter, we're going to stick to our knitting here and guide just one quarter as time. The market remains very dynamic. We're just now starting to see improvement in endpoint ICs while our systems are remaining soft. And that's not unlike what we saw as we exited COVID. The endpoint ICs recovered before systems did. But we're still in the early stages of what we hope to be a recovery. So we're not going to lean too far forward on our guidance for beyond Q4 at this point.

I -- Toshiya, I will point you to my prepared remarks, where we lean in about as far as we want to, where I said, looking into 2024, this is with respect to our end policies. Looking into 2024, we see secular growth in both parcel tracking and retail. And then cited the self-checkout driving 100% tagging and the expansion in general merchandise. Of course, we anticipate seeing a pickup in retail apparel as well, driven by more than just 100% tagging due to self-checkout, but that is a driver as well. And so we are guardedly optimistic for 2024, but I think that's as far as we want to go right now.

Got it. That's very fair, and helpful. As my follow-up on gross margins, Cary, you talked about Q4 being up sequentially. I was hoping you can kind of walk through the puts and takes, not only for Q4, but also over the next couple of quarters, if you can kind of touch on, your expectations for foundry costs or wafer costs, your pricing profile going forward. And you talked about M800 coming in, starting next year, but how can that help your gross margin profile, say over the next couple of quarters? Thank you.

Yes, I got this. Yes. So as I look to -- start with Q4, I think gross margins may increase. We had -- if you think back to my guidance on Q3 gross margin, a signal that we'd be impacted by two things. First, we have lower revenue scale against fixed cost in our operating cost structure. And then we had a softer mix of product, particularly reader IC. As I look into the Q4, I think our product mix normalizes. So we get some of that back, but we're still subscale at a guide midpoint of $67 million. So that's the dynamic. We'll see a little bit of lift, but I don't anticipate us getting back to the 53%, that is our targeted level right now. As I look into 2024, I expect the mix to continue to be normal. I expect, eventually revenue to start growing again as the retail market recovers. And as we grow, back into the revenue level that we were in the first half of this year, I would expect to get the full realization of scale in our gross margin. And that takes us back to that 53% targeted range. Now on top of that, as the M800 layers in, I expect gross margin to further improve. We're at the very early days of the M800 ramp. Most of our partners are still in the certification or qualification process. So we're not really shipping M800s at this point. As they make the way through that qualification process, we'll start shipping in and then the demand will start ramping. I will keep you up-to-date on our progress on that ramp.

Yes. And when Cary says we're not really shipping, M800s yet, it really is relative to the overall opportunity in front of us from M800, which is quite large. The ramp has started. And we have smaller opportunities out there going now. But, our direct partner are waiting for certifications and approvals. When they're all in the approval cycle right now and for the most part in the approval cycle right now, and as those approvals start coming through, we expect the ramp to accelerate.

Thank you so much.

Thank you.

Thanks, Toshiya.

The next question comes from Jim Ricchiuti - Needham and Company. Please go ahead.

Thank you. Earlier in your script, you talked about steps you're taking to improve demand forecasting and inventory management. I was just wondering if you could elaborate on that.

I will start with the demand forecasting, and I'll probably let Cary layer in as well. On the demand forecasting side, the market turned earlier this year, It wasn't just we who were -- who didn't anticipate the magnitude of the decline, it was our direct. When I was at this, the conference just last week, I had many of our partners and their partners and service peers basically said they didn't see it come. And I'm feeling personally, we should have seen it coming. We should have seen it coming at least better than we did. And it's a learning experience for us. We were significantly relying on our industry's view. What I want to do now is rely Both on our industry's view and a lot more on the macro view, leveraging what our enterprise end users are seeing directly, trends in the overall market, trends in the retail market, trends in the supply chain, logistics market, and taking into account at a higher level. What the macro is doing and use that to kind of set a basis for ourselves. So be more forward looking in terms of what we're doing from a larger macro perspective. I'm not saying we did anything wrong in the past. We did everything we could do in terms of engaging with our partners. And working with them and understanding what they expected their demand to be. But I want to layer on top of that. Overall, understanding of the broad market because quite frankly, that's what we're selling into right now. We are selling into their retail macro. Cary, you want to make a choice on inventory management?

Yeah, Jim. This is Cary. So on the end of the channel inventory side, we're doing multiple things. We're increasing the frequency of our channel inventory reporting, so we can stay closer to, call it sudden swings in the channel inventories, which will help inform demand planning as well. We're also going, reaching further into our distribution model, if you will, to talk to customers and partners beyond our in partners, our direct partners to understand how their demand is trending, how their inventory levels are, all in an effort to better inform you know, how we and our partners run the level of inventory in the channel.

Got it. My follow-up question, Chris, Amazon recently talked about their use of RFID. For this, this, just walkout technology solution. Can you comment at all if you're working with them? And if you can't talk specifically about it. I'd be curious just to get your perspective on their comments about this or about the application.

So, Jim, to the first part of the question, I obviously can't say anything about any particular opportunity that has been identified publicly as associated with us or not associated with us. In terms of the broader opportunity, I have always firmly believed that just walkout solution or whatever you want to call it in different opportunities, will include both a combination of RAIN RFID and vision it just makes logical sense. If you use RAIN RFID, you can tag individual items, for example, for a meat product or something like that. You know, exactly what the items cost is because, the items cost is attached to the tag. The vision system can just tell you what the item is, not its weight. For, loss prevention opportunities, we can identify the item being stolen, but can't tell you anything about the first stealing it, a vision system can tell you the fact the person's stealing it, but not much typically about the item. So I see going forward, the opportunity to blend the two technologies together to provide an overall just walkout opportunity, which will include loss prevention as we're driving into. So without speaking about any one company's particular comments, I will say again that I have several meetings, last week, around this overall opportunity to speed consumer checkout and quite frankly, to delight consumers in their shopping experience. And those conversations all rely on the same thing. It's a combination of RAIN RFID and vision systems and self checkout to drive an overall positive customer experience.

Got it. Thank you.

Thank you, Jim.

The next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.

Great. Thanks. It's good to hear some of the green shoot comments. But, Chris, I'm going to switch gears a little bit. Just you mentioned the updates with NXP. Can you help us maybe frame the opportunity there? You talked about a potential monetary award. Is this something maybe you think you could reach a royalty type agreement with them over time? And I know you're trying to go back after the injunction and, maybe you could share with us how your customers feel about the potential of an junction with NXP. If you're able to meet demand, you shouldn't have junction happen down the road?

Yeah, Mike. Thank you. And I’m going to pause here a little bit because those are difficult questions for me to answer given that we're going to think of it right now. I'll say a few things, and then I'll turn it back to you to follow-up, but I'll answer what I can. In terms of the monetary award in California, the jury initially awarded us roughly $18 million in damages of lost products. The judge, went back and said, you know, there's some foreign sales that shouldn't be included [in there instructed] (ph) parties to get together. And discuss what the actual damages of lost products should be. And that came out to be roughly $13.1 million subject that still to on-going appeals, but that would be the amount in the California case. Our California case was against NXP USA. It did not include the NXP, Dutch affiliate, which whose sales are much larger. So we have filed suit on the same patents against NXP Dutch affiliate. We do no longer -- we don't need to litigate the patents in that case anymore. We would just be litigating the damages and lost profits amounts coming to us. And that case has not been scheduled yet, but we look forward to it happening hopefully soon and getting awarded significantly additional damages and loss and profits. In terms of the settlements with NXP, I can't really comment on anything at this time. Like I said, we're going to think of it and anything I say could be construed one way or another or damaging. In terms of the overall market, we are obviously in discussion with our in light partners and service bureaus, I can't speak for NXP, but I would imagine they are as well. We obviously want to see the market continue to grow and go forward. At the same time, we feel it is very important to protect our intellectual property. And I will note that in California, one of the patents was sound to be locally entrenched. So, we're in this delicate situation where we want to drive the market, yet at the same time we want NXP to respect our intellectual property. We are navigating that dynamic as best we can and navigating a resolution as best we can and confident in our case and confident in the eventual outcome. I'll turn it back to you to see if you have a follow-up or if there's anything I can answer a little bit more, but I'm not trying to go much further.

No, that’s very helpful -- help us think about it. I'll switch gears for my second question. Just, maybe for Cary or just the overall team. I know we're in Q4 now, and it’s the time when you start to negotiate pricing and you have new products come in like the M800. Any thoughts on, you know, how we should think about end point pricing in 2024 versus 2023? Is it too early to tell?

Hey, Mike. This is Cary. I can take a shot at that. So, historically, if you go back multiple years, we've seen ASPs decline annually, call it the low to mid-single digit range. Those declines have been accompanied by wafer cost downs. And that's how we've been able to maintain and improve gross margin, over the years. Over the last couple of years, however, we've been in an inflationary environment. And as a result, our ASPs have actually gone up. We're still in that inflationary environment as we're not expecting a wafer cost down this year. You know, as we go into those conversations, which you know are happening, are not just happening now. They're in constant dialogue with our partners. But as we go into those types of pricing discussion, our goal remains the same. We need to maintain the integrity of our margin model.

Great. That's helpful. Thanks for taking my questions. I'll pass the line.

Thanks, Mike.

The next question comes from Scott Searle with ROTH MKM. Please go ahead.

Hey, good afternoon. Thanks for taking my questions and congratulations on a nice job in a tough environment.

Thank you.

Thank you, Scott.

Hey, guys. Maybe to start, you know, digging a little bit on the green shoots starting to clear the decks for M800 adoption. I was wondering if you could dive in on that a little bit more, some more details in terms of what you're seeing in terms of the interest level, the timing of the adoption cycle, and how that's teeing up additional services, such as authenticity going forward.

Okay. So I'll start here up here and I'll let others jump in. So in terms of the M800 itself, there is very high excitement level about that product on the market. I had multiple of our partners, direct inlay partners and service peers talked to me about M800 and said, you guys have created an incredible chip. It has better sensitivity, better overall performance, better reliability, quality, just we're really excited about this product. It's not that we did badly in any of our prior ones. It's just this one. I feel really good about where we are and in some ways, it's not really that surprising because we did our first chip M700 in a 65 nanometre node. First chip in that node, every time you do something the first time you're cautious. So you don't pull out all the stops. Then we turned to M800 and we pulled out all the stops. Our partners see it in terms of where we are in the market. Our leading partners have multiple inlay designs. Those inlay designs are in certification, both in US and at the University of Auburn, at their arc lab, at direct end customers and in Europe in the same, there is a lot of enthusiasm for that product. And, so the pace of adoption will be paced by how quickly those inlays get through certification and qualification at the end users, but as Cary noted, we expect to see a ramp, starting -- significant ramp starting early next year. It's a little bit early to cite the pace, but I'm guardedly optimistic that M800 will rapidly become our key volume. In terms of the authentication opportunity that is our M775, which is, basically, our M700 series with an authentication engine built in. We have, multiple use cases right now in tax tracking, health care, and specialty food applications. We've seeded the market. We've shipped a significant number of chips into the market. That product will go kind of through the typical S curve of adoption where we see the market. The opportunities are there. And then it get -- they get qualified in Houston and then it picks up. And so we're in that seeding the market and getting going. We also see other opportunities out there in fashion apparel and footwear and pharmaceutical application and others. So I am excited for that product. That said, because it's a completely new offering, really the first general purpose authentication I see I don't think you should expect a super rapid pace of adoption because we've got to get in front of customers and we are now on our partner well to basically educate them in terms of what this thing is and what we've done for the market. That's going to a little bit of time. Just as a fun fact, I had last week, one a newest partner come to me and without citing any of the details, raised the opportunity again. Well, can't you put this chip into currency? You know, to protect against counterfeit currency. Of course, that opportunity is way out in the future and we're not prepared to do that. And, you know, the chip has to be made thinner and more, there's a lot of things you have to do. But we've got partners who are thinking at that level that M775 with its authentication capability is a game changer, and that's what I really like.

Perfect. Very helpful. And as a follow-up, I think you indicated that this year, despite the headwinds, you're still, anticipating endpoint. I see growth in the ballpark of a 29% CAGR, which has been in the historic range. Now as we look to 2024, you've got some other items that are coming on board, big customer in terms of general merchandise. I think logistics customer is starting to ramp up. I'm wondering if you could kind of give us some benchmarks in terms of how we should be thinking about 2024. Is it an inflection year that we start to see this start to accelerate beyond that historic rate? Thanks.

I'm almost prepared to quote Lincoln, with excitement for the future, with no prediction with respect to it is ventured. We feel excitement for 2024, as I said in my prepared remarks, but we guide one quarter at a time, and I don't want us to get too far ahead of ourselves. Cary, anything you'd add?

Yeah. I just reiterate that, you know, as Chris said, that the opportunities are there for secular growth for additional program to roll on, but the market is still pretty dynamic right now. We're still seeing the softness in our systems business while retail start or while endpoint ICs are starting to recover. So just given that dynamic nature, we're going to hold off on, we need to fire to the future at this point.

And I think Lincoln said with optimists, future, not excitement, but I misquoted him a little bit. Sorry. That's

That’s okay. Sounds like you guys have some excitement and optimism. So, thank you.

Thanks, Scott.

(Operator Instructions). The next question is a follow-up from Harsh Kumar with Piper Sandler. Please go ahead.

Yeah. Hey, Chris. I wanted to go back to the question that was just asked about the growth for endpoint IC in 2023. I think correct me if I'm wrong, but I heard 29%, endpoint IC growth for the business in 2023. Is that accurate?

What we said was we expect our endpoint IC volumes to be consistent with our industry's historical unit volume CAGR. The historical CAGR has been 29%. We didn't peg ourselves at 29%. What we basically said is we're applying a range around that number. But in the general vicinity of our the historical industry unit volume without citing an accurate number, and not to be within like 1% accuracy or something like that. But the historical CAGR has exceeded 25%. You know, if you look back years and years, right now, it's in the range of 29%. Depending on what each year brings. And so we expect ourselves, we expect our unit volume growth to exceed 25% and be in the general range of the historical unit volume CAGR.

Yeah. So as I'm looking at my model and the reason why I asked this question was as I'm looking at my model. So I need to be close to that number of 29%, call it even 27 or 28 implies a pretty significant sequential uptake in the December quarter. You know, somewhere in the neighbourhood of 30% to 40% sequential uptake. Is that how we should think about your guidance, or am I missing something here in the middle?

I think something may be missing in that because it's not that type of a volume increase in the fourth quarter. Last year included a high mix of specialty industrial IC. So that impacted revenue, but not the unit volume. So you have to make sure that you've normalized for that. And then if, if the commentary we've made throughout this year on unit volume growth, you can roughly estimate what we're thinking for Q4 unit volume.

Fair enough. Thank you.

First, I'll add to get Cary’s point of spot on about specialty. But the one point I want to add is that the fact that we're able to deliver growth in unit volumes in a significantly down market is what gives us significant confidence in our long term opportunity. We're driving -- we're driving massive improvements at enterprise end users in terms of them being able to track out of manufacture, transport and so. And even in a down market, we still see growth in that opportunity. We see our large, our target supply channel logistics end user continue to press forward because the value proposition that ran our [indiscernible], which is why we're bullish on the long term future. It's unfortunate we have to go through the pain of this current downturn. We're down with the retail market overall. We remain excited about our long term opportunity.

Understood, guys. Thank you for the clarification. That that wasn't I had pressed the buttons for to ask, but that question was interesting, so I jumped on it. But I know you don't want to talk about 2024, but you are citing sort of things green shoots and you are citing some numbers for the industry unit volume of or your unit volume of 20, I call it high 20s, Maybe you could help us think about, how we should think about 2024 as a year that's coming off the bottom. Would you expect yourself to do better than the industry numbers in 2024 as everything rebounds with the growth rates being excess? And then what's a good growth for the systems business, and if there's any seasonality that we should think about with your business in 2024.

You know, Harsh, you fix the retail market and we'll do the rest. No. But in all seriousness, we're just coming through a very difficult environment where we said in our prepared remarks, it's too early to call a bottom. Field green shoots. We really can't estimate the pace of that turnaround. It depends on factors that are so much larger than us. Macro factors in terms of retail, in terms of spend, in terms of the government spending, there's just too many variables in there. What I believe we can say is that we see unit volume CAGR growth in a difficult market this year. And we fully anticipate there will be significant unit volume growth next year. Magnitude of it, exactly what it turns out to be, exactly what it's going to be and everything, it's far too early for us to predict. But our industry has grown year over year, every year since 2010 in terms of unit volumes. And we have no doubt that 2024 will follow the similar trend. I just can't peg where it's going to be.

Great. That that's it for me. Chris and Cary, thank you for all the input today.

Thank you, Harsh.

The next question comes from Natalia Winkler with Jefferies. Please go ahead.

Hi guys. Thanks for taking my questions. So, the first one was just on the logistics end market. It sounds like given the retail's kind of weak, this is where we see a lot of, you know, the spotlight. So could you guys speak about, you know, the opportunities beyond this project that you're seeing ramping right now? How was your engagement with maybe some of the other potential customers there. And what is, you know, like at which point of this current ramp do you think you will see sort of any potential further inflection in demand in that logistics end market.

Hi, Natalie. This is Jeff. I think I first reiterate what we've said often, which is, you know, the pace and timing of new enterprise deployments is very hard to predict. But what I will say is that the supply chain and logistics industry is engaged and closely monitoring what others in the industry are doing that would impact their competitive opportunity in the same marketplace. So I'm encouraged by the level of engagement that we have with other supply chain and logistics organizations that are considering how impinge platform and RAIN RFID can help them improve their competitiveness in a difficult market.

Emily, this is Chris. I'm going to add -- Natalia. I'm sorry. This is Chris. I'm going to add one thing. If you look at our markets our industry's history, it's generally been the case that, one of our small number of end users have caused us segments to go. So if I look at retail opportunity, it was ACs and Marks & Spencer and [Indiscernible] back in the early days. If I look at aviation led by Delta Airlines and then KLM Air France joined in, and then I added notice that all member airlines would fall aboard suit. Now, of course, that's installed by the setback that we had during COVID time. It was the same in the automotive space with a small number of automotive companies that led, for example, by Volkswagen, to drive forward. And so our industry tends to get pulled when a giant end user decides to adopt and basically proves the use case. And so, I can't guarantee that's what's going to happen here again. To Jeff’s comments, others are watching closely and are engaging. And so, we're doing everything we can to make this first opportunity successful and then to pursue everything else we can in the supply chain and logistics space.

Awesome. Thank you. This is super helpful. And then the second one, could you guys provide an update on the Voyantic acquisition like how has that been and how are you seeing maybe any kind of integration or revenue potential there?

So the Voyantic integration, from both my perspective and I spent time last week with, Jukka, Voyantic CEO, the integration is going well. Teams are working well together. We started with the financial integration, HR integration, IP integration just because Voyantic was running just fine before we acquire them. And as we go forward, we are going to be significantly focused on improving the quality, reliability, and performance of labels in the market, easing the design process, helping insured to enterprise end users that the labels that they deployed with the ICs that are in them and the whole set of the deployment is sufficiently reliable for them to base their business on. So we have very high hopes for the future, close integration between the teams, to drive enterprise adoption, and our solutions focus as a company by adding that quality, reliability, manufacturability, and performance to the equation that we already were bringing to bear, which is the endpoint I see is the reader I see is the readers gateways and the software. So it's just a piece of the puzzle that we think makes a stronger whole solution.

And, Natalia, this is Cary. In addition to the strategic benefits that Chris just outlined from a financial perspective, it's gross margin accretive, it's operating margin accretive, it's checking all the boxes for us.

They are in good team.

Awesome. Thank you.

Thank you, Natalia.

The next question is a follow-up from Scott Searle with ROTH MKM. Please go ahead.

Yeah. Just a quick follow-up on Harsh's question on the system side. Chris, you know, this business, it's tended to be a little bit lumpy and depending on where customers are, it's kind of been a little erratic sometimes from quarter to quarter. But the general direction seems like it continues to build those. I was wondering if you can give us some metrics or help us frame a little bit you know, how big the opportunity is today? How does that pipeline look like on the project and the systems front versus maybe where we were at the start of the year or 12 months ago? Thanks.

Yeah. I'm going to start that with an overall strategic perspective and then then I'll hand off to Jeff in terms of just any comments he wants to say on the pipeline, but I'd like to start kind of with where we are strategically. We as a company are focused on enterprise solution, enabling enterprise end users, the likes of our large North American supply chain and logistics end user to successfully deploy a solution that completely delights them and their customers. And so our systems business is really the tip of the spear that gets us into those accounts, helps us invent solutions to hard business problems, as I said in my prepared remarks. And drive that use case, drive the solution to that problem, which drives the use case. And then flow our learning’s down to our reader ICs over time such that we can enable broad market adoption of that particular solution and use case and then step on to the next. So if you think about what we're doing with the readers and gateways, the focus is on enterprise solutions. We typically don't give that pipeline numbers in terms of where we are and things like that, but I'll let Jeff say maybe a few words on kind of the overall systems business and opportunity.

Yeah. Thanks, Chris. I'd start with, that their systems pipeline remains strong. To Chris's point, our strategy of engaging with visionary lighthouse enterprises to solve previously unsolved problems is reflected increasingly in our systems pipeline, that is, the proportion of our overall pipeline, that is represented by these large enterprise engagement opportunities is increasing. It is strong. I would say that the broader pipeline, broader reader in shape can't reader and gateway channel pipeline reflects some of the impact of the macroeconomic. That is it is not growing currently at the same rate as the large enterprise engagements in our pipeline. I think can’t predict when, but I think sometime in 2024, when overall macroeconomic conditions improve, we'll see a return to the growth in the broader channel partner led, reader and gateway pipeline.

Great. Thank you.

Thanks, Scott.

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

Thank you, MJ. 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. And thank you for joining our call. Bye-bye.