What happened

Shares of Impinj (NASDAQ:PI) fell as much as 12.4% on Thursday morning, following a strong third-quarter earnings report with a side of conservative next-quarter bottom-line guidance. By noon EDT, the stock had recovered to a 6.4% drop.

So what

The maker of radio frequency identification (RFID) tags and devices saw third-quarter sales fall 31% year over year to $28.2 million. On the bottom line, Impinj swung from $0.08 of diluted earnings to a non-GAAP net loss of $0.29 per share. Your average Wall Street analyst would have settled for a deeper loss of $0.32 per share on sales near $24.7 million.

The midpoint of Impinj's guidance for the fourth quarter stopped at a net loss of roughly $0.37 per share on revenues near $27.5 million. Here, analysts had been looking for a loss of roughly $0.25 per share on top-line sales in the vicinity of $24.7 million. The negative market reaction today stemmed from this modest earnings guidance.

Two RFID chips from the Impinj M700 series on a white background.

Image source: Impinj.

Now what

The company shipped more than 100 million of the recently introduced M700 RFID endpoints in the third quarter. These advanced and more profitable endpoint tags should drive Impinj's profit margins higher over time. However, the M700 product line won't simply replace older models right away, resulting in a more customer-friendly price increase and a more complicated financial model.

"I would expect gross margin to start improving in 2021. Now keep in mind that for that improvement we have to increase our mix of the M700 and when we introduce a new IC it's typically not a replacement -- think of it as a layering effect," CFO Cary Baker said on the earnings call.

Shipping volumes are normalizing after a difficult spring and summer in the clothing retail and automotive industries. The future remains cloudy due to uncertainty related to the COVID-19 pandemic, which inspired a conservative slate of fourth-quarter estimates.

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