Mike Walkey: Great. Thanks. Yes, my congrats on everything too. I guess, Chris, just on the strong intellectual property and your comments about protecting it, what has been the feedback from the RAIN RFID outside the industry post-year settlement with NXP and are there additional opportunities to license your technology?
Chris Diorio: I’m going to start with the latter part of the question first, Mike and there are additional opportunities out there for licensing overall. So there’s opportunities on our IP front, on cloud services front and for our platform overall. We just got a lot of strengths and capabilities in the things that we’re doing. Furthermore, we see opportunities to integrate with our partners and make more partners out of the market and drive additional licensing opportunities to generate recurring revenue. So on that front, we feel good, which is why I cited it in the prepared remarks, although obviously we didn’t give any further details because we can’t really cite anything until we have any further details. And licensing is core to our strategy going forward.
In terms of the industry reaction to settling with NXP, the industry was for the most part relieved. There was a cloud of uncertainty hanging over the fact that there was litigation ongoing between the two largest NYC suppliers and the fact that that overhang to the industry is removed. I’m guardedly think that helping as we continue to move forward and it takes away any concerns or any concerns about potential impediment going forward. On top of that, of course, we carry sight of the details of the settlement and we feel the outcome is good for us and good for the industry overall.
Mike Walkey: Great. And for follow-up, Cary, just on gross margins, obviously, next quarter will be a high gross margin quarter with the licensing payment. But as we kind of back that out and think about gross margin trends for the rest of the business, with M800 ramping and potentially a stronger mix of systems later in the year. How should we just think about gross margin trends for the business?
Cary Baker: Yes, thanks for the question. I think as you know, looking at the second quarter, we expect gross margins to increase with a strong benefit from the license revenue. If you remove that, we’re modeling gross margins at the product level to be about flat quarter-to-quarter. Currently, we’re running below our targeted 53% to 54% range for a few reasons. First, we remain a little subscale, but are closing that gap quickly. And then second, as has been the case historically, the system’s business recovery typically lags the endpoint IC’s recovery. This has caused our endpoint IC revenue to grow as a percent of our total revenue. Endpoint IC carries a gross margin that’s slightly lower than our corporate average. And then finally, our lower margin 200 millimeter volume running SKUs are slightly higher as a percent of revenue in 2Q and will likely be so again in Q3.
That product line is two generations old at this point, and we’re moving it before the M800 ramps. We’ll know more about that pace of the M800 ramp in the next quarter or so. But the second quarter volumes remain small from a mix perspective and we’re really not having visible impact to our gross margin. So overall, though, we remain confident in the gross margin targets that we outlined at our Investor Day.
Mike Walkey: Okay. That’s very helpful. Thank you very much.
Chris Diorio: Thank you.
Operator: Thank you. The next question comes from Christopher Rolland with Susquehanna. Please go ahead.
Christopher Rolland: Hey, thanks for the question. The Digital Product Passport, I think you talked to it regarding textiles as well. Can you tell us a little bit more about that, the applications, maybe the economics associated with it and how big you think it can ultimately be?
Chris Diorio: So, Chris, the application really is the EU has passed regulations that basically require traceability of textile items are cradled to grade for point of manufacturing all the way through shipment, sale, consumer use and recycling. Those regulations really begin kicking in at 2027 and lifecycle traceability. And the key thing is EU wants to give the consumers ability to an item’s provenance, the consumer to make an informed choice around item sustainability and informed choice about the products that they’re buying. And doing so provides the data about the item to the consumers and then, like I said, recycling and end of life. So the key here for us is that I believe DPP will drive significant opportunities for consumer engagement.
Now, RAIN RFID is not [indiscernible] in for DPP because there are other data carriers. What we, our partners and our enterprise end users want is to make the tags that are already on the retail thorough items and more and more embedded in the items via data carrier DPP. In order to get there, we need consumers to be able to read those items, which is the impetus for putting readers into mobile phones. And I personally think that brain [ph] reading in mobile phones opens up a wealth of opportunities and actually is a new and transformative use case for the mobile phone suppliers. So, I am hopeful, but I can’t go beyond hopeful. I’m hopeful that this increased pressure or increased impetus for putting brain reading in mobile phones, maybe we’ll put us over the edge, over the top in terms of getting the readers in phones, which would open up a wealth of opportunities beyond DPP.
So that really is a, the core focus, the text already going on the items, we need to get consumers being able to read them and when they can, it opens up a whole new set of opportunities close to point of sale.
Christopher Rolland: That’s very interesting. Just a quick follow up there. Would you be selling ICs into the mobile market for that? Or could they use some sort of existing function there and then just a housekeeping on the licensing. Is there a volume component to royalties for future payments and how dependent on volumes are those payments?
Chris Diorio: So the – I’m taking the latter question first, the payments of fixed amount increasing by a modest amount each year. So – and that’s what we said with regards to the licensing payment. Going to the former, it’s too early to say whether there’s an opportunity for us in silicon in the mobile phones or not. But putting that aside for a minute, if you think of our platform that has the endpoint ICs, reader ICs, we’re pushing more into some of the services around it. We already have enterprise level engagements. We see a large opportunity for our platform, whether or not it’s actually our silicon that ends up in the phones. Of course, we’ll try and get our silicon in the phones. But even if we don’t, we’re going to be pushing forward with opportunities that leverage our platform, the benefits our platform brings, and we want to be side by side with the retailers and phone providers and the manufacturers to be part of the overall solution.
