Owlet Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 5 speakers on the call.

Operator

Hello, and welcome to the Howlett's Q1 2023 Earnings Call. My name is Elliot, and I'll be coordinating your call today. I'd now like to hand over to Mike Cavanaugh, Investor Relations, the floor is yours. Please go ahead.

Speaker 1

Thank you, Elliot. Good afternoon, and thank you for joining us today. Earlier today, Owlett Incorporated released financial results for the quarter ended March 31, 2023. The release is currently available on the company's website at investors. Owletcare.com.

Speaker 1

Curt Workman, Elliot's Co Founder and Chief Executive Officer and Kate Skolnick, Chief Financial Officer, will host this afternoon's call. As a reminder, some of the statements that management will make on this call are considered forward looking statements, including statements about the company's future operating financial results and plans. Such statements are subject to risks and uncertainties that could cause Performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward looking statements.

Speaker 1

And the company does not undertake any obligation to update or revise forward looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's SEC filings for further guidance on this matter. With that, I will now turn the call over to Curt Workman, iOLET's Co Founder and Chief Executive Officer. Curt?

Speaker 2

Good afternoon, and thank you for joining us for Allett's Q1 2023 earnings call. Before we dive into the details, let's revisit our objectives from our last update in March. Through category defining products With FDA clearance and a focus on operational discipline and cost management, our goal is to position Allied on a pathway to long term sustainable growth and profitability. We believe that by focusing on these objectives, we can advance our mission to improve infant health and wellness and deliver value to our shareholders. Owlette has made significant progress towards these goals in reducing operating expenses year over year by approximately 50% on a run rate basis And including cutting marketing cost per acquisition by 80% year over year, resulting in a significant improvement in the adjusted EBITDA loss from Q4 to Q1.

Speaker 2

Despite these aggressive cost reductions, channel sell through was up 36% year over year as we continue to see strong consumer demand for our products. From a revenue perspective, we typically see a sequential decline in revenue from Q4 to Q1. As you recall from Q1 last year, we had our first large Initial load ins for the Dreamstock late in Q1, so year over year selling comparisons reflect that impact. In addition, for Q1 2023, we managed channel sell ins, specifically reducing in certain areas to support our goal of improving our channel health and in stock levels. We have more work to do here, but we are making improvements.

Speaker 2

Overall, implementing continuous cost reductions and achieving marketing efficiencies, while achieving strong consumer demand and improving channel health will create a stronger, More sustainable business as we continue to work towards clearances and be in a favorable position to eventually accelerate in long term As Q1 was the anniversary of our Dreamstock launch, I thought it appropriate to take a look back at the past year. Allo has made significant progress with our new DreamSock. Since launch, we've monitored over 1,200,000,000,000 heartbeats, Sold over 450,000 DreamSock and CAM units and achieved a DreamSock NPS over 60, demonstrating high levels of customer satisfaction. Additionally, over 300,000 parents added Owlette to their registry in the last year, showing strong demand for our products. Elliot also remains the number one considered brand in the health and wellness monitoring category for multiple quarters in a row, demonstrating the strength of our brand and reputation in the market.

Speaker 2

We have ranked number 1 on Amazon for smart baby monitors year to date, further highlighting our market leadership and customer feel. We've also received hundreds of life changing stories from parents who have used our products, reinforcing our mission to improve the lives of families. We are committed to driving technology that improves infant health and safety into the future. Turning to Q1 results. In Q1, we continued to focus on rebuilding our channel health, reestablishing our baseline operating expenses and making progress towards regulatory approval for our 510 and Product Applications.

Speaker 2

Revenue for Q1 was $10,700,000 down sequentially from $12,000,000 in Q4 due to both seasonality and intentional focus on normalizing channel inventory with our retail partners. In addition, we faced gross sales headwinds Q1 after a large retailer, Buybuy BABY announced financial trouble in January and followed with its bankruptcy announcement shortly thereafter. As the largest specialty retailer in our space, it will take time for the demand to transition from Buy Buy Baby to other channels. We anticipate this will be a sell in revenue headwind for outlet for the balance of 2023, but we are working aggressively with other channels such as Baby List, Target and Amazon to ensure recapture of this lost demand. We are pleased to report that our Q1 sell through was up 36% compared to Q1 2022, Indicating continued strong consumer demand for our products since introducing the Dreamstock in Q1 last year.

Speaker 2

Additionally, we're continuing to focus on raising awareness and driving In Q1, we saw great success with over 25,000,000 organic video views of our content through social media. We expect this trend to continue and drive further growth in Q2. Following some anticipated and unanticipated revenue challenges in We expect revenue to sequentially increase in Q2 as we begin to normalize our channel health and begin to see a healthier balance Between sell in and sell through, specifically in Q2, we are expecting seasonal catalysts to drive sell in revenue growth such as upcoming events like Mother's Day And Amazon Prime Day in July. In Q1, gross margin was 39.3%. This was a significant sequential increase in gross margin and is a testament to the hard work and dedication of the OLED team as we continue to optimize our operations and focus on efficiency.

Speaker 2

While there is more to come, we are pleased to see our efforts paying off as we work towards stabilizing the business following the RTB activities of last year. Moving forward, we remain committed to driving margin improvement with the goal of returning gross margins to the 40% to 50% range Over time, through optimizations in our warehousing and shipping and reduction in our PPV as we reduce inventory levels And improve our returns and lowering discounts. Our adjusted EBITDA loss for Q1 was 5,800,000 We successfully brought down our operating expenses, cutting our adjusted EBITDA loss by more than half sequentially from Q4. We remain As we shared in our March call, We closed a $30,000,000 financing round in Q1. We amended our loan and asset based lending agreement with SUV to include an extension of our principal payback period And an increase to the eligibility in our borrowing base.

Speaker 2

Combined, this puts Allied in a cash position that will enable us to continue moving the business forward, Support our FDA clearances and ultimately get the business turning towards adjusted EBITDA breakeven in late 2023. I'd like to briefly touch On the letter of non compliance we received from the New York Stock Exchange, we continue to evaluate options available to cure both the $1 minimum price rule As well as the minimum market cap threshold, we have 18 months to secure the market capitalization listing requirement. We will be sure to keep you updated when we have material news to share. Turning to our regulatory work. We've made significant progress towards pursuing FDA clearances for our monitoring platforms in 2023, Including 2 distinct passports for our submissions.

Speaker 2

The BabySat submission to the FDA is for a new medical device that will be available through prescription for babies who need home monitoring, While the health notification de novo submission is for an additional software as a medical device to our existing DreamSock product that will enable parents to receive real time notifications about their baby's health status at home. We are currently in the review process with the FDA and are working to respond promptly to any questions or clarifications Additionally, we will be filing our European regulatory submission to a notified body in Europe in Q2. We are very pleased with our progress here and believe that achieving these regulatory clearances will unlock further long term opportunities and growth for outlet, Allowing us to better help parents navigate the gap between the hospital and the home and use our large and growing data set as a critical tool for pediatric care. In conclusion, we made significant progress in the quarter towards our goals of profitability and FDA clearance on multiple fronts. These achievements include our brand health remains at all 10 highs with Net Promoter Score for our products at all 10 highs.

Speaker 2

We've reduced and stabilized marketing spend and cost Our corporate spending has decreased across the business, putting us on track to spend no more than $40,000,000 And adjusted operating expenses excluding stock based compensation for the full year. We've been in constant communication with FDA on our 2 regulatory submissions And believe we have a clear path forward towards these clearances. And finally, we have secured critical capital, renegotiate our loan agreements and see a path towards profitability. We're excited about the progress we've made towards creating an efficient and profitable organization, and we are confident that we're building a strong foundation For sustainable growth as we move forward, we believe that the FDA clearances we are pursuing will accelerate the adoption of our products and position us to be the platform That bridges the gap between the hospital and the home. As we hold parents' hands through this journey, we're confident that our products and services will make a meaningful impact on their lives.

Speaker 2

We remain focused on executing our operational strategy and achieving our long term goals, while continuing to deliver value to our customers and shareholders. Thank you for your time and continued support. We look forward to updating you on our progress in the coming quarters. Kate, over to you.

Speaker 3

Thank you, and good afternoon, everyone. Kurt covered a number of our financial highlights in his overview. I will repeat a few items with some color and provide some additional financial commentary. Gross billings for the Q1 of 2023 were $12,400,000 down from $15,400,000 sequentially. Q1 product promotions and discounts were $700,000 primarily associated with promotional activity for olllet.com And Q1 Retail Promotional Discounts.

Speaker 3

Returns and allowances reserves for Q1 2023 were 1,100,000 8.9 percent of gross billings. This compares to reserves sequentially in Q4 of 1,500,000 10.7 percent of gross billings. Total revenues in the Q1 of 2023 were 10,700,000 A sequential decrease from $12,000,000 in the Q4 of 2022. Total revenues were driven primarily by sales of DreamSock and DreamDuel. Cost of revenues were $6,600,000 in Q1, resulting in gross margin of 39.3% Compared to 27.5 percent gross margin in the 4th quarter.

Speaker 3

The sequential improvement in gross margin was primarily due to improvements in purchase price variance Costs, prior period inventory adjustments and declines in promotional activity. Operating expenses in the quarter were $15,100,000 including stock based compensation of $2,800,000 and transaction costs of $2,100,000 It was a sequential decline of 37 percent from $24,100,000 in the 4th quarter. Excluding stock based compensation and transaction costs, Q1 operating expenses were $10,200,000 The sequential decrease in operating expenses was primarily due to employee related costs, Bad debt reserves and marketing expense. Operating loss in the quarter was $11,000,000 compared with operating loss of $20,700,000 in the 4th quarter And $21,700,000 in the Q1 of 2022. Net loss in the quarter was $11,900,000 Compared with $19,500,000 last quarter $28,800,000 in the Q1 of 2022.

Speaker 3

Adjusted EBITDA loss for Q1 was $5,800,000 compared to adjusted EBITDA loss sequentially in Q4 At $15,200,000 $18,000,000 for Q1 2022, our focus on operating efficiency has delivered multi quarter improvements in our We will continue to identify areas to leverage as we work towards adjusted EBITDA breakeven later this year. Turning to our balance sheet, cash and cash equivalents as of March 31, 2023, or approximately 25,000,000 With the additional capital raised in February, we can continue to build our brand and execute on our growth initiatives, while at the same time reducing our overall cost structure to Looking ahead, we will again refrain from providing specific revenue guidance for the year As we want more visibility around both sell into retailers and sell through to parents, which we believe is approaching a healthy balance. As Curt said, we anticipate Q2 revenues to improve sequentially from Q1 due to holiday and prime day promotional sell in, Although we are taking a more cautious approach than prior years to ensure balance with sell through channel inventories. We are continuing to focus on operating expense controls. We are forecasting expenses in Q2 to be relatively flat Approximately $12,000,000 to $13,500,000 including stock based compensation.

Speaker 3

Olive's leadership in the Connect And by our determination to empower more parents globally. For the areas that are within our control, we are focused on core business activities in 2023 that will maximize supporting and achieving sell through of our core products and therefore driving balance in retail inventory For future selling opportunities, making strides in our medical device clearances and efficiently managing our operational plan towards breakeven and profitability. Thank you for your time today. Operator, please let's open up the call for questions.

Operator

Thank you. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Charles Rhyee with TD Cowen. Your line is open.

Speaker 4

Yes. Hey, thanks for taking the questions. I wanted to start with the So the impact of the Buy Buy Baby bankruptcy, can you give us a sense for what percent of your sales go through that channel For that retailer specifically and then you said that it will take some time for this So the impact to materialize, is that because the stores are still operating and there's still inventory there? Maybe if you could just give us a little bit more Color on the dynamics going on?

Speaker 2

Yes. Thanks, Charles. Great question. I think Buy Buy Baby is our 4th largest retailer, so not insignificant, but also not The one of the larger contributions in terms of revenue, Buy Buy Baby was a key specialty retailer that assisted in customer education in our space. They were the largest specialty retailer in the category.

Speaker 2

That said, I think, Allett has fantastic customer awareness independent of channel because our product is so highly Considered, and there's so much awareness around us. So most of the time, parents will actually do quite a bit of research outside of channel before Then deciding which channel to purchase in. And so I think long term we'll be very resilient to the changes in channel mix. I do think It will take some time for that demand to shift to new channels, specifically in Q2 Buy Buy Baby will be liquidating inventory, so that will have some Pull in effect from other channels. And then as we get into Q3 and Q4, we're going to work aggressively with other channels like Baby List, Target, Amazon to bring that demand back through other channel opportunities.

Speaker 2

So short term, there are some headwinds with inventory liquidation and Consumers finding their new shopping partner, I think long term this category will continue to grow and will reinforce a great shopping experience with new partners. And we're excited about You know what Baby List specifically is doing to capture this demand, Amazon continues to grow as a channel and Target, we're hoping will play a big role as well.

Speaker 4

When a retailer liquidates inventory in this kind of situation, Would you be to say is that we're not going to get the sell in into that retailer as they're just winding down? Is that the right way to think of it? So That's the headwind to 2Q revenue and the rest of the year?

Speaker 2

That's right. Yes. So the sell in Q2 won't be balanced The sell through won't be balanced with sell in in terms of revenue. As we move throughout the rest of the year, we'll start That based on hand and inventory calculation for other retailers, I think will start to change as we see some of that demand shift to other channels. And so we hope to be able to move some of that sell in revenue into other channels as we as their sell through starts to pick up With buyback baby going out of business.

Speaker 4

Okay. Does this impact at all your ability to reach Just leave that break even by year end in your view?

Speaker 2

I think we still are on track to do that, but I'll pass it over to Kate to answer that question.

Speaker 3

Yes, I mean, no one likes to have additional headwind with what we're trying to accomplish this year, but It's a signal that we have here in May and I think we see a lot of opportunity in Q2 with the holidays that we have coming up. We obviously have the Prime opportunity with Amazon that's been very successful. We've been experimenting with some additional ways to maximize our own online presence with olllet.com. So there's a lot of opportunity to be successful as we head into the back Half of the year, especially as we see this momentum that's starting to improve with the sell through. Not a headwind that we wanted, but it's at least a signal that we understand now that we'll try to overcome.

Speaker 4

Great. And maybe the last question for me. The sell through being up 36% sequentially sounds really pretty impressive here. Can you give us a sense in terms of magnitude what On a revenue basis, what that kind of looks like to give us a sense on once we kind of get the balance on inventory, We could what is the real selling power of the brand right now?

Speaker 2

Kate, do you want to take that or do you want me to take that?

Speaker 3

Go ahead, Kurt.

Speaker 2

Okay. Yes, so what I would say is that our sell through in Q1 again Outpaced the sell in as we look to kind of rebalance inventory levels. Overall, sell through, we believe is on healthy track. And keeping in mind that We've significantly reduced our cost per acquisition across the business, and we held that from Q4 into Q1, and we'll continue to That efficiency this year. So we feel really healthy with that.

Speaker 2

Generally, Q1 sees a 10% to 15% decline in sell through based on promotional So we were sort of in that ballpark from Q4 as we reported in Q4 and then we'll see And increase as we move into Q2 and then Prime Day in Q3, and then you have the holidays in Q4. So we feel like we've got The revenue baseline to get to profitability this year.

Speaker 4

Okay, great. I'll stop right there. Thanks.

Operator

This is all the time we have for questions today. We'd like to thank for your participation. You may now disconnect your lines.

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Earnings Conference Call
Owlet Q1 2023
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