Owlet Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 7, 2024

There are 5 speakers on the call.

Operator

Hello, everyone. Thank you for attending today's outlet's 4th quarter 2023 earnings call. My name is Sierra, and I will be your moderator for today. All lines will be muted during the prepared remarks from our management team with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Mike Cavanagh, Investor Relations.

Speaker 1

Thank you, operator, and good afternoon, everyone, and thank you for joining us today for ALEC Baby Care's Q4 2023 earnings call. We appreciate your time and interest in our company. Earlier today, ALEC released financial results for the quarter and full year ended December 31, 2023. The release is currently available on the company's website at www. Investors.

Speaker 1

Owletcare.com. Our speakers for today's call are Curt Workman, Owlet's Co Founder and Chief Executive Officer and Kate Skolnick, our Chief Financial Officer. Curt will begin with an overview of our performance and key developments, followed by Kate, who will provide a detailed review of our financial results. Following their remarks, we will open the call for your questions. Before we get started, we'd like to remind participants that today's discussion will contain forward looking statements based on current expectations.

Speaker 1

These statements are only predictions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, but are not limited to, those described in our most recent filings with the SEC and in the Risk Factors section of our annual report in Form 10 ks for the fiscal year ended December 31, 2023. Please note that the company assumes no obligation to update any forward looking statements whether as a result of new information, future events or otherwise, except as required by law. With that, I would now like to turn the call over to our CEO, Curt Workman.

Speaker 2

Good afternoon, everyone, and thank you for joining Owlet's earnings call. 2023 was a transformative year for Owlet. We set out with 3 key goals: secure FDA clearances, achieve adjusted EBITDA and year breakeven exiting 2023 and revitalize our channel health. I'm incredibly pleased to announce that we achieved all three. These accomplishments are a testament to our team's dedication, the strength of our product portfolio and the large community of parents, health professionals and partners that believe deeply in the importance and mission of Owlett.

Speaker 2

Most importantly though, these achievements position Owlet for substantial growth in 2024. Now let me talk about each. Our recent FDA clearance was a pivotal moment for the business and by launching BabySat and DreamSock with medical grade features, we redefined consumer health monitoring and redesigned the market for outlet. Let me explain why this is so significant. First, it removes purchasing obstacles.

Speaker 2

FDA clearance addressed the key customer concerns around regulatory status and the efficacy of our products and firmly. Specifically for Dreamstock, we added features such as live vital sign displays and health alarms, giving medical grade comfort to parents wishing to monitor and protect their children. I'm excited to report that parents responded in kind in Q4 as evidenced by the doubling of our sell through during the recent holiday period and our DreamSox sell through has continued to maintain double digit growth over prior periods. 2nd, it solidifies our market leadership. OLED is now the 1st and only FDA cleared baby monitor in its category.

Speaker 2

Setting us apart from competitors who are basic consumer products and further distinguishing our category from traditional sound and video monitors, also allowing us to draw direct comparisons to trusted hospital grade technology. 3rd, it opened the market for medical expansion. These clearances paved the way for our Baby Sat product to enter healthcare distribution, allowing us to improve the standard of care of monitoring for higher risk babies. It also allows pediatricians to prescribe outlet instead of the traditional intrusive and clunky hospital monitoring solutions that increase risk with wires going into the crib. These new channels increase our distribution, strengthen our consumer and medical brand and improve margins.

Speaker 2

Alongside our FDA success, we've dramatically improved financial efficiency. Through a combination of strategic actions since the launch of Dreamstock in 2022, we reduced operating expenses by nearly 60%, including consolidating vendors and eliminating unnecessary costs. Over the same timeframe, we significantly reduced marketing expenses by over 70% and we've been able to effectively maintain those marketing spend levels while still driving a 20% increase in sell through in 2023. This was done by focusing on targeted channels on social media, specific partnerships, product satisfaction initiative and leveraging our credibility behind our FDA clearances. Our marketing team drove over 100,000,000 unique video views and increased our social media following to 1,300,000 parents.

Speaker 2

The sell through growth in 2023 and significant year over year improvement post FDA clearance demonstrates that we can grow without significantly increasing marketing spend. We also improved gross margins to 47% in Q4, a 1900 basis point improvement year over year and would have delivered over 50% and adjusted EBITDA positive if not for the one time impact of our former Amazon partner going out of business. The improvement in margins during the year were due to warehouse changes, improving our channel mix, PPV reduction and the onboarding of Amazon 1P. These were significant operational achievements for our small operations team. These combined efforts of expense reduction, marketing efficiency and margin improvement brought Owlet to adjusted EBITDA near breakeven and the most efficient operating position in our history.

Speaker 2

At the start of 2023, we focused intensely on channel health. Key channels like Amazon, Target and Walmart saw significant reductions in weeks on hand, while sell through improved getting to a healthier channel position. An additional 800 Walmart doors fueled over 100% growth in sell through year over year. We added distribution of our Duo 2 product to Dreamstock in all Best Buy stores and on boarded Amazon 1P. The combined sales effort helped fuel the sell through needed to improve our channel health at retail.

Speaker 2

We also addressed imbalanced international inventory with strong sell through in the second half, reducing weeks on hand to manageable levels. Overall, our weeks on hand are now healthy. Owlette navigated this even while overcoming the Buy Buy Baby bankruptcy, where liquidation temporarily impacted other channels. Overall, across 2023, we improved weeks on hand with our retailers by over 45% from the beginning of 2023, setting us up for strong revenue growth in 2024. As we enter 2024, Outlet has the best product portfolio in the industry, strong sales momentum, healthy level of channel inventory, scalable operations and FDA clearance.

Speaker 2

We're now focused on rapidly expanding medical distribution, elevating our retail presence, all while maintaining our operational and financial efficiency and discipline. In addition, we're eyeing 2 important milestones ahead of us to further unlock growth and market access. 1st, European expansion. CE Medical clearance of focus for early 2024 will propel continued European momentum and open new markets. 2nd, software and services.

Speaker 2

Providers are now able to use our data to better enable care at home. And Outlet will be developing software and services behind this new theme that will empower parents with new insights and better close the loop between healthcare and the home. These new services will be introduced in 2024 and begin to shape our revenue and margin story in 2025. I'm incredibly proud of our team's perseverance and the amazing work done in 2023. Our mission to empower parents fuels our dedication during challenging times.

Speaker 2

This was evident in our donation to our foundation partners of over $1,400,000 worth of Dream Socks to families in need. In addition, fundraising for SIDS Research, which raised over $150,000 and support for grieving parents were Owlette and our partners donated and planted trees over 500 trees in memory of these parents' precious little ones. We are dedicated to serving the families and communities who need Owlette the most and I'm grateful and proud of the team that took time to give back, while also pulling Owlette through very difficult times. I'm incredibly excited about the growth and opportunity we've unlocked for 2024 and beyond. I've been on this journey with Outlet and our community of over 2,000,000 parents for over 10 years now.

Speaker 2

And I can tell you Owlette has never been in a better market position. Our time is now. Thank you. Kate, over to you for the financial highlights.

Speaker 3

Thank you, Kurt, and thanks for everyone joining us today. In Q4 2023, outlet demonstrated strong financial performance. I'll spend the next few minutes walking through key financial metrics and providing some additional detail. Gross billings for the Q4 were 32,900,000 dollars Product promotions and discounts were $5,900,000 and returns and allowances reserved were 5,700,000 dollars Within this, dollars 3,100,000 was related to the transition of our business on the Amazon platform. Excluding the Amazon platform, returns and allowances were approximately 8% of gross billings within our average range.

Speaker 3

Q4 revenue, which excludes returns and sales discounts, was $21,000,000 Gross billings for the full year 2023 were $73,200,000 Revenue, which excludes returns and sales discounts, was 54,000,000 dollars Entering into 2023, our sell in to distributors had outpaced sell through to consumers and during the course of the year, our partners were able to work through their excess inventory, bringing sell in and sell through into a healthy balance by year end. Q4 sell through units were up 32% sequentially, demonstrating a 4th consecutive quarter of sell through growth in 2023. We ended 2023 with overall sell through increasing 27% year over year at the top 4 retailers. Our gross margin for the Q4 was over 47%, a significant increase from 27.8% in the same period last year. Gross margin for the full year 2023 was 41.8%, a significant improvement over margins of 33.7% from 2022.

Speaker 3

Our strategies to expand gross margins have been multifaceted. We've been focused on improving our sales product mix and optimizing our promotional strategy. We've also been working diligently to reduce our cost of goods sold where possible, including negotiating better terms with our suppliers and improving our shipping and warehouse processes. Operating expenses in the 4th quarter were $13,000,000 including stock based compensation of $2,300,000 representing a 46% decrease of $11,100,000 year over year. Excluding stock based compensation, Q4 operating expenses were $10,700,000 dollars Within these expenses, we accounted for a net $1,300,000 bad debt expense regarding our former Amazon distribution partners.

Speaker 3

For the full year, operating expenses were $51,200,000 including stock based compensation of $9,900,000 representing a 53% decrease of $56,700,000 year over year. Excluding stock based compensation, 2023 operating expenses were $41,300,000 The year over year decrease in operating expenses was primarily due to employee related costs and marketing spend. The measurable progress towards operating profitability in 2023 is an important foundational shift for Owlett's business. 4th quarter net loss was $6,900,000 for the quarter, a 65% decrease from $19,500,000 in Q4 2022. For the full year, net loss was $32,900,000 a decrease of $46,400,000 year over year.

Speaker 3

Adjusted EBITDA loss for the Q4 was approximately $700,000 down 95% from $15,200,000 year over year. For the full year, adjusted EBITDA loss was $16,300,000 compared to $68,300,000 in 2022. In terms of our balance sheet and cash flow, we ended the year with $16,600,000 in cash and cash equivalents. Coupled with our recent $9,000,000 financing announced in February, we're beginning the year with good financial flexibility to invest in our 2024 growth initiatives and the necessary working capital resources to meet growing customer demand for FDA cleared products. We remain focused on executing our strategic initiatives to further strengthen our commercial and financial performance in 2024 With revenue growth, sustained gross margins and controlled expense management, we believe we can continue to drive shareholder value.

Speaker 3

2024 is off to a strong start. Looking ahead, we will again refrain from providing specific quarterly guidance. We are focused on executing on the core business activities in 2024 that will maximize supporting Dream product commercialization and driving continual balance of sell in and sell through retail inventory. From a linearity perspective, we anticipate a seasonal sell in step down in Q1 from Q4 and particularly with the strong Amazon 1P sales with past Q4 followed by sequentially strong sell in Q2 for Mother's Day holiday promotions and Prime Day. 2nd half sell in for the November December holiday promotions usually take place in Q3.

Speaker 3

Making strides in ramping Baby Step commercialization with new DME partnerships. Baby Step revenue will begin ramping as we develop our important long term DME partnerships in 2024 and align for revenue model impact in 2025. Driving gross margins within our target range of 45% to 50% through unit volume, product mix and ongoing operational efficiencies and driving our operational planning towards breakeven and sustainable profitability. We are targeting operating expenses excluding stock based compensation between $10,000,000 to $20,000,000 per quarter. With that, I will turn the call over to the Q and A portion.

Speaker 3

Operator, please open up the call to questions.

Operator

Absolutely. We will now begin the Q and A session. Our first question today comes from Charles Rhyee with TD Cowen. Please proceed.

Speaker 4

Thanks and congratulations guys on end of the year strong here. Kate or Kurt, maybe just touch on Amazon a little bit here. Obviously, the direct selling to Amazon, what's the importance of that? And why do you why should we view this as a real significant step forward for the company?

Speaker 2

Yes. Thanks Charles for the question. I think one of the big things to note is that Amazon is our largest channel. Something close to 30% of our revenue is driven through Amazon. So this is a really important channel for us.

Speaker 2

And traditionally, we've been working with 3rd party sellers on Amazon that help manage the logistics and compliance with Amazon's fulfillment process. And then they also help with some of the marketing on Amazon for us. As we progress through 2023, we realized that outlet sell through was growing. We're getting into a healthier position. We were worried about some of the partners' financial strength.

Speaker 2

And at the same time Amazon approached us, they usually work with kind of the top 70 brands in every category, the kind of the top brands in every category. And outlet was one of the brands that they weren't working with, the top in our baby category. And so we're really excited about the opportunity. What it provides is better financial stability, better margins, the unit economics through Amazon are better than going through 3rd party distribution. We get additional placements as part of our agreement for advertising and marketing, to give us better elevation.

Speaker 2

And so all of that combined puts a much better margin profile for the business, specifically within that channel as we move into 2024. And then combining that with the FDA clearances, this channel is one we expect to see a lot of growth in.

Speaker 4

Yes. And maybe just to begin with the clearance, obviously, you're the only FDA cleared product that's available in stores. Maybe talk a little bit about the competitive landscape. I know Mossimo has a product out there or maybe just give us an update on what you're seeing in the rest of the market?

Speaker 2

Yes. I would say the number one concern our customers had heading into Q4 was around the confusion with the FDA. And so being able to announce that OLED is the 1st and only FDA cleared monitor for over the counter use, that's still the case today. There's no other monitor that has FDA approval to sell over the counter and through retail channels to empower parents directly with all this health information. So, Allet's in that position.

Speaker 2

And what we saw as a result of that is that it opened up the bottom of the funnel. The top of the funnel has been pretty healthy. The awareness around ALLETE has been really good. And there's just been this question mark around is outlet FDA approved? Should I buy this for my baby?

Speaker 2

And we were able to answer that very clearly for consumers in Q4 and they responded. That's why our sell through doubled during that holiday period year over year with that specific messaging and the press around that. We're really excited about that opportunity. I think this year, Owlette's been put into a new category. We are the only FDA cleared monitor on shelves.

Speaker 2

Our retail partners are really excited about that. They're giving Owlette more shelf space. They're differentiating Owlette from the competition. We're able to do that through our marketing and labeling, which is really, really exciting. So what we're seeing is the outlet was the number one monitor in the category and we expect that distance to continue to increase in 2024.

Speaker 4

That's great. Maybe switching over to BabySat a little bit quickly. This one, I think you had talked about partnering with a direct medical equipment distributor. Maybe give us an update there where you're at with that. I think you had already selected 1 or you've been you partnered with 1, maybe give us a little bit more details there?

Speaker 2

Yes, of course. We partnered we announced a partnership with Adapt Health at the beginning of January. Adapt is a nationwide distributor of medical devices. They have relationships with every national insurance payer in the United States. They're in a big portion of the hospitals throughout the country.

Speaker 2

And so there's a perfect partner for Owlette to go to market with as we begin to sell Baby Sat. They're integrating with all the insurance companies. They've integrated with our website so that the checkout experience through our website is seamless for our customers. They do all of the prescription verification, all of the insurance verification. They've got a sales group of hundreds of sales reps that are taking Owlet now to hospitals.

Speaker 2

It's obviously a channel that takes a little bit of time to build. Things move a little bit more slowly. But we're really excited about that partnership. You'll hear more partnerships announced probably every quarter this year as we're building out that medical distribution, but we're really excited about this first step into medical distribution.

Speaker 4

Great. And sorry, maybe 2 more questions for me. The first one on international, that's you kind of moved into Europe early on before some of the things that kind of got delayed here. Maybe give us an update on where you are CE mark? And when you get to CE Mark, is that for an over the counter product or is that for a prescription product?

Speaker 4

Just curious on the distinction there.

Speaker 2

Good question. It's for an over the counter product. Europe's a little bit different in terms of their we have prescription over the counter here for pulse oximetry there. You can get medical distribution and have an over the counter product, but it is specifically for over the counter use. We'll be able to sell it through all of our retail channels that we've set up there.

Speaker 2

And we think it's going to have a huge impact on not only the expanded distribution that we've been working on, but also the same thing, the opening up the bottom part of the funnel. We've worked hard for a few years to build awareness and we believe this is going to drive additional conversion and more partnership opportunities. So we're very close to it. We've been able to leverage a lot of the a lot of the work and a lot of the studies that we did for FDA clearances and we feel like we're in the kind of final steps to getting clearance.

Speaker 4

Great. And maybe my last question, Kate, if we kind of look at the quarter here and we kind of back out sort of the one time items that you kind of noted with, particularly with the shift to Amazon, It would look like gross margins were north of 50% and adjusted EBITDA would have been positive for the quarter. I know you're not really giving forward guidance per se, but maybe you could help us think through sort of how margins how you're thinking about margin progression and sort of a move to profitability here?

Speaker 3

Yes. As I said, we're looking at the trajectory that we have through the year, what we're trying to get to for our long term model is really margin between 45% 50%. Some of the undulation just kind of comes with the pace through the year as we talked about the Q1 being a step down from Q4 just given volume. And then as it ramps up in Q2, Q3 with the different holidays and the promotions in Prime Day. So I think that what we're seeing is the more gravitation that we have towards our sock product that is obviously the hero product as it relates to margin.

Speaker 3

So mix moving towards there is a benefit. Looking further out, as I mentioned, as Baby Sat ramps out further into 2025, that will be margin benefit to the model as well. In terms of adjusted EBITDA, we're not changing our profile as it relates to expense. So excluding stock based compensation, operating expense being between $10,000,000 to $12,000,000 per quarter. We're looking at leverage in the model that way.

Speaker 3

Depending on where the revenue lands each quarter, we'll see that improving too. Our goal is to be in a sustainably profitable company and I think the benefits of 2023 that we made in taking as much expense as we did out, we don't want to lose that momentum that we have. So it's the opportunities that we have to put our working capital towards the FDA cleared products this year having revenue growth that will get us to that over the sustainable line, if you will, in 2024 and beyond to make this really a company that is focused on being that independent growth company with a profitability lens. So still some work to do in 2024, but I think what you'll see is that that improvement continues as we go through the year.

Speaker 4

That's great. I'm sorry, maybe one more here. You talked about opening at the bottom of the funnel and you saw that kind of double here in the 4th quarter. Can you give us a sense on what that trend looks like on sell through here in the Q1 so far? Are we still seeing the same kind of momentum?

Speaker 2

Yes, I would say not. It hasn't been a double kind of in the Q1 of 2024, but we've seen definitely double digit growth year over year for Dreamstock, which is part of the sales mix that's really starting to outperform and Duo is close to that. So we have seen sustained sell through lift that's really promising as we go into 2024 that we can build on and it's significant.

Speaker 4

Great. Appreciate all the questions. Thank you.

Speaker 2

Thanks, Charles.

Operator

Thank you for your questions. There are no further questions in queue. So I will now pass the conference back over to Mike Cavanaugh for further questions that came in via email.

Speaker 1

Thanks very much, operator. Yes, we did we have received some questions from investors and particularly some of our retail investors that we wanted to share during the Q and A session today. So the first one, congratulations team on the 13 trillion heartbeats. Are there efforts to identify potential correlation between heartbeats and various medical conditions or sleep quality? What can you tell us about the product roadmap and some of the other products like BAND and CRIB, considering both FDA clearances and your extensive data set compared to competitors, that should be an advantage for you?

Speaker 2

Yes, I'll take this one. Yes, Owlette has one of the largest datasets of infant health at home and a fantastic data science team. We've known for a long time that the potential of our data and our technology and the value we can drive from those insights is immense. We've really been limited for years just being a consumer device and limitations around being in the consumer device space. So now with FDA clearance, we can really start to unleash our data and technology for parents and providers.

Speaker 2

That's a big part of this year. I talked a little bit about software and services. So our focus in 2024 is really 2 things. It's to drive adoption of our medical devices and we're seeing the momentum in that area and launching software and services to leverage Allens data. So we really do believe that there's significant revenue and margin growth as we progress here by focusing on those 2 specific areas with about 140,000,000 babies born globally, we're just scratching the surface of Allo's long term potential.

Speaker 2

So stay tuned for more. This is a really exciting area that we'll be sharing more and more about.

Speaker 1

Okay. Thanks, Kurt. The next question, as an investor, I appreciate the strong support from Eclipse as well as Oleg going forward. With the public floated only about 20% of total shares, do you have any thoughts on the best way to build shareholder value? And then in the current macro environment, how does Owlet push forward and stick out from the others?

Speaker 3

Yes, I can take that question. As a microcap company, I think along with others, we've been impacted by these conditions of the capital markets, especially since they've continued to be drawn out over what seems like a long period of time. We've had the financial support of our largest investors and our banking and trade partners. So we've been able to continue to also execute against our mission and vision. I think this support has been really helpful in our ability to deliver against our business and operational plans in 2023 that we've just spent time discussing today.

Speaker 3

And these accomplishments set us up for even more success in 2024. So we believe that the execution of last year and also the execution plans that we talked about for 2024 is what puts us in the best position to continue to build shareholder value right now.

Speaker 1

Okay. Thanks, Kate. Next question, does outlook plan to launch in India or other Asian countries? And if so, what is the potential timeline for that?

Speaker 2

Yes. I mentioned that we're very close on the CE meth clearance. I'm really proud of the team's work there. That's the near term focus, but there are 140,000,000 babies born across the world every single year. And parenting really has universal needs.

Speaker 2

There's it doesn't matter where your baby is born. Parents care about their child's safety and their health and then being able to get a good night's sleep. And so our technology has a really big opportunity to have an impact across the globe. We're really excited about this. In 2024, our specific focus is on expansion of Allot's medical device in Europe.

Speaker 2

There's a lot of room for growth there. And then we'll open up other geographies in coming years.

Speaker 1

Great. Thanks, Kurt. Next question. Given the demographic of outlet's target market, how important is social media and influencer marketing? And can we expect celebrity type marketing for the outlet sock in the future?

Speaker 2

So we work really hard to meet parents really where they're at with messages that resonate with them in channels that they spend their time. And one shining example for us recently is the TikTok strategy that we've put in place, put a large emphasis on getting outlet stories out into the communities. And those stories include really fun and creative content about parenting, very serious and emotional content around the parent or the child's story, their health journey or outlet detecting that the baby had low oxygen and parents being able to intervene in time, that those stories have a big impact. We've even had a lot of user generated stories and partner stories. Somebody wrote a song about Owlette and or about their child and they included Owlette in it.

Speaker 2

So we do a lot of work on social. We had over 100,000,000 video views and engagements last year. And we want to be a very authentic connection with parents. And it's obvious that parents telling real stories and real life examples and the word-of-mouth behind our product is always meaningful to Owlette. It's been a big part of growing our brand and our awareness and being able to do that also while cutting marketing expenses.

Speaker 2

So there's a lot of opportunities with that. And there are a lot of celebrities who use outlet organically and share about outlet because they absolutely love the product. And so we feel like that's the approach that resonates the best with parents.

Speaker 1

All right, great. And we have one final question that we received. I noticed there was a PR firm that is public relations firm hired towards the end of the year. Can you speak to that and the strategy behind it?

Speaker 2

Yes. I would just simply say that Owlette really again we're in a 1st and only position. We are the 1st and only approved FDA monitor for over the counter distribution and we're taking advantage of that in the market today by driving awareness and cleaning up any confusion in the market that's existed. We've had hundreds of articles written about Allot in just the last few months, millions of parents engaging with that message. Thanks to our social and our PR team that's doing a fantastic job.

Speaker 2

And that's a big reason why we're seeing this organic lift in sell through. People now know that Howlett is in that position and we're the best available option. So this is a massive year for us.

Speaker 1

All right. I think that's it for our supplemental questions. Operator?

Operator

Thank you. I will now pass the conference over to Kirk Workman for closing remarks.

Speaker 2

Thank you. Yes, as we look ahead, we're excited about the opportunities that are ahead of us. We're focused on expanding our product footprint, driving revenue growth, improving operating leverage and achieving further profitability. Our strategies and initiatives are designed to capitalize on our recent product introductions and regulatory successes and to continue to deliver value to our shareholders. In conclusion, I want to express my sincere gratitude to our shareholders, to our clients and our dedicated employees for their unwavering support and loyalty and your belief in our mission and commitment to our vision has been instrumental in our achievements this past year.

Speaker 2

Thank you. As we look forward to 2024, we are energized by our progress and the momentum that we felt and we're committed to our mission of helping children live long, happy and healthy lives. We're excited to continue our journey with all of you. Thank you once again for your continued support and for joining us on this call today.

Operator

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your line.

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Owlet Q4 2023
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