Q1 2023 iPower Inc Earnings Call

November 14, 2022

Good afternoon, everyone and thank you for participating in today's conference call to discuss <unk> financial results for its fiscal first quarter 2023 ended September 32022, joining us today.

Powers, Chairman and CEO , Mr. Lawrence Tan and the company's CFO , Mr. Kevin <unk>. Mr. <unk>. Please go ahead.

Thank you operator, and good afternoon, everyone.

By now everyone should have access to our fiscal first quarter earnings press release, which was issued earlier today at approximately <unk> PM Eastern time.

The release is available in the Investor Relations section of our website at <unk> Dot com.

This call will also be available for webcast replay on our website.

Following our prepared remarks, we'll open the call for your questions.

Before I introduce Laurence I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward looking statements.

Private Securities Litigation Reform Act of 1995.

These forward looking statements are subject to certain known and unknown risks and uncertainties as well as assumptions that could cause actual results to differ materially from those reflected in these forward looking statements as.

These forward looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC did.

Do not place undue reliance on any forward looking statements.

<unk> made only as of the date of this call.

Stepped as required by law the company undertakes no obligation to revise or publicly release the results of any revision to any forward looking statements.

With that I'd like to now turn the call over to <unk>, Chairman and CEO Lawrence Dann parts.

Thank you, Kevin and good afternoon, everyone.

Our fiscal Q1 was a strong quarter, despite lingering challenges from a supply chain environment.

Although our gross margin dipped to below 40% due to higher freight costs associated with older inventory, we generated approximately 50% year over year revenue growth as we expanded both our hydroponics and non hydroponics businesses.

Throughout the quarter, we were able to maintain concentration on our in house product mix, which accounted for over 90% revenue compared to around 80% in fiscal Q1 2022.

We also continue to focus on diversifying our product mix with now hydroponics household products such as shopping supply home fans of chairs accounting for over 65% of the sales during the quarter.

Looking to the future of our product catalog.

We will be investing more in R&D to create even higher value and higher margin product.

We believe this will allow us to better manage quantity control and ensure that our customers are consistently receiving catalog leading products.

We expect to begin rolling out these new products in 2023.

Heading into calendar 2023, we will continue to leverage our extensive supply network and supply chain expertise to tap any and all consumer home and garden categories that can create value for our consumer base and business.

Earlier in the year, we made the strategic decision to stockpile inventory in anticipation of both residual supply chain wins and our planned increase in non hydroponics product sales.

This ensured that we have consistent availability of fast moving products for our customers and channel partners.

However, it did offset gross margin as many of those products came in at higher rates than what we're seeing today.

We continue to have elevated inventory position and we expect to work with higher cost inventory down over the next couple of quarters, which will improve both our cash flow and gross margin.

As mentioned on our last quarterly update we have been in the process of revamping our image to better showcase the core high power business alongside our increasingly diverse product portfolio outside our traditional hydroponics vertical.

We are launching our new website this weekend and expect our entire rebranding process to be completed soon which will include a new logo color scheme and other marketing related items.

This new branding is a important step in unifying our powers various non hydro related products and services, while creating a more seamless experience for our customers as we continue to scale and grow both domestically and abroad.

Looking ahead, we expect the volunteer activity and pricing in the supply chain to continue improving as.

As we are already seeing meaningful decreases in overseas shipping cost as well as lower leading time to cross the Pacific.

As a result, we expect to require less inventory going forward and plan to reduce the balance over the next few quarters.

Between selling through higher cost inventory purchasing less products and eliminating short term warehousing need at elevated rates, we are well positioned to improve margin and cash flow.

All of that said, we will continue to be.

<unk> learned in our business and capital allocation as the macro environment involves in fiscal 2023, and we look forward to delivering another year of strong growth and profitability.

I'll now turn the call over to our CFO , Kevin Vasily to take you through our financial results in more detail Kevin.

Thanks Laurence.

As Lawrence mentioned, our fiscal Q1 was another period of strong top line growth for the company.

Total revenue was up 50% to $26 million compared to $17 4 million in the year ago period, driven by increased demand for our non hydro product product portfolio, which includes.

Items like commercial fans shelving equipment chairs cards et cetera.

Gross profit in the first fiscal quarter increased 37% to $10 million compared to $7 3 million in the year ago quarter as a percentage of revenue gross margin was 38, 4%.

Compared to 42, 1% in the year ago quarter, the decrease in gross margin driven by.

A great portion of our sales coming from inventory that incurred.

Higher freight costs earlier in the year.

Total operating expense for fiscal Q1 was $11 5 million compared to $6 1 million for the same period in fiscal 2022.

As a percentage of revenue operating expenses were 44, 1% compared with 34, 7% in the year ago quarter.

Increase in operating expense was primarily driven by elevated warehouse costs. These costs were for temporary warehouse space.

This was the result of having that higher inventory compared to the prior year period.

As mentioned, we expect to improve operating margins.

The next coming quarters.

As we eliminate short term warehousing for those.

Elevated inventory levels.

Net loss in the first fiscal quarter was $4 3 million or <unk> 14 per share compared to net income of <unk> nine.

$9 million or.

<unk>.

Great.

<unk> per share gain for the same period in 2022.

Decrease in our bottom line was primarily driven by a $3 1 million goodwill impairment charge that was related to.

The decline in our market capitalization.

As well as the aforementioned elevated warehouse and freight costs.

Moving to the balance sheet cash and cash equivalents were $4 8 million.

As of September 32022, compared to $1 8 million.

At the same time at the end of our June quarter.

The increase is primarily due to purchasing less inventory because we previously added to that product stock to assure availability early in the year.

As of September 30, total long term debt stood at $16 1 million compared to $14 1 million at the end of June 32021.

Kris was driven in part by timing as we utilized our revolver to better manage working capital.

And then looking ahead to the rest of fiscal 2023, we plan to continue to drive solid top line growth in the business.

While maintaining our approach to capital allocation.

And returning the business profitability.

Although the macro environment continues to present challenges.

Lawrence.

You're on this a little bit.

A Q&A period is actually in China right now.

We've begun to see improvements in our supply chain costs.

And we think that these will continue into the next calendar year.

So this.

Concludes our prepared remarks, and we'll open it now.

Now for questions operator.

Thank you.

Minder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

Yes.

Okay.

Yes.

Our first question comes from Scott Fortune with Roth Capital Partners You May proceed.

Yes. Good afternoon. Thanks for the questions here when I dig into inventory, but first can you quantify kind of the $26 million topline result here as far as the business segments and the growth of each of each of those segments non canvas seem to be growing quicker, obviously than kind of your thoughts for longer term.

Mix from those segments and then also the segments.

Gross margins for each business.

And around each of the business for that for the quarter and kind of going forward from that standpoint.

Sure Scott I'll take a few of those.

So first is.

The breakout between our kind of hydro product line at our non hydro product line.

Let's call it roughly 50% each.

<unk>.

It was lower last year so.

Hydro sorry, non hydro was lower last year. So that's obviously growing a little faster than the.

50% clip the reported on the aggregate basis.

Laurence maybe you would comment on kind of margins for the.

The different segments.

Yes sure.

The non hydro and hydro business in terms of the in house product gross margin, they're relatively the same.

But we have always been seen in our hydro parts have been growing.

Faster than the hydro side.

Which now contributes to.

For last quarter over half of <unk>.

Total revenue.

But in terms of.

Gross margin for the in house parts, which are which.

Contributes the most of ourselves which is 90%.

September quarter then.

They are relatively.

Same.

And then.

Thank you.

Okay I gotcha.

A quick follow up on that because as long as you said you have a lot of R&D for new product growth going forward. It gets back to the question about the mix how should we look at that with new products coming on board.

Mix moving forward away from from the canvas side and more on campus going forward here.

We'll actually be doing on both.

The R&D will be put it in both the hydroponics and non hydro business.

As a way to.

To make our products smarter and better value for for our consumer.

We're not limited by.

Either the hydroponics or marketed products.

This is basically a typo.

The way we.

Put more R&D into the <unk>.

Existing product line or some new product lines, where they did so that we can provide a better product to the market.

Yes.

And then Scott.

Scott one other kind of advantage for.

More kind of in house R&D is that lot of the products that we bring to market are done.

Or co engineered with a partner.

Either a third party or directly with.

Some of our suppliers.

So by bringing some of the R&D in house, we obviously own a bit more of the IP associated with that but there is a little bit.

Can I try to quantify it too precisely, but theres a little bit of a margin.

Bump, we get because we're not paying.

The co engineering service fees. So it's.

In an attempt to keep.

Tried to push those gross margins.

Upward. We think this is an important thing to do over the next couple of years.

Got it and then my follow on question, obviously the inventory.

Level.

It sounds like this is clear over a couple of quarters just kind of.

Step us through as you look at SG&A in the costs, there going forward and the key to getting back to profitability.

From the settlement and I take it that your partner Amazon did not boost.

Holding more inventory among QC agency that booth, just kind of step us through how <unk>.

Inventory in the.

Briskin back to profitability plays out on the SG&A.

Okay.

So.

The biggest.

Yeah.

The biggest incremental cost associated with.

Yeah.

Holding this inventory is.

All of the temporary warehouse space that we needed to procure two.

The store that inventory and as such.

As you might imagine the short term lease significantly for a short term kind of service fee is significantly more expensive than the long term.

Warehouse lease.

Our challenge was over the summer.

Somewhat still worried about the supply chain, that's still fairly elevated.

Shipping times.

And not wanting to.

Mis kind of the demand window that still feel felt like it was going to be there and I think the.

The topline results we saw.

This quarter kind of supported that view.

But as we've seen shipping costs good times come down we believe our ability to.

To run the business on a lower level of inventory meeting high returns.

We will return so that's one and with that.

The money were spending to to.

Hold inventory in the short term facilities.

We will start to disappear.

Have a.

The exact time table, because it's obviously a function of.

Sell through.

Got it.

It's related as that inventory comes down.

Don't need to be.

Holding it in.

Very very high cost storage so.

That's the way to kind of think about.

Getting us back to a more normalized.

Operating expense environment.

Got it I appreciate the color I'll jump back in the queue.

Thanks Scott.

Thank you and as a reminder to ask a question you will need to press star one on your telephone.

Our next question comes from Michael Baker with D. A Davidson you May proceed.

Okay. Thanks, So a couple a couple of follow ups and other questions. So first just to be clear. So you are still paying the temporary warehouse space that's.

That hasn't completely gone away you expect it to go away in the coming quarters, but we don't know exactly what is that right.

That's correct.

Do we think fiscal 2023.

Do we think that there'll be.

Yes at some point this year.

Through our fiscal year, yes.

Assuming another words will there be a quarter. This year, where you will be back to profitability I guess, that's the question.

Well I don't want to give specific guidance.

But we expect that.

Uh huh.

We will not have to be paying.

That elevated warehouse space cost at some point during this fiscal year. So yes.

Got it okay.

Uh huh.

And then the R&D is there an incremental cost to that is that like another sort of SG&A line item, that's going to pop up.

Well.

So I think the way that's going to rollout is.

Any incremental spending initially is going to be.

Pretty small so it may fall under kind of the G&A line, but.

The way to think about it though is.

Initially a bit of a one for one kind of.

Trade out of gross margin and into.

Uh huh.

And R&D line and then as that scales over time, we'll have a little bit of leverage on that gross margin line, because we won't be.

Again embedding co engineering cost and the cost of goods sold but.

Early R&D spend and if we decided to break it out if it is big enough.

We'll essentially be kind of a one to one kind of pull out of.

Kind of what we're spending on cost of goods sold.

That makes sense.

Yes.

I think it does okay.

Now more I guess, I guess bigger picture strategic type question.

So who is your.

<unk> base, which is I guess, primarily Amazon, but you do have other customers as your customer base is different for the non hydroponic versus hydroponic products.

And as part of that answer can you update us on your customer base have you diversified away from Amazon at all I know, that's something you've been working on.

Both in terms of customers, but also geographically as well can you update us on your international business.

Good morning.

Yeah. That's good that's good way to ask.

Laura do you want to take that.

Yes sure.

Terms of the sales channels for United States, the hydroponics and non hydroponics.

Do not differ very much.

Utilize the same channels.

For both business lines now in terms of our geographical area for the end consumers that buy and use our product.

We do not have a I don't have the data in front of me that shows the differences between these two segments.

I don't have that data in front of me right now.

In terms of the international business.

I think right now the European mostly have the.

Hydroponics.

Seles.

We are working on bringing non hydroponics.

Sales into European.

<unk>, Canada.

I think the it's mostly that as well so.

Mike.

In that regard.

Hydroponics business expansion.

To the rest of the world out of the United States. It was still is still a little behind the hydroponics business.

Okay.

And domestically any any diversification in the customer base in other words, I know you'd been sort of talking to some big box retailers and trying to diversify away from Amazon.

Date there.

Yes, we are making.

Slow, but solid progress there.

So, but it's a work in progress.

Yes, Mike.

Given that you work with a lot of those.

Big box retailers that.

We are developing relationships the windows, particularly to sell.

Bricks and mortar don't App open kind of every week.

So.

We are.

Going through the process of getting to be a qualified vendor and.

The process of being invited in.

Should happen hopefully over the next.

A couple of quarters, and we will keep you guys posted but.

These are companies that you.

I'm sure I'm familiar with so that you understand that are the windows that we get.

To provide product and we're optimistic given the progress we've made so far.

Yeah, Okay fair enough.

Thanks, Mike.

Thank you and I'm not showing any further questions at this time I would now like to turn the call back over.

Kevin the Sealy for any further remarks.

So just wanted to thank everyone for dialing in today.

He will be talking to you as we can.

Complete our.

Fiscal Q2.

And hold our conference call probably sometime in early to mid February Thanks, everyone again, and we will talk again soon.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Yeah.

[music].

Yeah.

[music].

Yes.

[music].

Okay.

Hum.

[music].

The conference will begin shortly to raise your hand during Q&A you can dial one one.

[music].

Okay.

[music].

Sure.

[music].

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Sure.

Hum.

Sure.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

[music].

Thank you.

[music].

Okay.

Yes.

Okay.

[music].

Okay.

Thank you.

Yes.

Okay.

Thanks.

Yes.

Okay.

Right.

Okay.

[music].

Okay.

Sure.

Okay.

[music].

Yes.

[music].

Okay.

Yes.

[music].

Okay.

Yes.

[music].

Sure.

[music].

Please.

Okay.

[music].

Okay.

[music].

Okay.

Thank you.

[music].

Yes.

Sure.

Yes.

[music].

Great.

[music].

Okay.

Sure.

[music].

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

[music].

Okay.

Yes.

Thanks.

Okay.

Sure.

Okay.

Yes.

[music].

Okay.

Sure.

Okay.

Great.

Sure.

Okay.

Alright.

Okay.

Hi.

Yes.

Okay.

Yes.

[music].

Sure.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Sure.

Yes.

Sure.

[music].

Okay.

Yes.

[music] notwithstanding.

Thank you.

Yes.

Okay.

Yes.

Perfect.

Yes.

Okay.

Yes.

Okay.

Thank you.

[music].

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

[music].

Okay.

Yes.

Great.

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Great.

[music].

Okay.

Yes.

Sure.

[music].

Okay.

Sure.

Okay.

[music].

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

[music].

Okay.

Thank you.

Okay.

Yes.

Okay.

Thank you.

[music].

Okay.

[music].

Thanks.

Thank you.

Okay.

Hi.

Yes.

Thanks.

Okay.

[music].

Great.

[music].

Yes.

[music].

Yes.

Sure.

Yes.

Okay.

Yes.

Sure.

[music].

Yes.

Okay.

[music].

Okay.

Sure.

Okay.

[music].

Sure.

Okay.

Tom.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

Thanks.

Okay.

Yes.

[music].

Yes.

[music].

Q1 2023 iPower Inc Earnings Call

Request a DemoDemo

IPW

iPower

Earnings