Q3 2022 Owlet Inc Earnings Call
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Good afternoon. Thank you for attending the outlet Q3 earnings call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
I'd now like to pass the conference over to your host Mike Cavanagh with Investor Relations. Thank you might you May proceed.
Okay.
Good afternoon, and thank you for joining us today earlier today I'll, let incorporate at least financial results for the quarter ended September 32022.
He is currently available on the company's website at investors Dot outlet care Dot com.
Curt Workman <unk> co founder President and Chief Executive Officer, and Kate Skolnik, Chief Financial Officer will host this afternoon's call.
Before we get started I would like to remind everyone that certain matters discussed in today's conference call, Andrew or answers that may be given to questions asked are forward looking statements that are subject to risks and uncertainties relating to future events and or the future financial performance of the company.
Actual results could differ materially from those anticipated in these forward looking statements.
The risk factors that may affect results are detailed in the company's most recent public filings with the U S Securities and Exchange Commission, including its quarterly report filed today November 14 2022.
And other reports filed with the SEC, which can be found on its website at investors that I'll, let Kurt dot com or on the SEC's website at Www Dot SEC Dot Gov.
The information provided in this conference call speaks only as of today's live call.
I'll, let disclaims any intention or obligation except as required by law to update or revise any information financial projections or other forward looking statements, whether because of new information future events or otherwise.
Please also note that I'll, let will refer to certain non-GAAP financial information on today's call.
You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures in the company's earnings release, which is also available on the company's quarterly results page of its website.
With that I'll now turn the call over to Curt Hartman.
Kurt.
Thank you, Mike and good afternoon to everyone joining us.
Today, I will share our results for the third quarter of 2022 and provide additional update on our business.
Specifically around our three key areas of focus.
Our dream product portfolio performance in the marketplace.
<unk> towards regulatory authorizations.
And operational strides towards profitability.
As noted in today's earnings release, we delivered revenue of $17 4 million.
The third quarter of 2022.
Highlights in the quarter.
Included are strongest prime day event ever significant distribution expansion development with U S retailers for 2023 and beyond and the major benefit of our marketing investments as we reposition back until leadership and growth in the connected nursery ecosystem.
That said as we discussed in our second quarter call we are.
Recognizing the headwinds from an uncertain macroeconomic environment.
Retailers focused on managing their working capital by reducing weeks of supply, which impacted our Q3 sell in demand compared to prior periods.
Moving forward one of our highest operating priorities is working towards getting back to 45% to 50% gross margin in future periods through tighter management of promotional spend in supply chain costs.
Outside of these factors, we believe consumer satisfaction of our products and trust and belief in the outlet brand as strong as we've continued to see baseline demand for our dream product portfolio improve over the course of this year.
Okay.
Notably the fourth quarter, we significantly reduced media acquisition spend in the U S. While growing the units sold through to the end consumer quarter over quarter by more than 50%.
In part due to July prior to date performance.
In July we launched our next generation camera and introduced the new predictive technology into our stock and Cam.
The new Dream <unk> has already been named best Baby monitor by best product Dot Com with.
With this launch we brought the duo in as a new offering into 600 existing target doors and added over 200, new Walmart doors to our retail footprint.
Our brand health remains strong.
According to an independent third party survey, we had the number one unaided brand awareness and number one in AD recall in our category in the third quarter.
Additionally, 53% of our customers find out about all of that from a friend. According to our survey from Allocher Dot Com in September .
We were the number one baby monitor brand on Amazon in the U S for Q3 based on revenue.
Most importantly, we believe we were able to meaningfully improve our parents' experience and confidence and caring for their baby.
Turning to our regulatory clearance work, we believe in making the highest quality care available to every baby by democratizing access to technology and information that has previously been limited to clinical settings.
Completed significant clinical work to be in a position to file FDA submissions for our monitoring platforms, which have cleared will unlock further long term opportunity and growth for outlet.
The past year, we've greatly increased our communication with the FDA, maintaining frequent conversations and meetings obtaining what we believe is a clear line of sight for <unk> submission.
One of which as we announced in October we've already submitted we filed a five 10-K premarket notification to the FDA for a new prescription monitoring device for insurance.
Mice, which we internally call babysat uses pulse oximetry technology and is intended to be prescribed by physicians to assist in the in home monitoring.
Babies under physicians care.
The device provides alerts to parents when their baby's heart rate or oxygen saturation level or spo two does not fall within prescribed ranges.
Babysat represent significant advantaged large wired hospital monitoring technologies on the market today with its wireless wearable form factor and cloud connected data integration designed for home use.
Additionally, in the coming weeks, we plan to file our second submission to the FDA for our software as a medical device.
And over the counter product that offers opportunistic heart rate and oxygen notification in conjunction with the existing dream stock sleep monitoring capabilities.
After multiple meetings with FDA over the past 12 months regarding our stock technology, we have recently aligned with FDA to submit a de novo application that will include both the display of heart rate and oxygen currently in the dream.
And additional opportunistic notification features as a software.
As a software as a medical device.
FDA has signaled they do not intend additional enforcement, while we work towards the submission we view this as a positive step towards creating best in class digital health products we.
Provided more information about our correspondence with the FDA and our 10-Q filed for this quarter.
We've completed a broad range of clinical studies to support these submissions and to further validate the accuracy and safety of our products.
These studies address various aspects of our devices monitoring capabilities, including.
Accuracy across many important metrics tested by reputable third party labs, clinicians, including confirming that our stocks monitoring pulse oximetry technology meets regulatory requirements across different skin pigmentations.
We also tested this accuracy under motion conditions, meaning this meaning the sox reading maintained accuracy with movement.
Demonstrating the safety and efficacy of the products clinical studies and third party testing has confirmed study results that certain product aspects such as skin sensitivity does that controls and cyber security.
In summary, these studies and product testing represents years of work and investment by outlet demonstrating hospital grade quality devices, yet the simplicity for homecare.
We believe the FDA authorizations with physician outlet to better help parents navigate the chasm between the hospital and home and increase our ability to use our large and growing dataset as a critical tool for pediatric care I look forward to sharing more updates on these submissions as we have news to share.
Okay.
Finally, we remain steadfast and focused on operational strides towards profitability in the first half of 2022, our focus was getting our dream product portfolio into the market and we spent heavily in marketing and promotions to build back and reposition effectively in the marketplace.
As we shared in our last call due to the changing macroeconomic conditions in the market. We adjusted our operating plan to drive the business to breakeven adjusted EBITDA in 2023, we.
We implemented significant cost reduction activities in late July to streamline our organizational structure, reducing operating expenses and managing with conserving our cash resources.
While the baseline restructuring was mostly complete in Q3 during the quarter, we worked through some of the spend and other costs already committed for the back half of the year.
We will continue to reduce costs through Q4.
In early 2023 to meet our operating plan goals.
In addition to further reducing our operating expenses, we are proactively working to further improve our cash balances and we're actively negotiating an amendment to our facility with SBB It would expand our access to working capital.
Alex has been pursuing access has also been pursuing access to additional capital to add to our balance sheet.
Over the past 12 months has shown operational resilience with the vision and commitment to be the long term leader impacting pediatric health.
As we bring 2022 took close we believe the volatility in our business caused by the FDA warning letter will be behind us and we can focus in 2023 with renewed opportunity for category leadership future growth and more consistent operational performance.
We are determined to execute as best as best we can.
Through this near term macroeconomic uncertainty and remain focused on the milestones that will best position us for the strongest long term potential for healthy profitable business and.
In a few weeks I'll, let we'll celebrate the 10 year anniversary Mark from when my co founders and I built our first prototypes Doc.
It's an understatement to say we've come so far since then surpassing one and a half million babies monitored delivering immense peace of mind to parents in helping families sleep better.
It's extremely gratifying to me that our mission continues to expand and resonate with a growing community of parents and caregivers around the world.
I am grateful for our passionate team that's been dedicated to improving lives in helping clients navigate this incredibly important part of their journey.
It is empowering parents with the information they need to better deliver care at home and our vision is that every family has access to the tools and technology, they need to keep baby safe healthy and happy.
Still in all of the continuing outpouring of support and strong word of mouth from parents and we're thankful we can be there to walk this journey alongside these parents.
Thank you for your continued support of valid Kate over to you.
Thank you and good afternoon, everyone.
Turning to our Q3 results first.
Gross billings for the quarter were $23 4 million from $22 7 million Q2 sequentially.
As we noted last quarter, we are experiencing selling macroeconomic headwinds with our retailers and their inventory management. However, we believe that recovering sell through trends and brand awareness for our dream platform.
Positive indications that the underlying strength of the value proposition of our products with consumers.
Q3 product promotions and discounts for $3 2 million, primarily associated with seasonal promotional activity across retailers that are taking place in Q4 and pricing changes at retail as related to our camera product transition.
This compares to product promotions and discounts a $2 5 million sequentially in Q2.
Returns and allowance reserves for Q3, 2022 for $2 $7 million of 11, 5% in cross selling.
This compares to reserves sequentially in Q2 of $1 8 million.
To provide some context for the increase in Q3 returns and allowances.
We experienced some lumpiness in the returns and charge backs claimed by our large retailers exceeded our estimates this quarter.
We're engaging with them to make sure root causes are understood and where necessary addressed.
While we believe the majority of the return to vendor program with retailers is behind US we experienced some overhanging activity this quarter that we did not anticipate.
Q3 revenues were $17 4 million, including the impact of adjustments such as promotions discounts returns and other allowances.
Cost of goods sold in Q3 was $12 7 million and gross profit was $4 6 million.
Q3 gross margin was 26, 6%.
<unk> to 36, 1% gross margin sequentially.
Cost and other items impacting our gross margin I'm favorably in Q3 compared to Q2, primarily worked from the sequential increase in returns and allowances and an out of period inventory adjustment.
In addition, the mix of products sold in Q3 shifted over 35% towards more camera units as we transition training product.
Year to date 2022, our gross margin was approximately 35%.
The largest nonrecurring cost impacts we've experienced year to date are there return to vendor program.
Elevated promotional discounts and product costs related to our FDA warning letter and launching our dream product as Chris stated one of our highest priorities in 2023.
Gross margin improvement and we are actively working to put the volatility of the FDA warning letter impact behind us.
In addition to the nonrecurring aspect of the cost of this past year. We are highly focused on the operational efficiency levers within our control to improve margins for next year with the goal of returning to 45% to 50% gross margins.
Q3, operating expenses were $26 4 million compared to $28 6 million credit same period from 2021.
Within our Q3 expenses, we had a few discrete expenses worth noting.
Q3 operating expenses included $1 2 million in severance charges.
$850000 in spend for regulatory submissions and.
And approximately $1 million in additional partner marketing expenses, which we don't expect to see in the fourth quarter.
As part of our restructuring program in July we reduced run rate operating expenses across the company from Q2 to Q3 in terms of specific projects tapering off by the end of the year.
We remain focused on driving our Q4 run rate operating expenses lower sequentially and are planning to exit Q4 at an expense run rate between 15% to $19 million per quarter, excluding incentive expense and stock based compensation.
Operating loss and net loss for Q3, 2022, or $21 8 million and $19 4 million, respectively, as compared with $13 8 million operating loss in <unk>.
<unk> $34 5 million net loss for the same period in 2021.
Q3, adjusted EBITDA loss was $18 4 million compared to adjusted EBITDA loss of $11 4 million for the same period in 2021.
Turning to the balance sheet cash and cash equivalents as of September 30 were approximately $23 2 million.
Accounts receivable were $20 5 million down $3 5 million sequentially from $24 million in Q2.
Inventory at the end of Q3 was $23 8 million down $5 6 million sequentially from $29 4 million in Q2.
Looking ahead.
Over the course of this year, we are actively work to best position, our dream portfolio for success in the connected nursery category.
We had significant success with Prime day in July we position ourselves for category success with all of our key retail partners for the holiday season.
For the areas that are within our control we are focused on driving the activities that maximize.
Achieving sell through of our core products, and therefore driving balance of retail inventory.
Making strides in our medical device submissions and efficiently managing our operational plans towards breakeven and profitability.
As we are operating in a challenging macro environment macroeconomic environment that has demonstrated higher volatility and unexpected disruptions.
Cautious this may impact consumer demand and increased inflationary costs.
We navigated through very difficult circumstances over the last 12 months and we will continue to find the best ways to adapt to the undulated macroeconomic environment.
For the full year of 2022, we are forecasting revenue between 69% and $74 million in revenue and gross margin between 32 and 37%.
As I mentioned earlier, we are targeting a run rate operating expenses exiting the fourth quarter of this year in the range of 15% to $19 million.
Excluding incentive expense and stock based compensation.
Beyond 2022, we are focused on improving the consistency of our operating results.
Executing against the priorities that will deliver the long term benefits for our business.
For 2023, our goals are to execute a best in class product portfolio with a broad U S retail footprint and growing international presence are.
Our revenue target growth rate for $2023, 13% to 16%, assuming relatively stable macroeconomic conditions and retailer balance sheets.
We estimate our market penetration in 2000, 22.09% and we're targeting one 3% in 2023.
Improving gross margin to a range of 45% to 50%.
Thousand 22, we estimate the nonrecurring costs from the FDA warning letter activity impacting our margins, but needs to 800 900 basis points in.
In addition, we are focused on driving operational efficiencies that we believe will have a margin benefit.
Reducing our operating expenses with the objective of turning the business towards adjusted EBITDA margin breakeven in 2023.
Executing against our plan for regulatory authorizations, we don't know the timing of when our regulatory submissions may be approved therefore to be conservative. Our current 2023 revenue and margin growth targets do not include benefit from achieving any authorization.
You for your time today, operator, let's open it up for questions.
We will now begin the Q&A session, if you'd like to ask a question. Please press star followed by one on your Touchtone keypad.
For any recent you'd like to remove that question. Please press star followed by two.
Again to ask a question press star one.
We'll pause briefly to allow questions to generate in Q.
The first question is from the line of Charles <unk> with Cowen You May proceed.
Yes.
Hey, guys. Thanks for taking the questions.
I guess maybe to start.
You mentioned that.
There was an out of period inventory adjustment also in the quarter, how much was that.
Yes.
To add a period inventory adjustment was about a third of the margin impact that we had in the quarter.
Okay.
And then.
You talked about the $2 7 million returns of that.
A little bit more than you expected.
How much is left in terms of what's out there that could be returned at this point.
Yeah.
Yes.
Further characterize that so some of that.
A small portion of that was product return and some of that.
That was related to smart stack some of it is.
Administrative items that we're working through we believe that based on the conversations that we have with retailers that have returned what they expect to return. However, these are large retailers. They do have large locations and so it is within their purview to.
To return anything.
But they do have.
Within their their warehouses, so based on the tremendous slowdown that has really moved to a trickle. We do not anticipate that we will see much more from them, but we're continuing that dialogue to make sure that.
That's the case.
Okay, and then I missed it you talked about.
Some of these onetime items, a $1 2 million in severance in her 50000 for regulatory submission what was the third item.
Yes, and we had a million dollars in marketing and additional marketing partner marketing expenses in the quarter that we don't expect a fan in the fourth quarter.
Okay. So when you when you talk about the big drivers to gross margin Youre, saying with a third is some of this out of period inventory adjustment.
A third is.
Another question is from the mix because we ended up having more camera.
Revenue, which is lower margin than the stock is that right.
Think about it.
That's right yes.
And then some of these.
Just a couple on returns.
Increasing returns.
Is that roughly about the margin was really yeah.
So about a third a third a third on the margin okay.
If we were to add that that would've been well.
Just to make gross margins would have been roughly.
Ignoring the sovereign Sotheby's like some other small yeah yeah.
Outside.
A couple of other small items I would say sequentially relatively flat.
Okay.
And then I guess, obviously in this macro environment youre, having retailers.
Kind of tightened their days of inventory.
So.
How much would you say the revenue impact is tied just to that versus.
Can you, maybe perhaps change in actual demand for the product.
So Charles I'll jump in on that one.
I think when we compare Q3 of this year to prior years.
Higher than 2020.
I would say just shy of 2021, so the underlying demand was pretty strong and we saw one of our best Prime base ever.
So I think that's a big part of it.
The fact that a lot of the first half.
Revenue was load in revenues with those retailers after having removed product from the shelf.
It's really our first kind of full quarter back to market and we felt really good about the demand in this quarter.
And so I think as we move forward and we've rebalanced inventory levels, we will see.
That revenue will sort of follow sell through trends.
I think that was a big one of the big headwinds this quarter.
But the revenue guidance for the full year of $69 million to $74 million I think the midpoint would imply I'm just kind of do the rough math here.
Uh huh.
That fourth quarter could be it could be down sequentially.
Can you talk to that a little bit.
Yeah.
Yes.
I see.
Yes.
What I would say is that the.
Yes.
Just on the precipice here of the holiday season, we best position ourselves with all of the retailers and with them, especially Amazon here.
To get through the next few weeks so a lot depends on how things go right.
Over the next several weeks. So we're just sitting here with a lot of information.
Information that will be on the other side of that and we're just trying to best position ourselves in Q4 that we'll see what we sold in and what we may see sell through in Q4 to be in the balance.
If we can provide better than that terrific four within that range that would be an outcome that would be fair just given this macroeconomic environment and what we're hearing in terms of inventory management from retailers across the board from the different types of companies that sell in there.
Got it.
Last question for me is on the FDA submission for <unk>.
Babysat and then also for OTC.
Currently obviously, we're seeing a big spike in RSV.
And.
I'm curious whether with babysat that is something that you can market.
For detection of given obviously you have some kind of feel like.
Sometimes.
<unk>.
Is that is that something that you can talk about under dream stock I'm guessing no but once.
Dave You said and maybe NBC is that something you can talk about more openly perhaps.
Yeah.
It's a good question.
And what I would say is that yes, I mean the.
The RFP pandemic right now is it really.
It's really unfortunate and protecting a lot of a lot of hospitals and a lot of families.
Is a big deal.
We don't have any indication specifically for RSV like the treatment or diagnosis or prediction of RSV.
But we do measure babies oxygen saturation, that's a pretty critical metric for home monitoring for babies who are.
Babysat for babies, who are sick or high risk and for the dream stock just for parents to know.
Additional information and kind of Opportunistically note that goes lower.
So.
The products will be really helpful with any situation where.
Oxygen plays a role which which.
That can sometimes be the case in RSV.
Okay.
And then lastly.
You talked about submitting for OTC in the next few weeks.
Yes.
I missed that you said.
Sort of straight with the FDA in terms of necessary information.
Any other discussion is needed before submitting.
So we've done a preset starting in Q4 of last year, we've had pre sub meetings every quarter.
And we'll probably have a few more informal check ins just online.
Little pieces of submission, but at a high level, we feel we feel very aligned with what's needed for that submission.
Okay, Great I appreciate all the comments thanks.
Yes, Thanks Charles.
Thank you.
Again to ask a question you can dial star one.
The next question is from the line of Jim Suva with Citigroup you May proceed.
Thank you.
<unk> prepared comments I believe one of you made a comment about a little bit more returns that you Werent expected and then you mentioned that you kind of sorted it all out.
Curious what is there a general theme to the reason or rationale behind those returns or something that we can kind of grasp a little bit. Thank you.
Hi, Jim sure so.
We're in the process of working through some of the information that we got back on.
Churns and allowances for the quarter, we take that information in a lot of that happened actually after after we after we closed our quarter. So some of that information came in in October and where we're working through that.
And so we've taken a return an allowance for that and then getting the information.
Afterwards.
What I would say at a high level is that given the going back to the return to vendor program that we conducted over the last several quarters.
There is a lot of inventory that came back.
From there from the retailers and there is a lot of.
Activity that we had to work through and a lot of information that came back from them through their portals.
So it was not a perfect science in terms of the information and the piece of information from them. So some of that came back in what I would say a batch and we need to work through that with them.
Some of them just exceeded our estimation of what we were going to get this quarter.
Okay, and Kate if I hear you correctly are you, saying that it wasn't like.
Bad battery or bad velcro, or bad misaligned screen or something thats more excess inventory. They wanted to remove off or are you, saying that you start to walk through all the information.
Yes, it was it not physical to that not because it puts the product now.
So in some cases, there was some additional product that was.
Included in some cases there is.
Some charges that are related to how product is received or something regarding the stat.
Status of the product when it is received in a warehouse of those kind of administrative allowances. So it had nothing to do with the the physical nature of the product.
Great. Thank you and then if I heard your outlook correctly and maybe you can correct me if I'm wrong revenues for next year are you still 13% to 16% of the base.
What you just gave guidance now of 69 to 74 and gross margins, 45% to 50% of it is that the guidance.
Yes for 'twenty three yes.
Okay.
On macro economic conditions and.
Relative to to retailer health, yes.
Okay, and then no FDA approvals coming through that would be additive if that accrual youre not thinking in a percentage.
Hopeful probability.
Correct.
We're not predicting timing on that so we have no assumptions in the margin or revenue for FDA submission and clearance.
Okay got it that's good to have that clear that nobody misunderstands in case they have no assumption. Thank you so much for the.
Details of the qualifications.
Thanks, Thank you.
Again, if you'd like to ask a question you can dial star one.
Yeah.
There are no additional questions waiting at this time.
With that we will conclude today's outlet Q3 earnings call. Thank.
Thank you for joining today. Please enjoy the rest of your night.
Okay.