Q2 2023 iPower Inc Earnings Call
Yeah.
Good afternoon, everyone and thank you for participating in today's conference call to discuss our parents' financial results for its fiscal second quarter 'twenty 'twenty. Three ended December 31st 2022, joining us today are our powers chairman and CEO Mr. Lawrence Tan.
And the company's CFO , Mr. Kevin vastly Mr. Basketball, you may begin.
Thank you operator, and good afternoon, everyone.
By now everyone should have access to our fiscal second quarter earnings press release.
Which was issued earlier today at approximately four O five P M eastern time.
At least as 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 under the private Securities Litigation Reform Act.
995.
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.
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.
You got to place undue reliance on any forward looking statements, which are being made only as of the date of this call.
Except as required by law the company undertakes no obligation to revise or publicly release the results any forward looking statements.
I'd like to now turn the call over to <unk>, Chairman and CEO Lawrence Tien Lawrence.
Thank you Kevin.
Good afternoon, everyone.
We generated a double digit revenue growth during our fiscal second quarter as we strategically named into sales and marketing to offload excess inventory built up over recent quarters.
The topline growth was led by our in house products.
Which demonstrates the consistent strong demand for high power is extensive and evolving product portfolio.
Throughout the quarter.
We continued to grow and diversify our product portfolio with no hydroponics offerings.
A few of our most notable products within the shopping.
Office and categories.
Which continue to receive strong customer feedback.
Although hydroponics is becoming.
A smaller portion of our business today.
It remains an important category.
We will continue to invest appropriately.
As the market evolves.
The growth and diversification of our product catalog.
And from our investments in R&D.
Moving forward we.
We will continue to invest in the development of new innovative products to create high value offerings for both our customers and channel partners.
This consistent growth of our portfolio will ensure our customers receive industry, leading products that they can trust and we expect to continue rolling out new products throughout calendar 2023.
Earlier in 2020 tubes, we made the strategic decision to stockpile inventory in anticipation of both residual supply chain headwinds and increased demand for our in house products.
This ensured that we had consistent availability of our fast moving products for both our customers and channel partners.
As a result, we have accumulated a heavy inventory position I had to pick up additional short term warehousing space, which impacted our margins.
As we closed out the calendar year, we began to experience a shift in the supply chain environment as freight and shipping costs began to stabilize returning to pre COVID-19 levels with improved supply chain, we no longer need to carry these higher level of inventory and <unk>.
We leaned into sales and marketing to offload access imagery.
This decision enabled us to improve our working capital and eliminate the extra warehousing space at the higher cost associated with it.
We expect these actions coupled with our continued revenue growth to drive improvements to our bottom line in the quarters ahead.
In calendar 2022, we've begun the process of revamping our image to better showcase the core I power business alongside our increasingly diverse product portfolio outside the traditional hydroponics.
I'm happy to report that we officially completed the strategic initiatives last month, which.
Which included a new company logo website color scheme and other marketing related items.
Together these new design elements will help instill a new breath IBD to position and guide our company's image moving forward.
In addition.
It will unify our various non hygiene related products and services to create a more seamless experience for our customers as we scale, both domestically and internationally.
As we look to the back half of our fiscal 2023, we expect to continue benefiting from the improved supply chain environment.
Elimination of elevated short term warehousing expenses.
With freight and shipping cost back to pre Covid levels, we plan to more efficiently allocated capital towards inventory purchases, while mindfully managing our operating expenses.
Between these tailwind and the continuing strong demand for high power product, we are well positioned to deliver another period of strong growth and profitability in 2023.
I will now turn the call over to our CFO Kevin Vasily.
Take you through our financial results in more detail.
Kevin.
Thanks Laurence.
Fiscal Q2 was another period of solid growth for high power.
Total revenue was up 12% to $19 3 million compared to $17 1 million in the year ago period.
Driven by strong demand for our in house product portfolio, including shelving.
Office, and pet products as well as hydroponics.
Gross profit in the fiscal second quarter increased 5% to $8 million compared with $7 $6 million in the year ago quarter as a percentage of revenue gross margin was 41, 4% compared to 44, 1% in the year ago quarter with the decrease in gross margin, primarily driven by increased freight charge.
<unk> as well as channel and product category mix.
Total operating expense for fiscal Q2 was $12 $1 million compared to $6 1 million for the same period in fiscal 2022.
As Lawrence mentioned the increase in operating expense was primarily driven by higher selling fulfillment in marketing costs related to the sale of.
The inventory buildup that we saw.
We still have some excess inventory to offload in fiscal Q3. However, we expect operating cost to normalize thereafter, along with improved working capital as we no longer have to carry higher loads of inventory.
And the incremental warehouse expenses.
Net loss attributable to high power in the fiscal second quarter was $3 3 million or <unk> 11 per share compared to net income of <unk>.
$8 million or <unk> <unk> per share for the same period in fiscal 2022.
A decrease in our bottom line was primarily driven by the aforementioned higher selling fulfillment and marketing costs.
Looking at our cash flow, we generated more than $7 $7 million of cash from operations during the quarter compared to $7 million cash burn in the year ago period.
Reflecting the improvements we've made to our working capital.
Moving to the balance sheet cash and cash equivalents were $4 million.
December 31 2022.
Compared to $1 8 million.
June 32022.
As of December 31, 2022, total debt stood at $12 2 million compared to $16 million as of June 32022.
The decrease was driven by our decision to pay down.
Significant portion of that given the freed up working capital related to inventory as a result, our net debt position was reduced 42% to $8 2 million compared to $14 2 million at June 32022.
As Lawrence mentioned earlier with the normalization of the supply chain, we've seen freight and shipping costs returned to pre COVID-19 levels as well as shipping times.
When coupled with lower inventory levels and the elimination of our excess warehousing cost.
We expect to significantly reduce operating expenses as we.
Exit our fiscal year.
Looking ahead.
We continue to plan.
On improving our working capital position.
Because on driving growth and improving profitability as we provide our customers with a diverse range of high quality home and garden products.
With that.
Collude, our prepared remarks, and we'll now open it up for questions operator.
Ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again, if you'd like to ask a question. Please press star 111 moment. Please.
Yes.
One moment our.
Our first question comes from the line of Scott Fortune of Roth. Your line is open.
Thank you for the question good afternoon.
Real quick focus on top line a little bit here can you provide a little more color on the top line growth I know, it's up year over year, 12% breakdown.
On a quarterly basis and can help us understand the seasonality or the slowdown in Angola.
On high growth segments kind of kind of what's driving the growth or what is it.
Loan growth quarter to quarter come from and then just a follow up on that are you seeing consumer weakness.
Here across the board and can you provide.
Providing additional color from from your commercial hydro business side and ongoing weakness.
Potential turn on the hydro side.
Anywhere anywhere near here as far as the potential color on hydro.
Please go ahead.
Turn positively from our standpoint, alright, gotcha, but there's a little bit more on the top line growth and where were you seeing the growth and the weakness per se.
Right.
So let me I'll start and then Lawrence you can.
You can jump in.
At any point.
Sure I think.
We've we've talked a little bit in the past about the typical seasonality.
In the business.
In the years, leading up to.
Uh huh.
Calendar year 2021.
The December quarter, and then the beginning of the.
Of the March quarter.
Represented low season for us.
And that was the seasonal pattern I think what we saw.
Last year.
Seem to defy seasonality a bit.
So I think from the standpoint of how our revenues as historically track quarter to quarter versus quarter over quarter.
Uh huh.
The.
The December quarter is.
A big event.
Okay.
Hum.
In that context, I don't think what we saw in December was that surprising you will say, though that.
Our channel partners.
Yeah.
Slowed their ordering a little bit.
And I think I think.
They like a lot of people, who were kind of in the broader home and good.
Home and garden categories.
Are finding ways to kind of work through inventory.
And so there was some slowing.
Yeah for some of our wholesale ordering.
But I think from a.
Uh huh.
Kind of seasonal pattern standpoint, I don't think what we saw was kind of out of the.
Out of the ordinary from.
From the standpoint of kind of consumer weakness.
Laura maybe you can kind of chime in here I don't think we've seen anything meaningfully weak I think the the general.
10 or is it is one of our supply.
Supply chains, finding way to deal with.
Higher levels of inventory, but there still is.
There still seems to be reasonable consumer demand out there Laurence if you have anything else to add there.
Yeah.
The consumers.
They they don't stop buying even though the there is a.
No doubt the economy, I think our product side.
Mostly known as like a valued products and.
These are more kind of like a utility hotline products, where people need it they need it so.
It's actually.
Somewhat beneficial to these kind of mid tier products as they provide the best value to data for consumers. So I don't see us slow down there.
As for Hydroponics, we maintained our.
Position.
I need to look at the data, but I think we are getting.
Get more market share now on the hydroponics side online. So so that part is it's growing but slowly.
The the most of the.
Growth contributed by our other products.
So yeah.
And then I think Scott you asked about commercial.
Well I think it's hard for us to see from our online orders.
Whether or not the purchaser is yeah.
Commercial or not.
Our offline commercial businesses. It is a very small part of our business right now and I don't think.
The demand environment there has changed.
In any meaningful way it's still.
It's still limping along.
The good news for US is that it's become such a small part of our business.
It's not having really.
A really meaningful impact.
Yes, that's correct that's correct.
No and I appreciate the color there. Thanks for in depth, there and then just no mention as a follow up on the progress I know, it's slow progress at adding potentially at big box partner here Youre looking.
It didn't figure by the end of fiscal year here can you provide any update or color on around timing of that opportunity kind of in the near term full for big box partners moving forward.
We got.
Into some of the channels.
We started there a progress there.
And we start to sell.
Sales or some of the online platform.
But that's just the first step.
To get the product into stores, but we've made some progress there.
So things are moving.
It just takes some time.
Got it okay, I will jump back in the queue.
Thanks Scott.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star one one.
Our next question comes from the line of Michael Baker of D. A Davidson again, Michael Baker Your line is open.
Okay. Thanks.
I just.
Wanted to ask about what should we expect in the next few quarters first of all Lawrence I think you said 2023 will be profitable. So you werent profitable this quarter, but did I did I understand that right you plan on being profitable on the net income line for the fiscal 2023, and then maybe to.
To help us get there.
Gross margin is down close to 300 basis points, how much of that was from supply chain, which seems like it's getting better and how much was from mix and then on the SG&A up $6 million how much of that was this incremental marketing that's going to go away. So in other words help us understand what the margins might look like in the next couple of quarters how much of.
What happened this quarter was because of things that are going to occur or are we sort of.
Partially behind us for the next few quarters. Thanks.
Right, Let me, let me take a few of those and then Lawrence again I'll have you kind of.
Jump in first.
I think that we said.
Full year fiscal 2023 would be profitable.
Sales and profits in 2023 is what I heard sales growth and profits in 2023.
Maybe I heard it well.
I think maybe the better way to kind of characterize that is that we expect.
That we can return to profitability in fiscal 2023.
So the trajectory will get us there.
By the end of the.
The.
Run rate of profitability by the end of 2023, but not profitable for the year.
Correct correct.
Without giving specific guidance I think the math would make the full year.
Jordan early hard.
What I thought that's why I asked yes, I'm glad you did.
So from a gross margin.
Perspective, it was a combination I think we've talked about this in the past given that.
We have a catalog of in excess of 20000 S. K use our in house products, We've got 6000 Skus.
There is a distribution of gross margins in that product they are not uniform across every product.
Product.
So.
What products sell at any given quarter influences that a big piece of the.
Incremental 300 basis point decline.
There was the shipping costs.
So the inventory.
That we purchased.
Over the summer.
Okay.
Anticipation not only of our.
Pretty important product ramp with with Amazon, but because of what felt like really dislocated in some.
Some ways panicked.
Our supply chains.
And.
And can container availability.
It's still flowing through the income statement in.
In this December quarter that stuff is starting to work through and in fact, one of the kind of.
Strategic initiatives, we took was to push as much of that out the door as possible.
In this quarter.
So that inventory that we hold now carries a much much lower freight costs and were talking.
Container costs that are.
Four to five times lower than they were in the March to June timeframe of last year. So.
That is that is going to east for us, which should improve gross margins.
I'm sorry, Mark go ahead, but well let me just say Kevin that was that was all clear from that from the remarks I guess, what I'm asking is can you help us with a quantification of that.
270 basis points or whatever it was you said a significant portion. So is it is it half was mix and half was the supply chain itself that will get better or is it more than half is at most.
Any.
If I am wrong.
So our projection I'm just asking you in the second quarter, how much was from everything you've described about the supply chain and then we can make our judgment as to what that will look like going forward. Yeah, I think I would say that at least 75% of it came from.
From the shipping.
Shipping and container costs and the other 25% yeah.
Okay.
And then same question on the on the SG&A of about $6 million increase how much was from what sounds like incremental marketing to push the product, which presumably is mostly behind you now.
Yes.
I would say almost all of that increase.
Was that there is there is some impact on sales and marketing from.
From channel.
But our channel our channel mix being different programs with our primary channel partner.
Fluctuate quarter to quarter anyway.
Where we get demand.
Pretty hard to forecast.
But the big chunk of that at least 80% of that.
That incremental came from.
Intentional sales marketing promotion that we did to push that higher cost inventory out the door.
Understood and am I correct in saying that a lot of that now that the inventory is coming down is behind you.
Laurence maybe you have a better sense of how much more we need to do on that front, but we've done.
We've done a significant amount of it.
And by December .
We reduced.
We accomplished 50% off brickell.
So.
We all the way there.
So your 50% through so so still have some some to go.
Yes were still kind of assume that all of that incremental 6 million will go away because you still have something that you're working through.
The the promotions cost won't be as much for the for the remaining half of the.
The inventory that wants to get out of the door.
But it will not all go away, but most part of up to six months ago.
We will not be there.
We do not we no longer plan to.
To play.
As aggressive as what we did when we are facing.
Higher total inventory pressure, but now.
Even though we only but we did like halfway through get through the inventory for our pressure, it's a lot slower.
Okay.
So we wont run less aggressive.
<unk> is what we did before.
Very clear I appreciate the color. Thanks.
Thank you.
Does conclude the Q&A portion I'd like to turn the call back over to Kevin <unk> for any closing remarks.
Okay. Thank you operator, I want to thank everyone for joining us today.
And we look forward to.
Speaking with you again, a little bit later this spring thanks, so much.
Yeah.
Ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
Yes.
Okay.
The conference will begin shortly to raise and lower Johan during Q&A you can.