Owlet Inc. Q1 2023 Earnings Call
Speaker 1: The.
Speaker 1: I I.
Speaker 2: Hello and welcome to the Howlett Q1 2023 earnings call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during the presentation, please press star followed by 1 on your telephone keypad.
Speaker 2: I'd now like to hand over to Mike Avanor, Investor Relations. The floor is yours, please go ahead.
Speaker 3: Thank you, Elliot.
Speaker 4: Good afternoon and thank you for joining us today. Earlier today, Owlet Incorporated released financial results for the quarter ended March 31, 2023.
Speaker 4: The release is currently available on the company's website at investors.outletcare.com.
Speaker 4: Kurt Workman, Owlet's co-founder and chief executive officer, and Kate Skolnick, chief financial officer, will host this afternoon's call.
Speaker 4: As a reminder, some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Thank you.
Speaker 4: Such statements are subject to risks and uncertainties that could cause performance or achievements to be materially different from those projected.
Speaker 4: Any such statements represent management's expectations as of today's date.
Speaker 4: You should not place undue reliance on these forward-looking statements.
Speaker 4: And the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.
Speaker 4: Please refer to the company's SEC filings for further guidance on this matter.
Speaker 4: With that, I will now turn the call over to Kurt Workman, Owletts co-founder and chief executive officer. Kurt? Good afternoon, and thank you for joining us for Owletts Q1 2023 earnings call. Before we dive into the details, let's revisit our objectives from our last update in March.
Speaker 4: Through category defining products with FDA clearance and a focus on operational discipline and cost management, our goal is to position all it on a pathway to long-term sustainable growth and profitability.
Speaker 4: We believe that by focusing on these objectives, we can advance our mission to improve instant health and wellness and deliver value to our shareholders.
Speaker 4: All that is made significant progress towards these goals in reducing operating expenses year-over-year by approximately 50% on a run-write basis, and including cutting-marketing cost practices by 80% year-over-year, resulting in a significant improvement in the adjusted cost to the Evalott loss from Q4 to Q1. Despite these aggressive cost reductions,
Speaker 4: Channel Celter was up 36% year over year as we continue to see strong consumer demand for our products. From a revenue perspective, we typically see a sequential decline in revenue from Q4 to Q1. As you recall from Q1 last year, we had our first large initial load-ins for the DreamSoft late in Q1, so year over year selling comparisons reflect that impact.
Speaker 4: In addition, for Q1 2023, we managed channel selling, specifically reducing in certain areas to support our goal of improving our channel health and in stock levels.
Speaker 4: We have more work to do here, but we are making improvements. Overall, implementing continuous cost reductions in achieving marketing efficiencies, while achieving strong consumer demand and improving channel health will create a stronger, more sustainable business as we continue toward toward declarances can be in a favorable position to eventually accelerate in long-term, healthy growth.
Speaker 4: As Q1 was the anniversary of our DreamSock launch, I thought it appropriate to take a look back at the past year.
Speaker 4: Allot is made significant progress with our new DreamSock. Since launch, we've monitored over 1.2 trillion heartbeats, sold over 450,000 DreamSock and can units, and achieved a DreamSock NPS over 60, demonstrating high levels of customer satisfaction.
Speaker 4: Additionally, over 300,000 parents added all it to their registry in the last year, showing strong demand for our products.
Speaker 4: I would also remain the number one considered brand in the health and wellness monitoring category for multiple quarters in a row, demonstrating the strength of our brand and reputation in the market. We've ranked number one on Amazon for smart baby monitors here today, further highlighting our market leadership and customer feel.
Speaker 4: We've also received hundreds of life-changing stories from parents who have used our products. Reinforce our mission to improve the lives of families.
Speaker 4: We are committed to driving technology that improves infant health and safety into the future.
Speaker 4: Turning to Q1 results. In Q1, we continue to focus on rebuilding our channel health, reestablishing our baseline operating expenses, and making progress towards regulatory approval for our 510K and Genoa product applications. Revenue for Q1 with 10.7 million, down sequentially from 12 million in Q4. Q1 with 10.7 million in Q4.
Speaker 4: due to both seasonality and intentional focus on normalizing channel inventory with our retail partners.
Speaker 4: In addition, we face grow cell heroin and Q1 after a large retailer, 5xbaby, announced financial trouble in January , and followed with the bankruptcy announcement shortly thereafter.
Speaker 4: As the largest specialty retailer in our space, it will take time for the demand to transition from by-by baby to other channels. We anticipate this will be a stellar and revenue headwind for outlet for the balance of 2023, but we are working aggressively with other channels such as BabyList, Target, and Amazon to ensure recapture of this loss demand.
Speaker 4: We are pleased to report that our Q1 cell through was up 36% compared to Q1 2022, indicating continued strong consumer demand for our product since introducing the DreamSock in Q1 last year. Additionally, we're continuing to focus on raising awareness and driving consideration through our organic activities.
Speaker 4: In Q1, we saw great success with over 25 million organic video views of our content through social media. We expect this trend to continue and drive further growth in Q2. Following some anticipated and unanticipated revenue challenges in Q1, we expect revenue to sequentially increase in Q2 as we begin to normalize our channel health and begin to see a healthier balance between selling and self-dru.
Speaker 4: Specifically in Q2, we are expecting seasonal catalysts to drive cell and revenue growth such as upcoming events like Mother's Day and Amazon Prime Day in July . In Q1, growth margin was 39.3%. This was a significant sequential increase in growth margin and it's a testament to the hard work and dedication of the allotment team which we continue to offer.
Speaker 4: over time through optimizations in our warehousing and shipping and reduction in our PPV as we reduce inventory levels and improve our returns and lowering discounts. Our adjusted EVIDL loss for Q1 was 5.8 million. We successfully brought down our operating expenses, cutting our adjusted EVIDL loss.
Speaker 4: but more than half to quenchedly from Q4. We remain committed to continuing to identify areas of efficiencies to create a leaner and more efficient organization.
Speaker 4: As we shared in our March call, we closed a $30 million financing round in Q1. We amended our loan and asset-based lending agreement with SBB to include an extension of our principal payback period and an increase to the eligibility in our borrowing base.
Speaker 4: combined this puttallet in a cash position that will enable it to continue moving the business forward, support our FDA appearances and ultimately get the business turning towards the justity without break even in late 2023.
Speaker 4: I'd like to briefly touch on the letter on the letter of noncompliance we received from the New York Stock Exchange.
Speaker 4: We continue to evaluate options available to cure both the $1 minimum price rule as well as the minimum market cap threshold. We have 18 months to cure the market capitalization listing requirement. We will be sure to keep you updated when we have material news to share. Thank you for listening to our regulatory work.
Speaker 4: We've made significant progress towards pursuing FDA acquaintances for our monitoring platforms in 2023, including two distinct passwords for our submissions.
Speaker 4: We made significant progress in the quarter towards our goals of profitability and FDA clearance on multiple fronts. These achievements include our brand health remains at all 10 pies with net promoter score for our products at all 10 pies. We've reduced and stabilized marketing spend and cost-track position by 80% of early 2022 levels. Our channel's sell-through has grown over Q1 last year and inventory in the channel is normalizing to healthier levels. Our corporate spending has decreased across the business putting us on track to spend more than $40 million in adjusted operating expenses, excluding stock-based compensation for the full year.
Speaker 4: We've been in constant communication with FDA on our two regulatory submissions and believe we have a clear passport or towards these clearances.
Speaker 4: And finally, we have secured critical capital, reading a sheet art loan agreement, and see a path towards profitability.
Speaker 4: We're excited about the progress we've made towards creating an efficient and profitable organization and we are confident that we're building a strong foundation for sustainable growth as we move forward. We believe that the FDA clearances we are pursuing will accelerate the adoption of our products and position us to be the platform that bridges the gap between the hospital and home.
Speaker 4: As we hold parents hands for this journey, we're confident that our product and services will make a meaningful impact on their lives. We remain focused on executing our operational strategy and achieving our long-term goals while continuing to deliver our value to our customers and shareholders. Thank you for your time and continued support. We look forward to updating you on our progress in the coming quarters.
Speaker 5: Okay, over to you. Thank you and good afternoon everyone. Per cover and a member of our Financial Highlights and Overview, I will repeat a few items with some color and provide some additional financial commentary. Thank you.
Speaker 5: Go ahead and answer the first quarter of 2023 with $12.4 million down from $15.4 million sequentially.
Speaker 5: Q1 product promotions and discounts were $700,000, primarily associated with promotional activity for all at dot com and Q1 retail promotional discounts.
Speaker 5: Returns and allowances reserved for Q1 2023 or 1.1 million, 8.9% of gross buildings.
Speaker 5: This compares to reserves sequentially in Q4 of 1.5 million and 0.7 percent of gross billions of dollars for gross times...
Speaker 5: Total revenues were driven primarily by sales of DreamSOC and DreamDuo. Cost of revenues were $6.6 million in Q1 resulting in a gross margin of 39.3% compared to 27.5% gross margin in the fourth quarter. This potential improvement in gross margin was primarily due to improvements in purchase price variance costs, prior period inventory adjustments, and declines in promotional activity. Exempting expenses in the quarter were $15.1 million including stock-based compensation of $2.8 million and transaction costs of $2.1 million.
Speaker 5: which was a sequential decline of 37% from 24.1 million in the fourth quarter. Excluding stock-based compensation and transaction costs, Q1 operating expenses were 10.2 million. The sequential decrease in the operating expenses was primarily due to employee related costs, that get reserves and marketing expense.
Speaker 5: Operating loss in the quarter was 11 million compared with operating loss of 20.7 million in the fourth quarter and 21.7 million in the first quarter of 2022.
Speaker 5: Net loss in the quarter was 11.9 million compared with 19.5 million less quarter.
Speaker 5: and $28.8 million in the first quarter of 2022. Adjusted EBITDA loss for Q1 was $5.8 million, compared to adjusted EBITDA loss sequentially in Q4 of $15.2 million and $18 million for Q1 2022. Our focus on operating efficiency has delivered multi-quarter improvements in our expense.
Speaker 5: we can continue to build our brand and execute on our growth initiatives, while at the same time reducing our overall cost structure to extend our cash runway.
Speaker 5: Looking ahead, we will again refrain from providing specific revenue guidance for the year as we want more visibility around both sell-in to retailers and sell-through to parents, which we believe is approaching a healthy balance. As Kurt said, we anticipate Q2 revenues to improve sequentially from Q1 due to holiday and prime day promotional sell-in, although we are taking a more cautious approach than prior years to ensure a balance with sell-through channeling inventories. We are continuing to focus on operating expense control.
Speaker 5: of our core products and therefore driving balance and retail inventory for future selling opportunities.
Speaker 5: making strides in our medical device clearances, and efficiently managing our operational plan towards both even and profitability.
Speaker 5: Thank you for your time today. Operator, please let's open up the call for questions.
Speaker 2: Thank you. If you would like to ask a question, please press R and start followed by one on your telephone keypad. If you would like to withdraw your question, please press R followed by two.
When preparing to ask your question, please ensure your device is unmuted locally. My first question comes from Charles Zareen with TD Co. Your line is open.
Yeah, I hate that. Thanks for taking the questions. One or two, I start with the
sort of the impact of the bye bye baby bankruptcy. Can you give us a sense for what percent of your sales go through that channel or that retailer specifically? And then you said that it'll take some time for this, the impact in the chair-lige, is that because...
The stores are still operating and they're still inventory. There, maybe if you just give us a little bit more color on the dynamics going on.
Yeah, thanks Charles. Great question I think.
You know, bye bye babies are fourth largest retailer. So not insignificant, but also not, you know, the one of the larger, you know,
contributions in terms of revenue. Five by Baby was a key specialty retailer that assisted in customer education in our space. They were the largest specialty retailer in the category. That said, I think Al, it has fantastic customer awareness independent of channel because our product is so highly considered and there's so much awareness around it. So most of the time parents will actually
do quite a bit of research outside of channel before then deciding which channel to purchase in. And so I think long term will be very resilient to the changes in channel mix. I do think it will take some time for that demand to shift to new channels, specifically in Q2, by the way, we'll be liquidating inventory, so that we'll have some.
pull-in effect from other channels. And then as we get into Q3 and Q4, we're going to work aggressively with other channels like BabyList, Target, Amazon to bring that demand back to other channel opportunities. So short-term there are some headwinds with inventory liquidation and...
consumer signing their new shopping partner. I think long-term this category will continue to grow. And we'll reinforce a great shopping experience with new partners. And we're excited about what BabyList specifically is doing to capture this demand. Amazon continues to grow its channel and target, we're hoping we'll play the role as well.
When a retailer liquids inventory in this kind of situation, what you're being to say is we're not going to get the sell-in into that retailer as they're just winding down. Is that the right way to think of it? So that's the headwind to 2Q revenue and the rest of the year. So we'll bring out the next your PC review by tomorrow. So we'll bring out the next your PC review by tomorrow.
in terms of revenue. As we move throughout the rest of the year, we'll start that based on hand and inventory calculation for other retailers, I think we'll start to change as we see some of that demand shift to other channels. So we hope to be able to move from that cell in revenue.
into other channels as their cell trusser starts to pick up with 5x baby going out of business.
Okay. The disimpact at all your ability to reach just if not break even by year end in your view.
I think we still are on track to do that, but I'll pass over to Katie to answer that question.
Yeah, I mean, you know, no one likes to have a additional headwind with what we're trying to accomplish this year, but you know, it's a signal that we have here in May. And I think we see a lot of opportunity in Q2 with the holidays that we have coming up.
We obviously have the prime opportunity with the Amazon that's been very successful. We've been experimenting with some additional ways to maximize our online presence with all of it. So there's a lot of opportunity to be successful as we head into the back half of the year, especially as we see this.
momentum that is starting to improve with this all through. So not a headwind that we wanted, but it's at least a signal that we understand now that we'll try to overcome.
Great, and maybe the last question for me, the self-thru being up 36% sequentially sounds really pretty impressive here. Can you give us a sentence in terms of magnitude on a revenue basis, what that kind of looks like to give us a sense on, once we get the balance on inventory, what is the real selling power of the brand right now?
Okay, do you want to take that or do I need to take that?
better do you want me to take that? I'll go ahead, Kurt.
Okay. Yeah, so what I would say is that our our self-through and Q1 again outpaced the cell in as we look to kind of rebalance inventory levels. Overall, self-through we believe is on a healthy track and keeping in mind that.
We've significantly reduced our cost-track position across the business and we held that from Q4 into Q1 and we'll continue to maintain that efficiency this year. So we feel really healthy with that. Generally, Q1 sees a 10 to 15% decline in cell through based on commercial activity. So we were sort of...
Okay, great. I'll stop it there. Thanks. This is all the time we have questions today. We'd like to thank for your participation. You may now disconnect your lines. Thank you.