iPower Inc (IPW) 2022 Q4 法說會逐字稿

Good afternoon, everyone. And thank you for participating in today's conference call to discuss iPower's financial results for its fiscal fourth quarter and full year ended June 30, 2022. Joining us today are iPower's Chairman and CEO, Mr. Lawrence Tan; and the company's CFO, Mr. Kevin Vassily. Mr. Vassily, please go ahead.

Thank you, Latif. Good afternoon, everyone.

By now, everyone should have access to our fiscal fourth quarter and full year 2022 earnings press release, which was issued earlier today at approximately 4:05 PM Eastern Time. The release is available in the Investor Relations section of our website at meetipower.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 Lawrence, 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 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.

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. Do not 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 of any revision to any forward-looking statements. With that, I'd like to now turn the call over to iPower's Chairman and CEO, Lawrence Tan. Lawrence.

Thank you, Kevin. And good afternoon, everyone.

Fiscal 2022 was a record year of growth and profitability for iPower, highlighted by a almost 50% increase in revenue, over 40% gross margins, and a positive net income; all in excess of the guidance we issued for the year. Throughout the year, we focused on prioritizing our in-house product mix, which accounted for over 80% of revenue compared to approximately 73% in fiscal 2021.

More recently, we have begun to strategically diversify our product offerings into categories outside hydroponics, with products such as commercial fans, shelving equipment, and chairs to name a few. In fact, our non-hydroponics business nearly doubled in the fourth quarter and accounted for about half of all sales in fiscal 2022. This reflects both our ability to leverage data to identify new faster-moving product categories, as well as our ability to utilize extensive supply network to create products that can fill gaps in the market and bring greater value to customers.

Looking back at the year, we delivered on multiple strategic initiatives including the expansion of our business to Europe and closing our first M&A transaction. At the start of 2022, we launched our business into Europe and the UK with the completion of our first order delivery for consumers abroad, which including trimming devices, air filtration systems, tents, and other accessories that service the DIY hydroponics market. As we have previously mentioned, we believe European market presents a medium- to long-term opportunity for us as that market develop.

During the fourth quarter, we extended our geographical reach with sales to Asia and South America as well. Although our business in these markets is nascent, we are keen on expanding our geographical presence as we are able to leverage our global supply chain expertise to effectively enter this market.

We acquired a global co-engineering partner, DHS, from China. And with the volatility in the supply chain over the last past year, we relied heavily on our global partner to source consistent high-quality products in a timely manner. For that reason, we made the strategical decision to acquire 100% interest in the company. The acquisition expanded our supply chain and e-commerce capabilities with in-house product sourcing, manufacturing, network management, quantity assurance process, and R&D expertise.

As mentioned on the last conference call, we are in the process of revamping our core image to properly showcase our business, as well as the various components that make up the iPower brand. This rebranding initiative will enable us, as well as our product portfolio, to optimize how we are perceived and positioned in the market. We expect to launch our rebrand in the coming weeks and look forward to go into market with a more consistent image and branding.

Given the broader macro pressures in the market, including supply chain challenges throughout the year and inflationary impact on consumer wallet, I'm incredibly proud of the team for executing our plan and delivering exceptional financial results in the face of these challenging market conditions. We continue to increase our in-house product mix, expanded our geographic presence, and diversified our product portfolio to include several new categories beyond hydroponics. We are excited to build on this momentum and deliver another strong year of results in fiscal 2023. I'll now turn the call over to our CFO, Kevin Vassily, to take you through our financial results in more details. Kevin.

Thanks, Lawrence. As Lawrence mentioned, our fiscal Q4 was another strong period of growth for the company. Total revenue was up 50% to USD22.1 million compared to USD14.7 million in the year-ago period. Driven by greater demand for iPower's non-hydroponic product portfolio, including commercial fans, shelving products, chairs among other products, iPower's non-hydroponic portfolio accounted for approximately 54% of revenue in the fiscal fourth quarter compared to approximately 37% in the year-ago quarter.

Gross profit in the fiscal fourth quarter decreased 39% to $9.1 million compared to $6.5 million in the year-ago quarter. And the percentage of revenue gross margin was 41.2% compared to 44.4% in the year-ago quarter with decrease in gross margin driven by both product and channel mix as well as elevated freight costs, which were partially offset by our decision to increase purchases and add to our inventory.

Total operating expenses for fiscal Q4 were $10.6 million in the quarter compared to $6.3 million for the same period in fiscal 2021. As a percentage of revenue, operating expenses were 48% compared to 42.8% in the year-ago quarter. The increase in operating expenses were primarily driven by additional warehouse selling and fulfillment costs.

Net loss in the fiscal fourth quarter of 2022 was $1.3 million, or $0.05 per share compared to a net loss of $1.9 million or $0.08 per share for the same period in fiscal 2021. Although our net loss improved year over year, it's worth noting that we had less direct import business with our largest channel partner during the June quarter compared to earlier in the fiscal year, which had an impact on operating margins.

Moving to the balance sheet, cash and cash equivalents were $1.8 million as of June 30, 2022, compared to $6.7 million on June 30, 2021. Decrease was attributed to our strategic decision to add inventory to offset some of the supply chain risk and volatility that we had seen earlier in the year, and effectively fulfill customers' demand. We saw the benefit of this approach so far in July and August where we recorded some of our strongest months of sales in company history.

As of June 30, 2022, total long-term debt stood at around $14.1 million compared to $500,000 in the same period ending June 30, 2021. This increase was attributed to the note associated with the acquisition of our global engineering partner, DHS, as well as a function of timing as we utilize our revolving credit facility to better manage working capital.

As we look to the rest of fiscal 2023, we plan to continue driving significant growth in the business while remaining prudent with our capital allocation and expense management. That said, it's no secret that the global landscape has shifted fairly materially so far in 2022. Additional business risks driven by supply chain challenges and inflationary pressure has created a level of uncertainty in projecting exactly what our business will do in the next 12 months.

We always strive to provide useful and accurate depiction of our business each quarter. However, we at this point decided to hold off on providing specific financial guidance for fiscal 2023 until visibility on the macro improves. That said, we do want to be clear here that we have expectations of continuing to drive meaningful growth in the business as well as profitability. And we think that we're in a really good position to execute on all of our growth objectives for the year.

With that, we will now open the call for questions. Operator, please keep them up.

(Operator Instructions) Scott Fortune, ROTH Capital Partners.

(technical difficulty) hydroponic revenue product mix, you said reached 54%. Can you unpack that segment a little bit and provide a little more color on what is driving the growth of that mix in looking out into fiscal 2023? Or can you provide a little bit kind of expectations at the non-hydroponics versus a hydroponic mix as we look out to this coming year here from that standpoint? That would be great.

Yes, Scott, we didn't quite get all of the first part of your question, but I think we got most of it. Lawrence, you want me to take this real quick?

Yeah, sure.

Yeah, so answering the second part of your question first, I don't think we're in a position to predict kind of what that mix is going to look like. The way that I would characterize, and I think we've talked with you and others about how we go about product developments and product extensions, et cetera, I think the best way to think about a lot of our non-hydroponic business is that they are extensions of not only what we've learned in product development and merchandising and sales execution side of hydroponics; but then we saw that there were natural use cases for quite a few of the products beyond hydroponics.

So maybe two really unique examples would be in the ventilation segment where quite a few of what we were selling for hydroponics, fan applications could be used for non-hydroponics: home use, commercial warehouse use, et cetera. And we saw an opportunity to extend that product line to include or go beyond wall fans, or floor fans, and stand fans as an example, where we saw through our data opportunities in the market that weren't being addressed with the same price point and potential quality that we thought could be serviced with.

Same thing for some of the shelving products that we offer, which were originally developed for applications inside a growing project. Those shelving units with some modifications could be targeted market to non-hydroponic applications. And again, through the work that we do in identifying categories where we see there's opportunity, it was a natural extension for us.

So given our margin profiles in both those areas, they seem like really right areas to go. And we did very well in providing products that add appropriate value for customers who are looking for that. We're as happy as we could be at this point for how well those have taken off. There are probably some other categories where we can do that. But we still see a lot of growth in those areas as well. Does that help, Scott?

Yeah, no, I appreciate the color. That's really good. Yeah, obviously, you put initiatives that extend beyond the hydroponic side and that's playing out. But can you provide a little more color on the new sales channel initiatives on the hydropower side? More specifically looking into the big box partners from that standpoint, JVs; a little bit more color as you look out to 2023 with different new sales channel initiatives coming on for you going forward here?

Yeah, Lawrence, maybe you want to take that one. Go ahead.

Yeah, sure, sure. We have been working on a new sales channel. And I'm pretty delightful with the progress. So we'll start to see some good development in new sales channel.

As for our hydroponics product line, we have shown pretty good performance while the whole market is not in a very favorable situation for the last couple of years. And I think we did it by grab more market share, provide pretty good value products to consumers.

We also, going down the road, will not only recover as the hydroponics market recovers as a whole, but also be having new products that we developed ourselves, both hardware and software as a solution that offers to the market. So we start to see some interesting applications on the hydroponics product line compared to the non-hydroponics product line. So all of these new products SKUs will be good for both online and offline applications.

Yes. And Scott, another comment on that front. So we have, as Lawrence mentioned, initiatives to develop channel relationships with the big box retailers that you might expect. We can't really talk about them specifically at this point. But I think most people would recognize the people that we are engaged with and beginning to work with.

One thing I think we can say is that, without mentioning the name, we've got our first small set of orders from a fairly well-known channel partner that, once we're in a position to announce, will be recognizable by anybody who shops at these types of places. So, as you know, getting into big box retail is a much different proposition than selling online. And so we put a fair amount of effort and work in the last six months to begin that process. And we're just starting to see the early benefits of that.

And so the way that we like to think about it is that we achieved this really, really strong growth this year without having significant additional channel partners at our disposal. So all of that is really in the future for us. And we're cautiously optimistic that we'll start to see some momentum in 2023.

Great. I appreciate the color. And thanks, and congrats on the quarter.

Thank you.

Michael Baker, DA Davidson.

Okay. Thanks, guys. So a couple of questions here. One, understanding you're not giving guidance for sales growth in 2023 but can you talk about, since you said July and August are some of the strongest sales months you've had -- is that in terms of dollars or growth?

Just trying to put that in context to the fourth quarter growth, which was 50% versus your long-term plan that you've set in the past; I think 25% to 30%. So how should we think about 1Q within that range with you saying that they are two of the strongest months you've ever had?

Yeah, that comment was with regard to dollars. September's not done yet, so I don't want to comment too specifically on Q1. But remember, I think last September was a reasonably strong quarter for us. And I think we're -- maybe the best way to say that we're going to be off to a better start in fiscal 2023 coming out of the gate than we were in the first quarter of fiscal 2022. But the comments specifically in the press release was about absolute dollar level. They were just both really strong, which was a part of the reason we wanted to have a fair amount of inventory, kind of on-hand exiting the June quarter for some of the stuff that we're starting to see.

Okay. Well, so let me follow up on the inventory part of that answer. How should we think about working capital in 2023, understanding the reason to increase inventory, and that is helping sales; but your net cash is way down versus a year ago when (technical difficulty) your debt is way up?

Do you start to work that down now? Your receivables are pretty high. So does that working capital start to get worked down now and you start to generate some cash from that inventory, or does the inventory still go up from here?

Yeah, I don't think it will go at least in the near term. It shouldn't go up from here. I think part of what was happening for us as we worked our way through the June quarter is -- anybody who's watching the news or reading the news knows China was continuing to go through a fair amount of volatility relative to pretty wide lockdowns. And there was a fair amount of concern that if we could get our hands on product to avoid any impact, given that we felt that we were still seeing really strong demand trends, we were going to do it.

I think some of the things that have changed since the beginning of that June quarter is that I think we're starting to see the lead times for both being able to get product but also shipping times go down, which means to support similar levels of sales; or if we kept sales equal, our ability to get product faster and turn that inventory faster improves. And so in an ideal world, we'll be able to bring that inventory level down yet still meet the sales targets that we have.

So I think working capital will change. We should be in it in a less cash-consuming stance, probably sometime after we exit the September quarter. And then we'll just have to see from there. But I think it's likely that we saw, again relative to inventory turns, the high watermark for the company.

Okay, and then couple more. Again, I'm seeing you're not giving guidance, but just thinking about 2023, your profitability on the EBIT line was down this year versus last year that the margin -- I calculate 2.9% versus 5.4% last year. So I guess if I ask you if that's going up next year, I suppose that's giving guidance, but what can you say about your operating margin? How does the mix into non-hydroponic products or doing more overseas impact that margin? And what sort of -- again, I don't know if this is guidance -- is the long-term margin closer to that 5.4% or the 2.9%? Like as the business has changed, that it's going to be less profitable than it was a year ago?

No, I don't think it's changed. I think what's changed over that 12-month period was that lead times to get product extended. So that's one. There's some volatility there. Two, during that period, that 12-month period that ended this past June, we had a significant spike in freight costs, which would have to flow through our cost of goods sold as well.

And then there are some -- I hate to use the word transitory but the costs that we had to incur, particularly in the June quarter, that to support some of the inventory that we wanted to hold, we needed some temporary space to house that inventory. And so, procuring that space beyond our warehouses could hold for a short period of time was a incremental cost above what we would normally have to pay if we either had that, our own space, and/or didn't want to carry that inventory for that short period of time.

I think as supply chains normalize, and that includes the comment I made earlier about lead times to get product across specific shortening, but also the cost of our containers coming across the Pacific, which is now heading back down to levels we saw pre-pandemic; that will get some natural lift in the business, all other things being equal, such that we can be headed back in the right direction.

I think the other thing I would say, too, that stood out in the in the June quarter was the amount of business that we pushed through the direct import program that we have with Amazon was lower than it was in prior quarters. We're optimistic that that will change, too. That we'll get a higher level of that in the future, although there's no guarantee for that. But if we're able to improve from where we were in the June quarter, that's an upward lift to operating margins because a lot of the costs, particularly on the sales and fulfillment side, and on the freight costs are carried by Amazon in that program.

So that's a better EBIT environment for us. And it was a low number relative to prior quarters for us. So, as we look at the business, to us it feels like a lot of the things that became headwinds in June, you can shift to tailwinds as we progress through 2023.

Okay. Fair enough. That's encouraging. One more if I could. Maybe more from Lawrence, bigger picture. Describe this new branding a little bit more.

So is this sort of branding away from hydroponics or, I don't know, ZenHydro? Anything you could flesh out on that. And then what's the goal of that? Well, two things. I presume that aims to drive more sales. So if you could talk about the goals or how we measure the success of the rebranding.

And what is the cost of that going to be? Is it also going to be a big expense incurred on a marketing line or something along those lines?

Yeah, the rebranding is for us to actually better present iPower as not only just a hydroponic company. We now have more lines with different brand names and different subcategories, not just hydroponics. So we want people to understand that we are beyond just about hydroponics company. We are an e-commerce company. We also have a services capability.

So we've been working on rebranding iPower so that we can show everybody what iPower really is and what's inside iPower's organization. The rebranding won't cost us that much as we are not reprinting logos or -- even if we need to do that, it will be step-by-step. Like, it won't be a overall -- like change all the market material. So that's very much controlled. But I think rebranding will be making the broader public understand iPower beyond just hydroponics.

Understood. All right, thanks for all the time. Appreciate it.

Thank you.

Thank you.

Thank you. At this time, I'd like to turn the call back over to Kevin Vassily for any closing remarks. Sir.

Great. Well, thanks, everyone, for joining us for our year-end earnings call. We look forward to speaking with you guys again soon as we're rapidly approaching the end of our fiscal Q1. So we'll be talking to everyone again in November. Thanks again.

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