Owlet Inc (OWLT) 2022 Q1 法說會逐字稿

Good afternoon. Thank you for attending today's Owlet Q1 Earnings Call. My name is Tania, and I will be your moderator for today's call. (Operator Instructions)

I would now like to pass the conference over to our host, Mike Cavanaugh, Investor Relations of ICR Westwicke. Please go ahead.

Good afternoon, and thank you for joining us today. Earlier today, Owlet, Inc. released financial results for the quarter ended March 31, 2022. The release is currently available on the company's website at investors.owletcare.com.

Kurt Workman, Owlet's Cofounder and Chief Executive Officer; and Kate Scolnick, 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 and/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 annual report filed March 25, 2022, and other reports filed with the SEC, which can be found on its website at investors.owletcare.com or on the SEC's website at www.sec.gov. The information provided on this conference call speaks only as of today's live call. Owlet 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 note that Owlet 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 press release, which is also available on the company's Quarterly Results page of its website.

I will now turn the call over to Kurt.

Thank you, Mike, and good afternoon to all of those joining us today. First, I want to note the overwhelming support from hundreds of thousands of parents over the past several months. They have been the voice of Owlet's mission to empower parents with the tools, technology and information that they need to deliver care at home. It's clear that new parents want solutions to help them navigate the incredibly challenging and rewarding stage of early parenthood. We cannot imagine a world in the future where every family doesn't have access to basic health-sensing technology to monitor their baby at home. We're more dedicated than ever to achieving that vision.

Our monitoring system will become the foundation for what we call the connected nursery ecosystem, a suite of products and services that will work together to help parents keep their babies safe, healthy and happy. Owlet is making significant investments towards this vision in 2022 in products like smart crib, our next-generation camera, a membership program and expanded Owlet accessories, which will fundamentally change the opportunity to build a longer-term relationship with each customer and expand our LTV in 2023.

Additionally, we believe that investments towards regulatory clearances, where needed, will accelerate market adoption and penetration, helping make Owlet the technology platform for every parent. Owlet delivered $21.5 million in revenue during the first quarter, primarily driven by loading in and rebuilding our inventory position with our retail partners. While the Dream Sock launched on owletcare.com and in some retailers in January, following CES, the full rollout of Dream Sock happened throughout the quarter with different retailers stocking their shelves each month of the quarter. Notably, Target did not reset in store, and Amazon was not at full capacity until the end of March.

Many of our key levers of growth were just starting to build throughout the quarter, including baby registries, consumer reviews and search rankings. As a result, we saw sell-through levels increase throughout the quarter, but we believe we will realize our full sell-through potential as we continue to build our registries, reviews and rankings. The best way to characterize Q1 2022 is that we focused on regaining our footing and positioning back in the market and work to reestablish ourselves as the best monitoring solution for parents.

While we're navigating the short-term headwinds of bringing our core products back online, it's clear that the long-term potential of our Dream Sock and Dream Duo is strong. We're seeing consistent increasing satisfaction ratings, both in our net promoter surveys and our Amazon listings, signaling that customer satisfaction is coming back on track with previous Smart Sock levels. We're also expanding our retail footprint and international presence significantly. We have a robust road map of new features and products as we continue to build our Dream platform. We intend to add medical device regulatory clearances that we believe could dramatically accelerate adoption.

I'd like to give an update on these 4 areas of growth, starting with our Dream Sock and Duo penetration in the U.S. We've seen sell-through of the Dream Sock and Duo grow double-digit month-over-month for the past 3 months, and the products have already been named best baby monitor and baby gift from the likes of Babylist, Glamour, Spy and Gear Brain. By the end of the quarter, 100% of our retail channels and doors were back online with Dream products.

In the second quarter of the year, we're now focused on growing sell-through. Owlet has continued its strong organic referral with 56% of customers hearing about the product through word-of-mouth In a recent survey, 93% of parents reported peace of mind with the Dream Sock, which is on par with the metrics we saw around Smart Sock.

We've continued to introduce new Dream product features to parents, improving the baseline Net Promoter Score every month with Amazon reviews for our Dream Sock and Duo climbing to 4.1 and 4.3 stars already. Some of the most notable features and enhancements include an even smarter sleep algorithm that's 10x more responsive and 11% more accurate than when it was first released.

At the end of March, we rolled out an app update that included the display of average oxygen in the Dream app to help give parents a more complete view and understanding of baby sleep. Dream Sock and Dream Duo users will also get access to a brand-new feature around predictive sleep in the third quarter. It's a completely personalized sleep tool that helps parents take the guesswork out of getting their baby the rest they need. Parents will receive personalized prompts when their baby needs to go to sleep based on baby's age, time slept in their prior nap and how long it's been since they slept. This new feature is automated for parents and adapts with baby as parents build routines and schedules. By continuing to add more features to the Dream platform, Owlet is becoming an ingrained part of the parenting journey. We see consistent app engagements every day, and we're exploring additional revenue opportunities like membership that would further enhance this.

The second key growth area we're focusing on as a business is expanding our ecosystem with our robust product road map and several commercial launches approaching. First, our new sleepwear accessories, the Owlet Dream Sleeper and Dream Sleeper with a Swaddle, will debut later this year. In a survey of Owlet customers, 73% said they would purchase a sleeper from Owlet. In Q3 of this year, the Owlet Cam 2 will launch globally, bolstering the existing 1080p HD video with next-generation artificial intelligence and machine learning to accurately decipher sounds from the nursery and detect when a baby's crying, so parents know when their baby needs them. We'll also use that data to store important video clips throughout the day so that you never miss a moment.

Also part of our product road map for the Owlet connected nursery ecosystem is our smart crib. Our team is making phenomenal progress on the development of the Owlet smart crib, which will be an anchor for the ecosystem. We recently brought parents into our office and presented Owlet crib prototypes alongside other infant bed options currently on the market, and 70% of parents there said they prefer the Owlet crib over the various other smart crib choices we presented.

Lastly, we continue in research and development of the Owlet Pregnancy Band, a wearable monitor for expectant mothers. After a successful beta test last year and following continued conversations with FDA, we have a stronger understanding of the opportunity, consumer fit and market needs. As a result, we are working toward an FDA-cleared medical device rather than a consumer wellness version, so we can offer a more robust feature set that we believe will provide the best experience for expectant moms.

The wearable pregnancy monitor is just one of the medical devices our team is working on as a third key area of growth for our business. In the U.S., we continue in conversations with FDA as we work toward medical device submissions for both a prescription-only version of the sock for use with sick babies under the care of a physician and an over-the-counter version of the sock with heart rate and oxygen notification features for healthy children. We have a strong health care team leading these efforts with experience from top health care companies like Philips, GE and Kaiser Permanente. We continue to meet with FDA regarding our submissions, and we believe we're on track to submit for the prescription-only version of the sock in the summer and the over-the-counter sock notifications following that.

Outside of the U.S., we are pleased with our progress towards filing for the UKCA and CE med marks in the U.K. and Europe, as well as our Health Canada filing as we recently obtained both our ISO 1345 (sic) [ISO 13485] and MDSAP certifications.

Our fourth area of growth is international expansion. 2021 was a banner year for Owlet as we expanded sales to our core products into nearly a dozen countries in Europe. This year, we plan to focus on increasing penetration in those markets. Our overall international revenue grew by over 100% year-over-year, accounting for 13% of our total revenue in the first quarter of 2022. Some highlights from our international efforts include significant retail expansion in the U.K. with Harrods, Boots and Currys and doubling the number of SKUs carried by John Lewis. We are now in major pharmacies, consumer electronics and department stores, in addition to baby retailers across Europe.

The Smart Sock was rated a top baby monitor by Le Parisien, a top French newspaper; as well as best baby monitor gift in The Independent, a large daily newspaper in the U.K. We are very pleased with this international growth and are eager to continue expanding and growing in these markets. Nearly every day, we hear from parents around the globe sharing their Owlet experience. Our mission is to get Owlet technology to every baby and every family, and international expansion is an integral part of our mission.

Also, part of this is our advocacy and charitable work, where we partner with dozens of parent-led nonprofit organizations to provide Owlet products to families in need. In March, in collaboration with many of these nonprofit groups, we were able to donate 650 Owlet monitors to Ukrainian refugees that had fled to parts of Europe. I'm grateful to work with so many [lifeline] groups with the same mission of delivering peace of mind.

We believe these key 4 areas are huge opportunities for Owlet, both in 2022 and beyond. We're setting the foundation for an ecosystem this year which we believe will open up significant long-term opportunities. We recently added several new team members to further support and lead Owlet. Albert Li joined in April as Chief Legal Officer, bringing with him more than 2 decades of health care and FDA regulatory expertise for medical product companies like Abbott and Zimmer. Following his tenure with Mattel and PricewaterhouseCoopers, Nate Yoo came onboard in the first quarter as our Senior Vice President and Chief Accounting Officer. Finally, we added Matthias Kosack as General Manager of our new APAC region. Matthias has extensive international experience with -- from top brands like adidas and Maui Jim.

Thank you for your continued support of Owlet and our mission. I look forward to sharing more updates on our future calls. I'll now turn this call over to Kate.

Thank you, and good afternoon, everyone. Our first quarter results were encouraging. And during this period, there were 4 main operational objectives Owlet achieved: number one, domestic launch of our Dream Sock and Dream Duo products; number two, selling to all of our major retail channels online and in-store and relisting with Amazon while growing initial December sales momentum with Owlet online; number three, establish a successful return-to-vendor process for domestic Smart Sock and Duo product returns to rework to Dream Sock and Dream Duo inventory; and number four, manage our working capital, operating expenses and existing cash position effectively.

Turning to Q1 results. Q1 gross billings before promotions and reserves were approximately $26 million as compared to $25 million for the same period last year. The 5% year-over-year increase in gross billings reflects our continued international growth. Domestically, we work closely with our retailers to launch our Dream line of products throughout the quarter. As of the end of March, we achieved initial selling shipments with all of our key retail partners. However, some of the retailers were not fully utilized for online and in-store sell-through until the end of March. Q1 product promotions and discounts were $1.4 million compared to $1.7 million for the same period last year.

Return adjustments for Q1 2022 were $3 million, 11.7% of gross billings. This compares to Q1 2021 return adjustments of $1.2 million, 4.8% of gross billings. The increase in return reserves in Q1 2022 relates to the new Dream product launches where consumer return rates were higher at the beginning of the quarter at initial launch but improved dramatically as we moved through the quarter. Looking ahead, we expect return rates will stabilize as parents continue to better understand the new value proposition of the Dream product.

Q1 net revenues were $21.5 million, including the impact of adjustments, such as promotions, discounts and other allowances. This compares to net revenues of $21.9 million in Q1 2021 or relatively flat. Within this, international revenue was approximately 13% of total revenue, more than double our prior year's first quarter international revenue.

Cost of goods sold in Q1 was $12.8 million, and gross profit was $8.8 million. Our gross margin was impacted by macro inflationary pressures, along with several discrete items in the quarter. Q1 gross margin was 40.7%. Our Q1 margin included a significant impact from cost inflation, representing roughly half of the decline in gross margin year-over-year. Other significant drivers included higher adjustment for returns and the rework costs associated with return-to-vendor inventory.

Operating expenses for the first quarter of 2022 were $30.5 million compared to $15.5 million for the same period in 2021. The increase in year-over-year operating expenses was primarily for planned increases in spending associated with the scaling of the business and higher marketing spend. Operating loss and net loss for the first quarter of 2022 were approximately $22 million and $29 million, respectively, as compared with $3 million operating loss and $8 million net loss for the same period in 2021. Q1 adjusted EBITDA loss was $18 million compared to adjusted EBITDA gain of $100,000 for the same period in 2021.

Turning to the balance sheet. Cash and cash equivalents as of March 31, 2022, were approximately $69 million. To effectively support a Dream launch and the inventory repositioning with our retailers during the first quarter, a significant amount of capital was utilized on the balance sheet. Our receivable balance grew, both reflecting the timing of sell-in shipments in the quarter, along with the disruption of return-to-vendor activity occurring in some cases, simultaneous and with initial Dream product selling. Inventory levels grew in the quarter as we executed our plans to rework inventory received back from retailers into Dream products, particularly as a lot of the rework activity was later in March. We expect that in future quarters, this will decrease the need for working capital usage until we work through the inventory on hand. As a significant portion of the inventory has not been returned from our retail partners, we are actively working with them to normalize our receivable position.

In summary, Q1 was an important transitional product quarter in the U.S. for Owlet. We achieved our top business priorities and have taken many of the necessary steps towards building a stronger global business for Owlet in 2022 and beyond.

Looking ahead, like most companies, we have seen increased inflationary cost pressures in our business related to supply chain and transportation, ongoing uncertainty with pandemic concerns and cost increases for wages and company administration. Within this uncertain macro backdrop, as Kurt discussed, Q2 will be a continued period of repositioning of Owlet's domestic business to focus on driving the first full quarter of retail sell-through in the Dream product lines and further reestablishing Owlet's market presence after being out of the marketplace last year due to the FDA warning letter.

Return levels at retailers were elevated exiting Q1 compared to last year, primarily reflecting timing of initial sell-in and sell-through of the Dream products domestically. Inventory self-through in the second quarter was driven by key commercial days, including Mother's Day and Father's Day, and online retail events. For Q2, we anticipated achieving revenues in the range of $23 million to $25 million.

With regards to gross margin and operating margin, we expect the headwinds we saw in the first quarter to continue in the second quarter, including macro inflationary pressures and return inventory rework costs. With regards to return inventory, we anticipate that we will be substantially complete with inventory rework by the end of the second quarter.

Owlet's long-term core growth objectives remain intact, including growing Owlet's connected nursery market penetration domestically and internationally; executing our vision for the future of the connected nursery market, returning investments in product innovation that expand the lifetime value of our customers; and focusing on developing medical prices and obtaining marketing authorizations in the U.S. and key global markets, where required. Thank you.

Operator, let's open it up for questions.

(Operator Instructions) The first question is from the line of Charles Rhyee with Cowen.

Yes. Kate, just wanted to just clarify. When you talk about this inventory rework, the $3 million, that's what you're referring to in the contra-revenue account that you talked about last quarter. Is that right?

The $3 million that we're talking about is on the return reserve. So that's -- we talked about gross billings, and then we increased the return reserve. So we've talked about year-over-year, that's about $1.5 million more than we had in the year prior because there's a new product launch. So when you talk about that kind of gross to net, it's a little bit more than we would have had last year, if you were doing the year-over-year comparison. We just wanted [present] that for you.

No, no, and that's helpful. But that's separate from the inventory rework related to the FDA.

Yes.

Okay. Can you talk -- yes. How much was that impact in the quarter?

The rework activity?

Yes. Or was there any impact in the quarter from that? Because you made mention that you were going to be done with that by the second quarter. Was there any impact on net revenue this quarter?

Right. So what we talked about is that we're about 80% of the way through of the rework activity. And really what we're talking about there is when you look at -- we talked about that we had -- we had made a liability adjustment. And when you look on the balance sheet of what's moved into inventory, that's where you can see the [prepaid] adjustment and what we have in inventory. So we've said that we brought in approximately 75% to 80% of the return-to-vendor product that we think is out there, and so we probably have a little bit more to go in Q2. But then after that, we think that, that activity is primarily behind us.

So if I look at the balance sheet from December and then the balance sheet here presented, the difference would be what impacted the quarter. Is that a fair approximation?

Yes, yes.

Okay. And then my last question, maybe, Kurt, can you talk about the competitive landscape? How are you seeing it right now? We're seeing -- obviously, when you guys introduced the Smart Sock years ago, not a lot of competition, I'd say, in terms of really advanced baby monitoring. We're starting to see new entrants in the market, particularly -- not in a wearable per se, but in cameras or monitors that -- using like computer vision and being able to detect motion, temperature, et cetera, without a wearable part, too. Can you talk about how this market is developing and you see how it's [placed] in it?

Yes. Thanks, Charles. I would actually say that early on, there was a lot more innovation. There was quite -- there were quite a few more competitors coming to market in the space, and I think Owlet emerged as the clear leader in our category. What we are seeing is more kind of connected cameras coming to market in the baby monitor section, which is obviously competitive to our camera, but nothing compared to what we are able to offer with the Dream Sock and the features that we have around Dream Sock that are kind of the next generation of sleep monitoring.

So we are seeing some more entrants on the camera side. There's a new wearable mat. But in terms of sort of being on par with our level of sleep tracking and sleep monitoring and sleep quality indicators that we have, I think Owlet is still in a really strong position and is leading the market in terms of technology. So yes, does that answer your question, Charles? Anything else you want me to go deeper on?

No, no. That was helpful. I was just curious how you're seeing sort of the market evolving. That's great. Appreciate it.

I think it's interesting that this market is, I would say, finally evolving for WiFi where the smart home market has been there for a while. And I think that the majority of the innovation that we're seeing happen right now is video monitors for babies connecting to WiFi.

The next question is from John Babcock with Bank of America.

The first question I just had, you talked about higher return rates on the Dream Sock. Might you be able to delve into that a little bit more and what you think drove those high return rates?

Yes, sure. So just to clarify, back to Charles' question, the impact to revenue is the return in allowances. So what you do is, in a normal quarter, you just take that as a percentage of revenue. We had a new product launch in Q1 with the Dream product, and we took a higher reserve as a new product launch.

We saw a slightly higher return rate when we first launched the product. And a little bit with that was, I think, some consumer confusion when we first launched it with the new value prop. At the very beginning of the product launch, we saw that return rate change very dramatically as we went through the quarter downwards. And we've seen that actually continue downwards into a more normalized range that we saw with our prior products. So we think that, that will continue, as we mentioned, as the value prop continues to resonate and our NPS score continues to go up with a new feature set. But as it works, we take an average for the quarter. So the average was a little bit higher in Q1, and our expectation is that it will be at a lower rate in future.

Okay. Just out of curiosity, what feature where mostly return (inaudible) that I guess didn't exist in the Dream Sock?

It was all different. So when we launched the product, the difference that we had was that as we changed the product from Smart to Dream, some of the future functionality that's been rolled out since is some of the Dream applications, some of the look-back application or the way that the app works and some of the new features that we've come out with since then. But it's the overall repositioning of the product in the marketplace.

I would say, John, just to add to that. Yes, I would just -- just to add to that, I think any time we launch a new version of any product, generally, those first few months, you see higher return rates. The -- in addition, just to kind of follow up on the feature question, we launched 3 new features in the Dream Sock in Q1 post launch. One is a real-time sleep gauge in the app, which is a really cool feature and kind of visually is pretty prominent in the app and helps parents in real time see what sleep state they're in. We made the sleep tracking feature a lot more responsive. And then we launched average oxygen display at the end of the quarter as well. And I think all 3 of those features we've seen the satisfaction and the ratings improve significantly with each new feature rollout in the quarter.

Okay. And then last question. I'll kind of combine this into 2 questions. I guess, first of all, just with regards to your revenue guidance for the quarter, how much visibility do you have into that? And then second of all, are you seeing any impact in your EMEA countries from this whole Russia-Ukraine crisis? And is that weighing at all on consumers' interest and (inaudible)?

Kate, do you want to take the revenue, and then I'll take the international?

Yes, sure. I think as we've talked about, I mean, Q1 was a major repositioning for us, and we talked about the initial sell-in domestically for Dream. That was an important milestone for our retailers, both online and in stores, and that sell-in happened throughout the period. We also relisted with Amazon very late in Q1. So we were very happy to have all of that activity at the end of Q1, but it all happened at different times, right?

So as a consequence to that, the sell-through activity started happening at very different times. So for Q2, what we're really focused on is the sell-through activity with all the different retailers. And what we're expecting is that a lot of that sell-through activity is going to correlate with the promotional opportunities with the different holidays. We have some online events that are really happening, too.

And so what we believe is that the demand that we're seeing out there, as mentioned obviously, the future functionalities that's resonating with folks. We anticipate that, that range of revenue is where we'll see things happening as we start correlating that sell-in, sell-through domestically. And then I'll let Kurt address the overall demand that we're seeing internationally and then in other areas.

Yes. I would just add that Europe is really a bright spot for the company right now. We're seeing incredible growth year-over-year. The team has done a great job of really it's not only building a great team there but working with each country specifically to build good marketing programs for each of the geographies. We mentioned the (inaudible) recommendation we recently got, the expansion into Boots and expansion in John Lewis and expansion to Harrods. So the business is growing really well there, and we're seeing strong consumer demand. I do think there was a little bit of softness, especially kind of at the peak of some of the news around the war in Ukraine. So -- but overall, the business is strong.

(Operator Instructions) The next question is from Jim Suva with Citigroup.

I have a question for Kurt about strategy. You mentioned that you're launching the Pregnancy Band with -- working with the FDA for that as opposed to, call it, a health device path. What's the reasoning behind that? Is that you always plan to do that? Or did the FDA kind of tell you, "Hey, we're going to view this as a health device and not -- I'm sorry, as a medical device and not a health device." Or I'm just kind of curious about that path because your other devices, you've taken the other route of going as more of a health device rather than an FDA health-approved device.

Yes. Thanks for the question, Jim. I would say that in Q4, as we're having discussions with the FDA around socks, we were proactive in discussing band with them as well because it's in a similar vein. And we were able to get to a point with the agency where we had a clear path for launching a wellness device, but there were certain features that we wanted to make sure were included at launch and felt like the best approach and the recommendation from the FDA was to seek clearance on those features prior to launch. So we did changed strategy a little bit with that product and have decided to just completely embrace the medical pathway and get clearance prior to launching it.

Okay. That makes sense. And again, -- you mentioned, if I heard right, you're planning to submit for that in summertime? Or did I get that mixed up with a different comment?

Yes. So the baby [sock], which is the prescription version of the sock, is what we're anticipating submitting this summer. We don't -- we haven't announced the time line for the submission of the band yet.

Okay. Got you. Are you relatively getting close to that? Or are these things so complicated, we're looking at kind of beyond this calendar year? If you can give any commentary for that. I just don't know about the longevity of that detailed process.

Yes. I think we're still in conversations about exactly what we're going to put in the submission with the FDA, so we'll have more information in future calls.

Okay. Got you. And then a question for Kate. Kate, you made a comment about cash flow was impacted by the reworking of the recall products that you returned to shift over from a medical to more of a health packaging, which makes sense. And you mentioned that was a headwind and challenge for working capital in the March quarter. Does that mean that in the June quarter, we should be thinking about cash flow materially changing because it kind of, I'm going to say, unwrapped itself or reversing itself? Or can you help us with a little more clarity about what you were referring to about that working capital comment that you gave on your prepared comments?

So a lot of the activity, Jim, was just staging a process with the retailers of bringing back the inventory that they had in terms of Smart Sock and the Duo product, bringing them back in-house to rework for Dream Sock and Dream Duo and then reworking that as inventory and then getting product back out to the retailers. And so a lot of that affected not only the process of getting it back into our company but also then, as you can imagine, accounts receivable and that whole process as far as selling in and selling through as we work with our customers.

So it's taking a little bit of time to get that all worked through. But we think that we're about 80% of the way done, then we will be able to kind of sell out with those customers. I think in Q2, we should be mostly done. And then I think we'll have more back to that flow that we've usually had where we sell in and then we have that kind of normal payment cycle with them.

But it's just kind of taking a little bit of patience, and everybody has been on a little bit of a different cycle. So that's why you see some of it, just a little bit tied up in some of the numbers on the balance sheet and the cash flow but all expected in Q1. And to be honest, to get through a lot of that in a short period of time has been put a lot of effort in at the retailer side and our side. So we're really happy with where we are, but we also expect to be mostly done by the end of this quarter.

That is all the time we have for questions. I will now turn the conference over to Kurt for any closing remarks.

Yes. I just want to thank everybody for joining today. Thank you, Charles and Jim and John, for the good questions. I want to thank everybody for supporting Owlet as we're working to innovate and solve real needs for parents and want to thank our team and our customers for all the support we've seen over the last few months. So thank you. Have a great day.

That concludes the Owlet Q1 earnings call. Thank you for your participation. You may now disconnect your lines.