Purple Innovation Inc (PRPL) 2017 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Purple Innovation fourth quarter and full year 2017 earnings conference call. At this time all participants are in a listen-only mode to prevent background noise. We'll have a question-and-answer session later and the instructions will be given at that time. As a reminder, this conference is being recorded.

Now I'd like to welcome and turn the call to Brendan Frey of ICR. Brendan, you may begin.

Thank you and thank you, everyone, for joining us today to discuss Purple Innovation's fourth quarter 2017 earnings results. On today's call are Terry Pearce, Founder and Chairman, and Mark Watkins, Chief Financial Officer. A copy of today's press release is available on the investor relations section of Purple's website at www.Purple.com.

I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Purple Innovation's judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting the Company's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of these risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our fourth quarter 2017 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, the Company may refer to certain adjusted non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today.

With that, I'll turn the call over to Terry Pearce. Terry?

Thank you, everyone, for joining us today for our first earnings call as a public company. This is Terry Pearce and I'm one of the founders of Purple. Before we get into a discussion of the Company and our recent results, I want to take this opportunity to thank Sam Bernards for his numerous contributions to Purple's recent success. We wouldn't be where we are today without his efforts over the past year and a half. As we announced in a press release today after the close, Sam has stepped down as Chief Executive Officer to pursue other interests. The Board has initiated a search for a new CEO to lead the Company through its next phase of dynamic growth. Until that process is completed, I will oversee the day-to-day operations of the Company.

Now to our recent results. During the fourth quarter, demand in our direct-to-consumer channel was incredibly strong, fueled by increased investment aimed at building awareness of our brand and understanding of our differentiated products. At the same time, recent expansion of our manufacturing capacity allowed us to better capitalize on our growth prospects by fulfilling orders in a more timely manner. Q4 sales increased 156% to $63 million and for the year sales were up 201% to $197 million.

We believe these are incredible milestones, given the fact that the Company only started selling mattresses about two years ago. To better understand how we got to where we are today as fast as we did, let me tell you some of the backstory. Purple is a leading comfort technology company that my brother Tony and I founded more than 20 years ago with a mission to improve how people sleep, sit and stand. Our IP protected cushioning technology was initially used on wheelchairs and hospital beds, as it is able to prevent pressure sores. For approximately two decades, we licensed cushioning technology to various companies inside and outside of the healthcare space. In late 2015, we realized there was a massive opportunity to make the world feel better through this hyperelastic polymer technology, which we have since renamed Purple. We invented our own proprietary machinery and processes that could efficiently produce our mattresses at scale.

Since Purple launched, we have been focused on becoming the leader in the direct-to-consumer mattress space, which space has grown over 400% in the last two years. We believe that disruptive DTC players like Purple will drive the majority of growth for the bedding industry going forward, as consumers become increasingly willing to buy mattresses online. Within the DTC category, we believe that Purple has surpassed most of the competition in terms of size, through customer acceptance of our products and effective marketing. In terms of online penetration within the mattress industry, we believe that we are still in the very early beginnings and we believe there is a meaningful upside, as DTC players continue to capture share from traditional mattress retailers. With our products and processes, vertical integration and marketing prowess, we believe Purple is well-positioned to continue to capture market share, build brand recognition, drive strong financial results and generate value for our shareholders.

Now I'll turn it over to Purple's CFO, Mark Watkins, who will provide more details on the quarter, year and our outlook for 2018.

Thank you, Terry. As most of you are aware, on February 2 we completed our business combination with Global Partner Acquisition Corp., also known as GMAC. Through this transaction, Purple became a wholly-owned subsidiary of GPAC. On the date of completion, GPAC changed its name to Purple Innovation, Inc. and the Company's stock began trading on NASDAQ under the ticker PRPL on February 5. The fourth quarter and full year results that I'm going to review today are for the predecessor company, which is Purple Innovation, LLC, which will be on a standalone basis.

For the three months ended December 31, 2017, net revenue was $63 million, up 156% compared to $24.6 million in the prior-year period. The revenue increase was primarily due to higher demand for our mattresses and related companion products in our direct-to-consumer channel, driven by increased marketing investments aimed at generating awareness of our brand and understanding of our differentiated product offerings. Additionally, during the quarter we enhanced our manufacturing capabilities with the addition of a third Mattress Max machine to allow us to increase our output and better fulfill demand. Gross profit dollars were up 191% to $28.5 million during the fourth quarter of 2017. That's compared to $9.8 million during the same period in 2016. Gross margin increased 540 basis points to 45.2% compared to 39.8% in the fourth quarter of 2016. The increase in gross margin was attributed to efficiency gains from our increased scale and manufacturing improvement. Operating expenses were $30.4 million in the fourth quarter of 2017 versus $10.0 million in the prior-year period. The increase in operating expenses during the quarter is mainly attributable to a higher marketing spend in the effort to expand our brand awareness and drive direct-to-consumer demand for our products.

During the fourth quarter we reported an operating loss of $1.9 million compared to an operating loss of $235,000 in the fourth quarter of 2016. Adjusted operating loss, which excludes one-time nonrecurring costs which were primarily related to the business combination transaction with GPAC, was $885,000 compared to an operating income of $414,000 which also had an exclusion for loss of disposal of property in the fourth quarter of 2016. Net loss for the quarter was $2.0 million compared to a net loss of $236,000 in the fourth quarter of 2016.

EBITDA was negative for the quarter at $1.7 million compared to a negative $193,000 in the fourth quarter of 2016. Adjusted EBITDA, which excludes deal and legal fees associated with the GPAC transaction, was negative $609,000 versus adjusted EBITDA of a positive $456,000 in the fourth quarter of 2016. The year-ago adjusted EBITDA excludes related party royalty fees, loss on disposal of property and equipment and legal fees.

Moving on to our full-year view, net revenue continued to see tremendous growth, increasing 201% to $196.9 million compared to $65.5 million in 2016. Similar to what we saw in the quarter, the increase in revenue was due largely to a surge in demand for our Purple mattresses and associated companion products through our direct-to-consumer channel. 2017 gross profit dollars were up 312% to $88.4 million versus $21.5 million during the same period in 2016. Gross margin increased to 44.9% from 32.8% in the prior-year period, driven by multiple efficiency gains associated with scale and manufacturing improvements.

Operating expenses were $93.8 million during the year ended December 31, 2017 compared to an operating expense of $23.4 million in the prior year period. This is due to a combination of the increase in marketing spend, infrastructure investments to support our manufacturing capabilities, the addition of key new hires and related team members and an increase in R&D, allowing us to further develop our product offerings. For the year we reported an operating loss of $5.4 million versus a loss of $1.9 million in 2016. Adjusted operating loss, which excludes deal and legal related fees and the disposal of property and equipment was $3.5 million compared to an adjusted operating income of $2.5 million, which excludes related party royalty fees, loss on disposal of property and legal fees from 2016.

EBITDA was negative for the year at $4.6 million compared to a negative $1.8 million in the prior year. Adjusted EBITDA, which excludes deal and legal fees and loss on disposal of property and equipment, was negative $2.7 million versus positive adjusted EBITDA of $2.6 million in 2016. Last year's adjusted EBITDA excludes related party royalty fees, loss on disposal of property and legal fees. Adjusted EBITDA margins were impacted by our marketing spend and efficiency due to increased digital marketing and brand awareness costs, primarily in the second half of the year, also impacted by capacity constraints and negative publicity from false competitor claims in 2017.

Moving on to our balance sheet, as of December 31, 2017 the Company had cash and cash equivalents of $3.6 million. That's compared to $4 million at the end of 2016. Inventories totaled $15.8 million for 2017 compared with $5.3 million at the end of 2016. The increase in inventory was once again due to the demand for our products. I also would like to note that our cash balance significantly increased with the completion of the recent business combination with GPAC, such that we have sufficient cash on the balance sheet to support working capital needs and drive future growth of the business throughout 2018.

So looking ahead to 2018, we expect net revenues to approximately double from 2017 levels and adjusted EBITDA to be toward the lower end of the range established in our investor presentation, which was filed with the SEC on January 8, 2018. For the first quarter of 2018, the Company expects net revenue will be between $53 million and $63 million and adjusted EBITDA to be between a loss of $3.5 million and a loss of $2 million.

With respect to the start of our year, we are very pleased with the consumer response to the recent launch of our new mattress models, which began selling in our direct-to-consumer channel in early February. These new models are differentiated from our original Purple mattress by the depth of the Purple material and the use of coils as the core of the mattress as opposed to foam.

Due to the weight of the larger sizes of our new mattresses, we aren't able to economically ship units to consumers using major carriers like we do with the original Purple mattress. Instead, we are offering a white glove delivery service that utilizes a third party to deliver and set up customers' new mattresses and remove their old mattress. Like any new endeavor, there have been some early obstacles to overcome which have delayed shipments and pushed out our ability to recognize revenue on some recent sales. This headwind has been incorporated into our Q1 guidance. We are confident that we will soon work out all the kinks associated with this new service and catch up on our current backlog of orders.

Finally, with respect to our 51-store test with Mattress Firm, we continue to meet or exceed initial expectations and based on our ongoing dialogue, we anticipate expanding our physical presence sometime in the second quarter of this year.

In summary, we are pleased with the progress we have made in our first two years of business. We are excited to have finalized our transaction with GPAC, which allowed us to become a publicly traded company, and provided liquidity to fuel continued growth. We look forward to updating everyone on our progress during our first quarter conference call.

I'll now turn the time back over to the operator for questions. Operator?

Thank you. (Operator Instructions). Peter Keith, Piper Jaffray.

Thanks for allowing me to ask a question and congratulations on the attraction and becoming a public company. I was curious on the manufacturing. You had capacity constraints throughout much of 2017. How did you wind up in maybe the last month of the year and maybe even a little bit of insight into where you are now? Are there any continuing constraints with manufacturing right now?

Thanks for the question. So, regarding capacity constraints in 2017, you're right. We were capacity constrained from a manufacturing standpoint for the majority of the year. In December, we were able to bring online our Mattress Max 3 machine --- so that's our third mattress-making machine --- and as part of that, that allowed us to quickly catch up on the backlog that we had experienced and we actually ended the year with very little backlog, just a few days of production, few days of sales. As we have moved into 2018, we have already brought on our Mattress Max 4 machine, which came online here in early February and continues to scale. As we look further into 2018, we do not anticipate any capacity constraints from a manufacturing standpoint and as we continue to scale, we will bring on a Mattress Max 5 machine during the year and potentially look to a 6, depending on how growth scales. But right now, no anticipated capacity constraints.

Okay, that's great to hear. Just looking at where the gross margin ended up, I guess where you had guided your sales and gross profit ultimately were above I guess the guidance you have provided. On the margin rate, it was a little bit below the range that was provided of 45.3% to 45.6% on the year. Was there anything that popped up in Q4 that caught you as a negative surprise?

So we did have some surprises. They were not significant in terms of any one thing but there were several smaller things that did surprise us. They were really one-off type things. Some inventory write-offs that were not anticipated was probably the most major. But outside of that, we were largely in line with our expectations. It just turned out that a lot of the small differences all went in the same direction.

Very good. Then last one from me. So just on the outlook, I guess again you are within the ranges that you had initially provided back in January for 2018 but I guess I will say on both a sales and EBITDA basis you're at the lower end. Is there anything that in the last two months has changed or is it just trying to set a more reasonable bar for yourselves?

Yes, you know, we are trying to be conservative. But the real change in the approach to the guidance is that we have a lot of dynamic and unique opportunities ahead of us. We want to prioritize those and be reasonable in what we can actually accomplish for the year, with a focus that allows us to truly execute against those. So we just want to set the expectations that we can accomplish that, we can execute against those initiatives in the most effective manner. So we may choose, from a strategic standpoint, not to tackle every one of the opportunities in front of us and that's really reflected in the guidance.

Okay. Sounds good. Thanks a lot and I'll yield to others.

Brad Thomas, KeyBanc Capital.

Good afternoon, Terry and Mark, and let me add my congratulations as well on becoming a public company here. I wanted to follow up on the outlook for the first quarter in particular, get the range that you all provided, $53 million to $56 million does look like it would be kind of a step-down sequentially in where your sales clocked in in 4Q. Mark, any more color you could share with us on the magnitude of impact that you're expecting from --- it sounds like the delays associated with the white glove delivery?

Yes, so we're still trying to get our arms around exactly what that's going to be but there is an impact -- call it somewhere between $3 million and $5 million and the reason for that is largely due just to the hiccups in getting that white glove delivery service up and running in a smooth fashion. We expect that we'll be able to clean that up in short order; in fact, we're making tremendous progress right now. But we got off to a little bit of a slow start and that's what has kind of put us behind the eightball. So we're playing catch-up right now. The catch-up is factored into that guidance and so those sales we do expect will flow through into the second quarter. But as we looked at the overall business plan for the year and where we wanted to be, we were expecting a slight step down from Q4 to Q1 but we are on track for our expectations for the year. So there is nothing that's happened in Q1 that has put us off of those expectations.

Gotcha. Then in terms of the new models, can you share any more about who you're partnering with to do the delivery or any other details on how that's working?

Yes, so we have one firm that we're currently working with and we may expand that, depending on demand. But the one firm --- I'm not going to use their name but they are a national firm. They deliver for several other furniture companies and fitness equipment companies. So they're very well-known and experienced and they have a national footprint that we are leveraging with multiple distribution centers across the country. Does that answer your question?

It does, yes. Then this is leveraging the expanded assortment that you initially rolled out in Mattress Firm and currently have online. I was hoping you'd share a little bit more detail on how that is playing out from a mix perspective, how much you're seeing customers trade up into some of these newer, higher price point models and what you think the financial benefits of that trade-up may be?

Yes, you bet. So I would just point out for the broader group, we started selling those new models in Mattress Firm in November of 2017 and we launched selling these new models online along with our original Purple bed in February, the second week of February here in 2018. We're very pleased with the performance. It is still very early, so I don't want to share too much information, set expectations because we see a lot of variability from day to day in the new versus original mattress cells. Part of the movement that we see from day to day is us testing what works and what doesn't work, as we use our digital marketing to reach out and attract consumers to those different models. So there's a lot of testing going on on our side to figure out what is the most efficient way to bring a consumer to our website. Do we bring them to the original Purple bed and have them convert or do we bring them to the new models? So because of that variability I don't want to share too much information but I would say that it is being very well received, frankly exceeding our expectations right now. But we've only been selling them for a handful of weeks.

Great. If I could just squeeze in one more here, just on the marketing side of things, I was hoping Mark that you could give us an update on what you're seeing out there in terms of the underlying customer acquisition costs and as you all have gotten a better understanding of the data behind it and what you're spending, what kind of success you may be having at getting more efficient with your marketing?

Yes, you bet. So you'll recall at the end of 2017 primarily starting in Q3 and then carrying into Q4, we did see dramatic increases in the cost of our digital marketing, the cost of our platforms and providers passing those costs on to us. We have seen those decrease in Q1. That is just because of the seasonality. We do expect that we will continue to see moderate increases in the cost per CPM throughout 2018 but we are testing a lot of different platforms. So far, things are looking very good in terms of our ability to manage through those increases. So a similar message to what I think we shared with you and others as we are going to the process of the transaction but we felt like we could manage those and we believe we are effectively doing that here in the first part of 2018.

Great. Thanks for answering all the questions.

Keith Hughes, SunTrust.

Just on the revenue guidance for the first quarter, what does that represent in terms of year-over-year growth in dollars and also if you are willing to talk about it in terms of units?

Yes, so on a year-over-year basis, our sales for 2017 were approximately $30 million --- $30.1 million. So the growth rate --- I don't have it right in front of me but high 80%/low 90% year-over-year growth rate, depending on where we are in that range.

And would units be about the same?

So we are seeing a slight increase in Q1 2018 to our average selling price because of the new models. I don't have an exact number in front of me but our ASP is going up so model count, relatively speaking, would go down as an overall percent but it's still a little early to tell where our mix of new models and where that ASP is going to land. I would say it's slightly under the dollar increase.

Finally, I know you have a test going on here with Mattress Firm. Can you update us how many cities you are in, and if there's any announced plans to expand that in 2018?

Yes, you bet. So we are currently in three geographies, three cities or broader areas within the city in 51 stores. We have continued to see success and consistency in our sales of mattresses in those geographies. So we do have plans with Mattress Firm to expand. The details of that expansion are still being worked out but we do expect several new geographies and expect that to happen during Q2 of 2018.

(Operator Instructions). Budd Bugatch, Raymond James.

Congratulations again on becoming a public company. Best of luck on that, Terry and Mark. I guess is there any information you can give us on the lift that you've gotten from Firm on revenues?

Sorry, Budd. I didn't quite catch the question.

How much sales lift did you get from Mattress Firm? What was the addition to revenues for Firm in the fourth quarter?

You know, I actually don't have that number in front of me.

Okay. Can you talk (multiple speakers) -- I understand. I know you gave to Keith the revenues last year. Any help on the adjusted EBITDA results from the first quarter of last year? The comparison --- I know we've got six months but I don't think we have the quarterly.

Yes, and that is correct and apologize for that. We went through this process with GPAC on the merger and we actually did not end up with Q1 specifically reviewed financials so those have not been disclosed. They will be part of our Q1 2018 Q, where we will go through that process and have the review but not comfortable disclosing any of that right now, just for that reason.

I got you. How does the backlog look now and other products as well as mattresses?

Yes, so at the end of 2017, the backlog was really only a few days of sales because we were able to catch up with the help of the introduction of Mattress Max 3. Currently, as it stands for the end of Q1, we will have some backlog specifically for those reasons that I mentioned with the delivery issues with our white glove service that we expect we'll be able to resolve here early Q2. But we don't have any capacity constraints so (multiple speakers).

Same on pillows, too? I know pillows had been an issue, at least a couple of months ago.

So pillows have been an issue when we have done promotions. But we now have several new injection molding machines that enable us to catch up very, very quickly if we do get on a backlog, within a matter of days. So nothing that is pushing us out weeks like we had in the past.

Gotcha. That is very good to hear. What about expenses or costs? Chemicals have been an issue for some --- and for a lot. We're seeing inflation in a lot of different places throughout the economy. What are you all seeing?

So our biggest item that we have seen increases on has been foam. Our increases have been in the neighborhood of really around 20% on a year-over-year basis. We saw those increases happen throughout 2017 but in Q4 they have kind of moderated and have not increased for us through the end of Q4 or the beginning of 2018. So any increases in the future would be a little bit of a surprise to us because they do seem to have stabilized. Any of our other raws --- we do have a mineral oil which is a petroleum byproduct. We do see that fluctuate a little bit based on the cost of petroleum, but our costs do not fluctuate exactly; they are much more stable and moderate than the overall oil prices. Other costs we have not seen any increases and I would just point out the cost of the foam increases have not been substantial in terms of what we're showing on a trend from our cost of sales, simply because we have been seeing improvements to our manufacturing processes. So that has enabled us to keep those cost of sales roughly flat, even though we saw those increases in some of the raws going in, especially foam. We expect we will be able to continue to realize improvements to our cost of sales line, primarily from efficiency improvements that we have planned throughout 2018.

Okay and I take it those efficiencies are coming in the factory? I know there was a lot of work being done on process, so I suspect that's where we're going to see most of the efficiencies?

That is correct. It is process and then equipment. So the GPAC transaction gave us a nice liquidity position that is enabling us to reach out and get some automation equipment that we did not have the ability to do in the past. So that is going to reduce our labor as a percent and allow for more efficiencies there. Then the other thing I would point out in terms of the foam is that as we continue to see some of this shift from our old model, which was a foam base, to a spring coil base in the new models, that also reduces that impact from the foam increases.

Finally from me, the news about Sam came as a bit of a surprise, at least to me, and maybe others were aware. I certainly wasn't. Can you share a little bit about what the plans are and how you're going to determine his successor and what your timeframe is for doing that or what you think the investment community should expect?

Sure, Budd. This is Terry. I was the CEO with my brother Tony -- we were co-CEOs before Sam -- and I am stepping in to take over until we find a successor. There's nothing really evil or unusual. I respect Sam very, very much. Probably everything you need to know is in that press release. We are going to continue to grow like we have in disrupting the overall mattress market as well as the DTC market and our plans remain aggressive toward that end. We are doing a national search with the help of a consultant yet to be determined but we are interviewing right now to go after another world-class CEO.

I see, and when do you think you'll have that firm chosen? Has the independent committee of the Board been chosen to do this? Or is it basically you and --?

We do have board members on an ad hoc committee. It is not an official committee but very much active. We have identified players in the consulting end and we probably can wrap that up by the end of next week. (multiple speakers). It's just the beginning of the search. I'm not saying we'll have the CEO by the end of next week.

No, I understood that. No, I expected that. Well, best of luck to you all and we certainly will be very interested in your progress.

At this time, I would like to hand the call back over to Mr. Pearce for any additional or closing remarks.

So thank you. I really appreciate everyone calling in. We are at the beginning of a very long runway. We're differentiated. We are marketing very well right now. Our cost of marketing ratios are staying constant in the face of price increases because our marketing efficiency is better. We are doing a great job and I just want you to know I'm still excited about Purple.

That does conclude today's conference. We thank you for your participation.