Purple Innovation Inc (PRPL) 2018 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to Purple Innovation first quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Shannon Devine. Please go ahead.

Thank you for joining us today to discuss Purple Innovation's first quarter 2018 earnings results. On today's call are Terry Pearce, Co-Founder, Chairman and CEO; 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 the 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 first quarter 2018 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.

Today's presentation will include references to non-GAAP financial measures such as adjusted operating income, EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures can be found within the earnings release and our quarterly report on Form 10-Q, each of which can be found on our website.

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

Thank you. Thank you all for joining us. I'll start by touching on our first-quarter results, including key drivers of our topline performance. Mark will then walk through the numbers in greater detail and outline our updated outlook. After my closing comments, we will be happy to take questions.

As you will hear in our comments today, the Company is healthy. Although we have pared back our near-term expectations for revenue, we believe the Company will be EBITDA breakeven this year. We are making this adjustment to drive toward our long-term objectives. We will come back to this a bit later, but the key understanding is that the Purple team continues to believe that our differentiated products and marketing are driving longer-term market share.

We delivered a strong start to the year, as revenues increased over 100% from Q1 2017 to $61 million in Q1 2018, meeting our topline projections. During the first quarter, we continued to experience strong demand for our original mattress in our direct-to-consumer channel. Growth was driven by marketing investments made over the past year that significantly increased brand awareness and focused customer interest on our differentiated technology.

Our recent performance was in part also driven by the introduction of new higher-priced mattress models, which debuted at retail in November 2017 and on our website in early February 2018. The new models offer a choice of 2-inch, 3-inch or 4-inch deep Purple hyper-elastic Polymer for incrementally personalized comfort, along with a completely different mattress core design.

Reaction to the new models has been very positive and is allowing us to reach a broader consumer audience. Site visitor conversion rates have been lower since introduction of the new models, as anticipated, for higher price considered purchase. We are monitoring, analyzing and optimizing on a daily basis. The landscape of direct-to-consumer mattresses continues to be cluttered with existing competitors and with new "me too" undifferentiated competitors. We believe that approximately 85% of mattress dollars are still spent in physical stores and that this ratio is unlikely to go below 75% in the medium term.

In order to address the lion's share of the approximately $20 billion sleep market, and consistent with our initial plans, Purple is growing its wholesale channel. The first quarter of 2018 marked our first full quarter selling mattresses to a wholesale channel in an ongoing test with Mattress Firm in 51 of its stores.

We have been encouraged with the customers' in-store experience, the enthusiasm of the sales associates and the initial sell-through of our products. Today I'm pleased to announce that Purple has already expanded into an additional 66 Mattress Firm stores for a total of 117 stores during the second quarter.

I am further pleased to announce that Mattress Firm and Purple have agreed to expand into an additional 73 stores early in third quarter of 2018. With this expansion, Purple will be in 190 Mattress Firm stores.

We also have a number of Purple products, including our original and Purple.2 mattresses along with our sheets, pillows and platform base, which are now available on Mattress Firm's e-commerce website. Mattress Firm and Purple are currently discussing plans for further expansion. Over the last 12 months, we have quadrupled the number of proprietary molding systems which make our elastic polymer layer for mattresses. Not surprisingly, we experienced a number of growing pains in the process, as we improved our quality control procedures and scaled our production. Our significant investment in increased manufacturing capacity supported the doubling of our first quarter 2018 year-over-year revenue.

Manufacturing is an important part of Purple's DNA. This core competency, including our proprietary manufacturing processes, provides Purple's clear differentiation and helps to create an IP mode around our business. As I mentioned in our March call, the Board has engaged a global search firm to assist with the CEO search. The search is progressing well and we will update the market on this important initiative as appropriate.

In the meantime, since I resumed the role of CEO 60 days ago, the Purple team has worked to improve reporting systems, structure and accountability and operating data to run Purple more efficiently. We now have additional data visibility for material activities inside Purple and continuous improvement is underway. During this time, we have been able to gather a deeper understanding of Purple's markets and factory operations. Our learnings over the last 60 days have included additional insight into the evolving competitive landscape and factors affecting the cost of DTC marketing, which has required that we adjust our forecast to continue our drive for rapid but importantly also sustainable and profitable growth.

Mark will now take the floor.

Thank you, Terry. I'll begin by discussing our quarterly results and we'll then review our updated guidance for the year. For the three months ended March 31, 2018 net revenue was $61.0 million, up 102% compared to $30.1 million in the prior-year period. The revenue increase was primarily due to higher demand for our mattresses and other products in our direct-to-consumer channel. Supporting the growth were increased marketing investments promoting our mattress offerings, our improved manufacturing capacity and, to a lesser extent, increased contributions from our wholesale channel that comprised 6% of our net revenue for the quarter.

Gross profit dollars were up 84.7% to $26.4 million during the first quarter of 2018 compared to $14.3 million during the same period in 2017, with gross margin of 43.3% compared to 47.5% in the first quarter of 2017. The first quarter of 2017 gross margin included adjustments that were not reflective of the full-year operations, with the full year 2017 reported gross margin at 43.7% of net revenue as a better comparison.

That said, the first quarter 2018 gross margin was less than expected for two primary reasons. First, we incurred inventory adjustments related to inefficiencies we experienced in quality control in the manufacturing process, as we scaled the production of the new mattresses to meet higher-than-expected demand. Second, we experienced higher freight costs during the first quarter associated with the online launch of the new mattress models, as we initially flat-packed the new models as opposed to rolling them, to achieve our February launch date.

In late April, we resolved this issue and began rolling the new mattress models and therefore expect a continued headwind to gross margin from increased freight costs in part of Q2 but expect lower freight costs in the second half of the year. These additional freight costs were partially offset by higher product margins of our new models.

Operating expenses were $29.3 million in the first quarter of 2018 versus $16.3 million in the prior-year period. The increase in operating expenses during the quarter is mainly attributed to a higher marketing spend, incurred in an effort to expand our brand awareness and drive online direct consumer demand for our products. In addition, operating expenses included $2.4 million of one-time, non-recurring costs related to the business combination transaction with Global Partner Acquisition Corp., as well as severance costs.

During the first quarter we reported an operating loss of $2.9 million compared to an operating loss of $2.0 million in the first quarter of 2017. After adjusting first quarter 2018 for the transaction and severance costs, adjusted operating loss was $600,000 compared to an adjusted operating loss of $1.9 million in the first quarter of 2017.

Net loss for the quarter was $3.6 million compared to a net loss of $2.0 million in the first quarter of 2017 and EBITDA was negative for the quarter at $2.5 million compared to negative $1.9 million in the first quarter of 2017. Adjusted EBITDA, which excludes the same non-recurring costs I just mentioned, was negative $100,000 versus adjusted EBITDA of negative $1.9 million in the first quarter of 2017.

Moving to our balance sheet, as of March 31, 2018 the Company had cash and cash equivalents of $26.8 million as compared to $3.6 million at the end of 2017, reflecting the funding from the business combination with GPAC and our term debt finalized on February 2 of this year. Net inventories totaled $26.6 million at March 31, compared with $13.3 million at the end of 2017. The increase to inventory at the end of the first quarter was due to an expanded product line, the growing demand for our products and the stocking of new models at third-party regional distribution centers.

Turning to our guidance for the second quarter of 2018, we anticipate net revenue to be in the range of $70 million to $73 million and adjusted EBITDA to be between a loss of $3 million and a loss of $1 million. For the full year, we now expect net revenue to be between $290 million and $310 million, an increase of between 47% and 57% over 2017. We are still forecasting 2018 adjusted EBITDA to be approximately breakeven.

The decision to adopt a more conservative topline outlook for the remainder of the year was driven by a number of factors. First, we are dedicated to driving long-term sustainable and profitable growth. During the first part of Q2, we determined that the ability to drive topline growth rates at levels required to hit our previous guidance would drive significant bottom-line losses in the near term. This is for several reasons, all of which have to do with diminishing returns of our advertising spend. The competitive landscape and general increases in the cost of digital marketing have put pressure on our marketing effectiveness, as we've continued to see a rise in the cost to acquire customers. By pacing our growth, we can better optimize ad spend as we grow our target audience. We are also diversifying our ad spend across multiple platforms, improving our understanding of our key consumer segments and utilizing technology to maximize conversion rates.

The second reason for a more conservative topline outlook is that our wholesale channel forecast has been impacted by a slower-than-anticipated rollout with retail partners. While the primary relationships that drove our previous forecasts are still in place, it is taking time to see the benefits. This goes for Mattress Firm as well as other partners, such as the 1,000-door retailer we had alluded to previously. We have not changed our long-term outlook for our wholesale channel, and in fact, we have evidence supporting its future success.

Third, we are choosing to place our focus on winning in the U.S. with our current sleep and sit categories. We view international expansion as a future growth driver that can be leveraged when we believe the time is right. We also continue to hold our position, not compete purely on price, as we believe our differentiated product provides consumers a premium experience and therefore, discounting would negatively impact Purple's positioning and the long-term health of our brand.

We are continuously taking steps to widen the net of our marketing activities to reach into broader consumer segments than we have historically, as evidenced by recent television and cinema advertisements, as well as through activities with other digital initiatives. We are committed to building a brand for the long term that we can proud of.

Despite the reduction in the 2018 forecast, my confidence in the future opportunities of Purple has not changed. We participate in a large and growing industry with a highly differentiated product. Our team and our full vertical integration gives us the levers we need to drive long-term sustainable growth.

As a side note, before I turn the call back to Terry, I want to point out that as part of our first-quarter accounting close, we discovered an issue with our 2017 year-end inventory balance and 2017 cost of revenues that has been revised in our 10-Q filed just this afternoon. The revision reduced our inventory balance and increased our cost of revenues by $2.5 million for the 2017 period. The controlled efficiency that resulted in this issue is being remediated.

I will now turn the call back to Terry for some closing remarks. Terry?

Thanks, Mark. We continue to be very optimistic about Purple's future prospects. There is a long runway for sustainable growth ahead of us, both in the online, DTC and wholesale channels. We have future growth opportunities from new product expansion and, as Mark mentioned, international expansion.

We remain committed to capitalizing on the many opportunities that our unique comfort technology gives the Company. While vertical integration can be challenging, it is one of the reasons we are optimistic about our long-term potential as a company, because of additional marketing contribution and especially the IP protection it provides. We are committed to striking a balance between expanding market share and increasing our bottom line in order to drive long-term value for shareholders.

Operator, we are now ready to take questions.

(Operator Instructions) Seth Basham, Wedbush Securities.

Thanks a lot and good afternoon. My first question is around marketing efficiency, if you guys could elaborate on the key issues you're facing right now. Break down the impact from advertising rate inflation versus more limited conversion than you were expecting and your decision to reduce your ad spend.

You bet. As we look at just pure CPMs, we have seen those continue to increase over the prior year quite dramatically. We had expected, going back to the beginning of the year, that CPMs would moderate in terms of the year-over-year increases. That has not happened; in fact, we've seen some acceleration. That's really due to a few factors. One is just general economic conditions. The economy is good. There's trends of people moving over into more and more digital marketing and the marketing in the digital space is largely auction-based and so it's driving those prices up. In addition, just our bed-in-a-box competitors, there is very aggressive digital advertising going on right now -- again, more so than we had originally anticipated for this year. There's more entrants into the space and the existing competitors are stepping up their game as well to the tune of many, many millions of dollars above what we would have expected to be incurred on our side because of those increases to the auctions and targeting the same type of consumers. And so, we are seeing upwards of high-double-digit, even triple-digit year-over-year increases in CPMs with our primary digital advertising partners.

In general, our cost to acquire a customer has gone up. As we're trying to expand our target audience, it's more expensive and we need to do that to expand our growth rate. But it's something that we are looking to moderate to some degree and that's part of the reason for the changing guidance because what it allows us to do is it allows to better optimize our ad spend as we target a broader audience. In other words, we're able to try new marketing tactics for our given audience, adapt, test and then scale. And so it's a combination of competition, just general economic conditions and the bed-in-a-box players being so aggressive in digital advertising.

Got it. As it relates to conversion specifically on your traditional digital ad channels, are you seeing any significant changes in conversion for your core products, putting aside your new products?

So it's a little bit difficult to separate the original Purple mattress from the new one in terms of conversion rates, because we're targeting an audience, they're coming into the space, they look -- and we're able to track this. They're able to look on our website and we see that they're going to the original, they're going to new, they're bouncing back and forth. And so it's a little bit difficult to separate those. But I would say that we have seen a decrease in conversion. Terry alluded to that in his commentary before the Q&A, that with the higher-price-points models it's more of a considered purchase even than it was. And so we've taken that to a new level and we do see those conversion rates dropping off.

Got it. And as you think about the advertising spend outlook going forward, paring back your initial expectations but where are the places you're paring back most? Are you still focused on top of funnel brand advertising to drive awareness or not so much anymore?

No, we have been leaning more and more toward brand than we had historically and we believe that that's the right move for us. As we set ourselves up for long-term success we need to invest in general brand awareness. You can call that top of funnel but we separate to some degree our marketing efforts into brand, top of funnel, bottom of funnel. And as we try to optimize our marketing spend, we are focused on bringing in people into the funnel and converting them as quick as possible. But we are also taking initiatives that -- from a more brand, broad and brand awareness perspective such as television advertising. Those are going to pay dividends in the longer run and they're a little bit more difficult to quantify in the short term.

Fair enough. Then switching gears here, thinking about your wholesale growth being a little bit slower than you anticipate in your 2018 outlook now, how much of that is Mattress Firm versus other retailers?

You know, Mattress Firm is a significant player. They are the majority of where our focus is right now, but they are not the majority of our wholesale business. Over time, we expect to expand into several different wholesale retail partners through our wholesale channel. But there is no doubt Mattress Firm is going to be a major player in that space. We're very encouraged by the expansion that we've seen here in Q2 and we'll continue to see in Q3. But we aren't sharing exact percentages at this time with the wholesale channel.

Fair enough. In terms of the revision to your wholesale outlook for the year though, is that due to slower rollout with Mattress Firm, more so than with other retailers?

You know, it's a combination and it really is just a difference in expectation of what we had expected was possible and where we're at today. But Mattress Firm has been slower than we anticipated. I don't necessarily want to speculate on why but they have had a lot of changes going on, on their side of the business, and we're encouraged by what's happening right now and look forward to continued partnership with them. We do have plans to continue those discussions and further the test.

Fair enough. One last question and I'll turn it over to others. Thinking about your manufacturing operations now, a few more snafus, it sounds like. How do you feel about your ability to manufacture more efficiently for the balance of the year?

Great question. We did have some issues as we ramped up the production of the new models -- quality control, as well as just some of the processes in place. We were forced to ramp up the new model manufacturing quicker than expected, which is a good thing. It means that the new models were selling better than what we had anticipated. But we have made changes and we feel encouraged by the change we've made and we won't significant headwinds going out past Q2. We will have some in Q2, a little bit of headwind, and that is related to some of the same activities that we had going in Q1 related to just some of the inefficiencies in the manufacturing process. Those have now been resulted, but we will have some impact in April as well as the additional freight costs for flat-packing those mattresses, which is really just the new design required some modifications to the rolling process. We've worked through those and we will have -- we are rolling those now. But we will have some impact to gross margin in Q2 headwinds. But Q3 and Q4 we anticipate will go very smooth from a manufacturing standpoint.

Bobby Griffin, Raymond James Financial.

Hi, guys. Good afternoon. I appreciate your taking the time to answer my questions. I guess the first thing I wanted to touch on was the revenue guide reduction from the last time we spoke. You gave some good detail on a few of the reasons why you're cutting back some of the expectations but can you maybe provide some color on which one of those three that you listed off is driving the majority of the reduction?

You bet. The majority of the reduction -- and I would just put it in this order, in order of priority -- definitely diminishing returns on our ad spend. So just the pure cost to acquire a customer coupled with lower conversion rates right now is increasing that cost. So just couching that in terms of lower marketing effectiveness, is the way I would put it. And it does come down to competition, the increase in the CPMs, the need to expand our audience and how quickly we can do that at a profitable rate. Could we grow faster? Yes, we could, but we would be driving losses. And so the steps we are taking right now, we believe are the right thing for the business in the long term that's going to enable us to be healthy and sustainable and be breakeven to positive.

Second would be the wholesale channel. The comparison to the forecast -- this is actually in terms of a percent of the wholesale piece, a bigger change; in other words, it's a bigger drop. But in terms of the overall picture, we are primarily a direct-to-consumer business right now. So that's the lion share.

And then finally, our focus on international has come down a little bit. We had planned on rolling that out faster, although you may recall last quarter we talked about pushing that out. We are just pushing that out further. We realized that we need to focus and win in the U.S.

But in terms of our long-term outlook, we had originally said 30% to 50% growth over the medium term. Call it 3 to 5 years. We still believe that's the case. This change in forecast for this year is not changing our forecast for the long term in any way. We still believe in the long-term future of this business.

Okay. I appreciate that detail. Just to follow up, I guess, on some of the conversations about the advertising costs -- and correct me if I'm understanding this not correctly, but you saw kind of a step-up since the last time we spoke in March with rising ad expense. I guess, what does your guidance or EBITDA guidance kind of assume for competition around keywords and that type of stuff going forward? Are you factoring in another step-up, or are you kind of considering the run rates that we're at now will maintain flat?

We're expecting that on a year-over-year basis we're going to continue to see increases in the CPMs with our primary digital partners and that is a change in our forecast from previous. I think part of that is just the strong economy, the trends in digital advertising. So many more brick-and-mortar type businesses are pushing and pushing more digital marketing and in this auction environment, it's just causing those prices to go up. And then again, like I mentioned, our competitors are getting better and better at mimicking what we have historically done. And that's taking advantage of things that we had been taking advantage of in the past that's causing our prices to go up.

So we're adapting. Our marketing team is phenomenal at being agile and trying to keep those costs down. If you were to see Facebook cost, for example, double and even triple digits on a year-over-year basis, our costs have not gone up and we've still been effective at driving sales. As you look at Q1, we exceeded our expectations there.

But it is putting a cap on what we feel we can do at a profitable level. In terms of just the overall effectiveness for the long term, for the rest of the year, we are going to continue to adjust our marketing activities such that we can be profitable. And I feel like that's something that we can and will do despite the fact that we see these increases.

Okay. I appreciate that detail. And then lastly for me, with one quarter of kind of a wholesale rollout now behind you guys, are you noticing anything different in kind of the profitability the two channels that's worth calling out?

It is more profitable on the bottom line. We have a lower gross margin at wholesale but we do have a slightly higher contribution margin, which is a nice tailwind to the bottom line. And so we expect, as we continue to rollout more and more wholesale business, that that's going to drive profits and as we look at our long-term model, that's a key to getting there. As we look at the short term for DTC, it's going to be tough to be driving high profits and the wholesale channel is what is going to enable us to do that.

Okay. I really appreciate the detail. Best of luck in the coming quarters.

(Operator Instructions) Brad Thomas, KeyBanc Capital Markets.

Hey, good afternoon, Terry and Mark. Thanks for taking my questions. Let's see here. I wanted to just circle back on the D-to-C rollout of the additional models. You referenced the conversion rate being lower with that rollout. I guess, just to be clear and ask you directly, do you observe it to have been a net positive to have added these additional models onto the website?

There's no doubt that we're getting a tailwind on our gross margins from those; they have a slightly higher gross margin. And so we've seen that benefit in terms of the change in conversion relative to the sales. It's honestly a little bit tough to bifurcate and tell you exactly what that is. But what I can tell you is going forward, we anticipate making tweaks, changing the way we bring people into the website, changing the way we promote those new models in such a way that we will be able to measure that and maximize our return on having the new models on the site. So that could range anywhere from taking a model off [sometimes] and testing it all the way to something more extreme and putting them on a different site, but we'll continue to test, refine and improve. There is no doubt that we are able to sell those new models online effectively. And that's something that we had a question going in. There are very high priced relative to the general bed-in-a-box industry and our sales have gone much better than expected in terms of Q1. But we're early on. We only launched them in the second week of February. And we've continued down the path like we always do of test, refine and scale, and we continue to refine. So I can't really tell you exactly where it's going to end up but I am encouraged by the results.

Great. Then just trying to get a better understanding of how you're thinking about growth as we move through the year. I know you're not getting into specific numbers on the different channels between D-to-C and wholesale. But I guess, can you help us think about what rate of growth you're now expecting out of that D-to-C channel as we move into 3Q, 4Q? It looks like you're still at least probably clocking in at a double-digit growth rate. Might you still be in the 30% or 40% range in the back half of the year? How are you thinking about that growth rate?

Yes, absolutely. The growth rate for the back half of the year is going to be somewhere in 40% to 50% growth rate. So let me just give you a little color. We would expect, as of right now, that -- we've given guidance for Q2, Q3 to be slightly higher and then the balance fall to Q4. So that should give you at least an indication, generally speaking, of what the rest of the year would look like.

Got you. And so for 4Q, if you back out the retail side of things, you think D-to-C is probably still 30% to north of there?

Yes. Absolutely. We still expect D-to-C to be the lion's share. Regardless of the rollout with Mattress Firm or other retail partners, it's going to be the lion's share for the remainder of 2018.

Great. And just on the topic of competition, the online part of the market continues to evolve at a very rapid pace, the traditional players are doing some different things. I guess, when you look at the competitive landscape. are there any particular players that you feel like are maybe putting more pressure on you or just everyone, in terms of those advertising costs in the competition?

Yes. But I'm not sure I want to give them credit. There is a handful. The biggest players and the biggest spenders frankly are the ones that put the most pressure on us, right? And so the Caspers of the world that are just spending so much money, basically the top five competitors are putting a ton of pressure and then there is a host of smaller ones. But it's really just a question of who's spending the most, and that's where we feel the pressure. Who's mimicking us in the most common way? So those that are targeting more video than not would also be putting pressure on our costs. Those that are following our strategies are the ones that we feel that pressure from.

Got you. And then just on the topic of input costs and raw materials, is that something that you're feeling the effects of, of late? Obviously, many others in the industry are seeing increases in the petrochemicals and the steel prices. What are you all seeing?

Yes, so we only have good visibility through the end of Q2, right? But for Q2 we are not seeing a significant change in any of our inputs. The biggest inputs for us that would have commodity exposure are foam, first of all, and we saw foam for us increase fairly dramatically over the course of Q2/Q3 of 2017 and then moderated and flattened out in Q4, and we've seen that continue to stay the same. Steel coils -- we're relatively new in pushing any type of volume with steel coils. We have our expenses pretty well set for the remainder of Q2 and we're not expecting any dramatic changes for steel coils or headwinds in Q2. Mineral oil, which is another major input, as you know -- we do feel a little bit of pressure there from a commodity standpoint but for Q2, we don't expect it to be a measurable impact to our cost of sales. The only other item will be textiles and that's been flat.

Great. Maybe I can squeeze in one last one for Terry that I think everybody will be interested in hearing. It's just if you have any sense of update on maybe the timing that you think you might have an announcement of a new CEO.

Brad, I just can't outguess the process. I really would like to have some guidance. It's very active right now and we will keep everyone informed. But there is just no way to put a hard schedule or even a decent guess on that. (multiple speakers)

Well, I appreciate you letting me ask anyway. Sounds good.

It is going well. I mean, I'm seeing results. I just -- we're not to a point where we can say we think it will be 20 days or 50 days or any number.

That's great. All right, well thank you guys so much.

Peter Keith, Piper Jaffray.

Good afternoon, guys. It's actually Bobby on for Peter. Just going back to the topline guidance, I appreciate what you guys have given so far. Is it more fair to say that lowering the guidance as you did, just a matter of getting the further clarity on the business as you're growing it out, or are there have been some things that have really changed from an operational standpoint? If you could touch on it over the past couple of months. Thank you.

You bet. So nothing major in terms of the operations. We do have the new mattress models and that has caused us to take a look at the conversion rates. Like I mentioned, we'll continue to refine the model around how we sell those. But overall, our marketing is what's driving this business and we're choosing to operate in a profitable fashion, as the dynamics of the industry and the competitive landscape are changing. It's really that drive to breakeven or positive growth so that we can sustain this business that's driving it and we're just adapting to the conditions.

But overall, we're really pleased with what we've been able to do in the last quarter. From an operational standpoint, from a manufacturing standpoint, yes we've had challenges. You'll recall we had challenges with our white glove delivery service. We are working through all those kinks. I'm very encouraged by the progress we're making.

We're a new business. We've only been around 2.5 years in its current form and there's a lot of growing pains when you're growing this fast. But we're getting the operations in place, we're getting the marketing dialed and we're getting our ability to forecast out as well.

All right, great. I appreciate it. And just also quickly around advertising, I remember like last quarter, that the total ship be based on your manufacturing capacity and the backlogs that you're having. So how is that kind of settling out right now, just the timing of getting ad spend and capacity on the same page?

Yes, so, let me just address capacity and then I'll talk to the shipping. So capacity we are doing extremely well. We brought on an additional max machine that's firing on all cylinders right now. And we have plans to continue their expansion throughout this year to make sure that we have the capacity we need as we grow, and that we can capitalize on opportunities and changes in the environment.

In terms of shipping, we do have what I would term a backlog but it's not a backlog from a capacity standpoint. It's a backlog from the ability to get the white glove delivery service from that time of transaction all the way into the consumers' hands. And we were struggling. We had a lot of growing pains in terms of bringing on that third-party delivery service but that is improving.

We did have a "backlog" from a delivery standpoint at the end of March in the neighborhood of $7 million, which you can see on our financial statements. That's up from $3.2 million as of December 31, so effectively there was a roughly $4 million loss of sales in the period from that. But as you look out into the future, we do expect that we will continue to have a rolling impact and not necessarily pick up in Q2 that $4 million. Anywhere from a 5 to 14-day delivery timeline of those sales of those new models from when we actually make the sale.

But we're encouraged by what's happening from a shipping standpoint. We are making improvements and we still will. One of the big issues was the flat packing, just due to the modifications and getting the new mattress models rolled. We've resolved that. We're now shipping all rolled models, which makes everything easier. It makes the trucking from us to our third party more efficient. It makes the delivery easier for the delivery partners. So that's now going well but we did have some serious growing pains.

All right. Great. Thank you and good luck.

Thank you. Ladies and gentlemen, I would now like to turn the call back to management for closing comments.

I just want to point out, as Mark said, we still have our mid- and long-term guidance the same as it was. We are reducing the short-term guidance but that doesn't mean Purple is on the ropes. Purple is growing. It's thriving. It's very healthy. We are doing the right things to keep Purple on track and we feel our investors out there and we want to support everything it takes to make Purple as successful as we hope to be.

So mid and long term, we're still on track. Short term we did change the guidance, but we're still working to EBITDA -- we're growing as fast as we can without getting EBITDA negative. So I guess we're shooting for no EBITDA. But that's a very big step ahead of most of our competition right now and it makes us healthy as long as we don't lose money.

So thank you all for joining. We appreciate your time.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.