iPower Inc. (IPW) Q4 2021 Earnings Call Transcript

Thank you for joining us for the iPower Q4 2021 Earnings Conference Call. Please note that this call may be recorded. I will now hand it over to your host, Mr. Kevin Vassily, Chief Financial Officer. You may proceed.

Yes, thanks, Valarie. Good afternoon, everyone. By now, everyone should have access to our fiscal fourth quarter and full year 2021 earnings press release, which was issued earlier today at approximately 4:05 PM Eastern Time. The release is available in the Investor Relations section of iPower's website at www.meetipower.com. This call will also be available for webcast replay on the company's website. Following management remarks, we will open the call for your questions. Before I introduce our CEO, Lawrence Tan, I would like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties as well as functions that could cause actual results to differ materially from those reflected in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any of these forward-looking statements, which are being made only at the day of this call except as required by law; the company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements. Today’s conference call will also include certain non-GAAP financial measures, including non-GAAP net income and EPS, as supplemental measures of performance of iPower's business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You will find reconciliation charts and other important information in the earnings press release and Form 8-K furnished by iPower to the SEC today. With that, I would like to turn the call over to iPower's Chairman and CEO, Lawrence Tan.

Thank you, Kevin, and good afternoon everyone. Fiscal year 2021 was a very good year for iPower, highlighted by strong revenue growth of more than 35% and gross margin expansion due to a growing mix of in-house product sales. The growing demand for our in-house products, which made up around 70% of the sales in fiscal year 2021 compared to 55% in fiscal year 2020, is a testament to our superior product research, design, and merchandising expertise. We were able to grow our proprietary product revenue over 70% in fiscal year 2021. The design and build products, where the data tells us we have real market share opportunity, were clearly the right products with the right features to address the needs of our target customers. During our fiscal fourth quarter, we utilized the growth capital raised from our IPO to make significant investments and lay the groundwork for continued growth in the coming years. This included increasing advertisements on new products launched in the second half of the fiscal year 2021, the expansion of our fulfillment infrastructure, and multiple new programs with our co-engineering and supply chain logistic partners. I am particularly pleased with our proprietary product catalog. In fiscal year 2021, we continued to introduce new proprietary SKUs into the market, most notably, roughly two-thirds of those SKU launches occurred in the last six months of this year. So we are still in the early stages of capturing the full potential. Although I'm incredibly pleased with our progress as a company, we are still in the early days of capitalizing on our unique model in the hydroponics industry. I want to give credit to our fantastic iPower staff, whose hard work and dedication allowed us to perform at a level we did this past year. We look forward to another year of strong execution ahead. I will turn the call back to our CFO, Kevin, to take us through our financial results.

Thank you, Lawrence. So diving into the financials, overall we were pleased with our fiscal fourth quarter financial performance. Total revenue was in line with our expectations and slightly up from the year-ago period at $14.7 million. Recall that our fiscal fourth quarter of 2020 benefited from heightened e-commerce demand due to the COVID-19 stay-at-home mandate, which made it a very challenging comparison for us. For the full year fiscal 2021, revenues grew 35.4% year-over-year, which is at the high end of our historical organic growth range of 25% to 35%. As we've stated in the past, we continue to emphasize selling more of our in-house brands. During the quarter, in-house products accounted for approximately 71% of sales compared to 65% in the prior year quarter. For the full year, in-house products made up approximately 70% of total sales versus 55% in the prior fiscal year, and sales of in-house products were up nearly 80% over fiscal 2020. From a channel perspective, roughly 90% of our sales were through our e-commerce and third-party partners, with the remainder being our offline wholesale business. Amazon remains far and away our largest and most important channel partner. Gross margin for the quarter was essentially flat at 44.4% compared to 44.7% in the year-ago period. Our focus on selling more in-house brands benefited margins during the quarter. As we've stated in the past, gross margins for our in-house products, on average, are around 20 to 25 percentage points higher than the third-party products that we carry. Our margins can still fluctuate based on a number of factors including sales mix, channel program mix, product input costs, and freight costs. For the full fiscal year, gross margin was 42.2%, up from 37.9% in the prior year. Total operating expenses for our fiscal fourth quarter were $6.3 million compared to $4.8 million for the same period in fiscal 2020. The increase was driven by several factors including higher merchant fees related to our channel program mix, increases in advertising, particularly around new SKUs that were launched in the second half of our fiscal year that ended in June 2021, and some catch-up spending with our co-engineering partners to accelerate our product development. We do not think operating expenses as a percentage of sales this quarter represents a new watermark for us going forward. Some of those expenses were specific to the circumstances of this quarter. Net loss in the quarter was $1.9 million or $0.08 a share, compared to net income of $1.2 million, or $0.06 per share for the same period in fiscal 2020. Non-GAAP net income, which excludes certain one-time and non-cash items, was $0.6 million or $600,000, or $0.02 per share during our fiscal fourth quarter compared to $1.2 million or $0.06 per share in the year-ago period. The decrease was driven by the higher merchant fees and increased advertising and partner spend. Moving on to the balance sheet, cash and cash equivalents were $6.5 million at the end of June 2021, compared to $1 million at the end of June in 2020. The increase is attributed to the proceeds raised from our IPO earlier this year. Net inventories were just over $13 million versus $5.7 million, and total debt was $0.7 million compared to $1.8 million in the prior year period. Before we take questions, I want to give just a quick word on guidance for fiscal 2022. As referenced in our press release earlier today, we are very comfortable with setting a baseline for growth expectations which should be at a minimum of 25% organic revenue growth for the year. However, from a margin and cost perspective, the supply chain environment remains quite volatile, particularly in and around input costs and freight costs. So we believe it's prudent to avoid forecasting specific margin targets at this point. What we can say is that we have several ways to push back against the supply chain and input cost pressures that exist in the marketplace. These include channel program mix, some bulk procurement, some of which we actually did in this last quarter, as well as larger production runs with some of our contract manufacturing partners. In addition, we will continue to emphasize a greater mix of in-house product sales and introduce new proprietary SKUs, including our own in-house developed nutrient line, which we hope to launch by the end of this calendar year. We expect all of these initiatives to provide positive benefits to margin and profitability over the course of the year. So at this point, that concludes our prepared remarks. And now we will open it up for any questions that you might have.

Our first question comes from Mike Baker of D.A. Davidson. The line is open.

Okay. Hi. Thanks, everyone. We have several questions to address. Let's begin with this one. Can you discuss your inventory levels? Your inventory is clearly increased, but many companies, even larger ones, have faced challenges in sourcing products from Asia. Did this affect your quarter in any way? Specifically, were there areas where you would have preferred higher inventory? Additionally, has this impacted the September quarter at all? With about 95% of the quarter completed, you should have some insights. Thanks.

Right. Lawrence, maybe you should take a shot at how we're dealing with supply right now?

Sure. Let me repeat the question because it was a little bit broken up. The question was regarding the logistics and supply chain; did it have an impact on our quarter four of 2021 and the September quarter that we are currently concluding? Is that correct?

Okay. Yes, you're breaking up a little bit, Mike. I think that’s right, Lawrence. I think that’s the question.

Okay, great. For the June quarter, one of the interruptions we saw is that our Amazon partner had to pull back or, as far as I remember, they had very few direct import purchase orders in April, May, and June compared to other times of the year and also historically. We believe it is due to their logistics problem. But we saw recovery in the July, August, and September quarter. So I believe the problem has been resolved for them. So we did see interruptions in Q4 of 2021. But I believe that problem has either been resolved or is mostly recovered. In terms of our own logistics and supply chain, as I mentioned before, we have an extensive manufacturer network in Southeast Asia, mostly in China. Those manufacturers have been working with us for years. We have established strong relationships, and we have good planning. We tend to work with our partners to further extend our cooperation deeper into their supply chain to mitigate and forecast the inventory needs and mitigate the risks of interruptions. So we did all that work. We don't see our supply chain having any capacity issues to supply the products. We have been able to secure sufficient transportation to get the products for ourselves. However, we are facing challenges of longer than normal transportation times as well as higher transportation costs from overseas.

Thank you. Our next question comes from Scott Fortune of ROTH Capital. Your line is open.

Thanks for taking the questions. Real quick, can you provide a channel mix kind of post-COVID and seasonality around the do-it-yourself hobbyists and tough comps coming up here in the third quarter? Also, we see a number of hydroponic competitors have seen growth here in the commercial side in the third quarter. A little color on your commercial business, if you can provide that with both segments of the channel mix here?

Right. So yes, let me take that real quick. From a mix perspective, we didn't see much change from our last quarter or the mix that we had kind of coming into the IPO. The commercial side of our business is still roughly 10%. And when I say commercial, that's offline wholesale. The rest of it is e-commerce, a combination of our website, which still remains very small and is a future opportunity for us. Our largest channel partner remains Amazon, operating at about the same percentage of sales as we have noted earlier in the year and published around the IPO. So there hasn't been much change in mix. Some areas did change. I think Lawrence referenced this in his answer to the question that Mike Baker asked, which is that within our third-party channel relationships, there are a number of different programs for each of them. The program mix definitely changed a bit. Lawrence referenced it as pertains to our largest partner. There was significantly more drop shipment from our inventory that took place in the fourth quarter than is typical. We are seeing normalization back to kind of our more traditional mix, and in fact, it might be pushing more towards doing a lot more direct import. But from a seasonality standpoint, we didn't notice anything in this quarter, and we haven't recognized any patterns that are meaningful for our first fiscal quarter of FY 2022. I think our biggest potential growth driver is our ability to have products. Looking at our balance sheet, we added considerable inventory since the end of our fiscal Q3. It was a substantial shift and a significant increase from last year. Therefore, we feel good about where we are going into the next fiscal year. Did I cover all your questions, Scott?

Yes. I appreciate the color there.

Oh, you asked — sorry, you asked about the commercial business.

Yes.

So what's the question regarding the commercial business? I was going to add a few segments on the parts that you just referenced.

Yes, why don’t you answer those first and then we can come back to the commercial wholesale business.

We are currently focused about 85% on our retail business, which primarily targets the consumer market. The challenges we are experiencing suggest that the commercial sector is experiencing some softness. We are collecting data that indicates the industry is undergoing this softening, particularly due to the significant hype that took place in the latter half of 2020 and the first half of 2021. As new opportunities arise, we remain optimistic. We primarily sell our own products, which represent over 70% of our total sales, giving us better control over our supply chain than many competitors who mainly offer third-party products. By managing our supply chain effectively during this challenging time, we have achieved success. Since our IPO in May, we've gained additional resources to work with partners and further enhance our supply chain. We have also secured a new 100,000 square foot warehouse space compared to our current total of 70,000 square feet, thus more than doubling our capacity. We recognized early in the year that space, efficiency, logistics, and supply chain management are crucial for success in the current market. This preparation enabled us to respond quickly to disruptions, such as when Amazon suspended imports in Q4; we had sufficient parts in the U.S. to meet our needs. Therefore, we've been well-prepared and have implemented operational strategies effectively to navigate these challenges. Regarding the commercial business, it is indeed softening. We are receiving industry signals and data that highlight this trend, particularly after the hype of late 2020 and early 2021, leading to a more normalized market. However, we still see many opportunities ahead.

I appreciate that. That’s great color. That's what we're hearing in the space on the commercial side softening there. But you're online, and you definitely offset that with the strengths. Just a follow-up question: you mentioned in-house products made up about 72% of sales in 2021. With 100 new SKUs coming on board here in the second half, you had a ramp-up in advertising in the second half. How can we expect in-house products to increase going forward? Can we look at it as maybe 100 basis points a quarter continuing to increase? Or do you have to maintain that ramp-up in SKUs and advertising to keep it at that level? How should we think about that cadence moving forward?

So you are asking about the mix, not margin, right?

Yes, the mix is currently at 72% for in-house products. I understand your goal is to increase that percentage, but how should we view that going forward?

Yes, I mean — right. So every quarter has its own kind of puts and takes. Our goal is definitely to continue to drive that number up. I think we are comfortable going out over the next several years wanting to get that to an 80% to 85% range. So, I don't know if it necessarily makes sense to think about it inching up by 100 basis points quarter-over-quarter. We tend to think of our business in terms of a full year. Nevertheless, there's no doubt that we will introduce a host of new proprietary SKUs over the course of the year I referenced. We have our in-house nutrient brand that will be launched, and we expect to start generating revenue by the end of this calendar year. Therefore, the direction is expected to go up. As for whether it will increase by 100 basis points a quarter, it is hard to say. We are also at the mercy of our customers, including our largest channel partner. One more thing to note is that we also see potential growth in our wholesale business sitting offline, where we still largely sell third-party products. Therefore, the penetration of our products into that part of the market still presents an opportunity to keep driving that percentage up.

Okay. That’s great.

I have a couple of things here. Yes, so we all recognize that in-house products are very important for retailers, brand owners, or distributors. At the same time, I want to emphasize that even though these have higher gross margins, the third-party products contribute significantly and are vital parts of our business. We do not overlook them, and we view them as partners. They assist us in achieving better customer experiences. Therefore, we intend to carry more and more third-party parts. You will see our in-house product growth, with new SKUs being introduced, and you will see the third-party products grow as well. Both of these areas will expand, so whether in-house products become 80%, 85%, or remain at 75% really depends on what makes sense. We already have a clear dominance where we continue to add great products, including nutrients, and we plan to do even more. Our emphasis will be on innovation and technology advancements, along with better customer satisfaction. That's how I view this. I believe, as Kevin noted, once the commercial business opens up, we won't merely sit back and watch; we will take action. There may be chances for our third-party products to experience a boost as well. In terms of the percentage, I have never set a specific objective for myself to achieve a particular in-house sales product percentage. However, we are already in a solid position, and I estimate that we will persist in growing. I cannot predict where that will end up, but it's highly likely that it will continue to rise from here, and that's my best guess.

Got it. Thank you for the detailed answers. I will jump back in the queue.

Thank you. Our next question comes from Mike Baker of D.A. Davidson. Your line is open.

In this time, I’m on a landline, so it should sound better. So I have a couple of questions, and obviously, I got cut off last time, so I'll group them together here. One, you mentioned, Kevin, that some of the costs incurred this quarter won't be ongoing or more of a one-time nature. Could you quantify that a little bit? Secondly, can you talk about the 25% plus growth you expect this fiscal year? Should we assume that, that will be more back-end loaded just given the comparisons? And, again, I don't know if you're comfortable talking about this, but the September quarter is September 27; any additional color on how we should think about growth for this quarter? Lastly, that nutrient business, can you remind us how big that is for you and what percent of that do you think could become private label? Thank you.

Okay, let me begin with the last question since it's fresh in my mind. Lawrence, please correct me if I'm mistaken, but I believe nutrients account for about 15% to 20% of our total sales, and currently, these are all third-party products. We haven't generated any revenue from in-house products yet. This presents a significant opportunity for us in terms of both revenue and margin, as the nutrient business has high gross margins. It's a natural fit with our other products. Is that mix accurate? Is it around 15% to 20%, Lawrence?

You're right. You're right.

Okay. As it pertains to cost, let me just provide a little bit of context. One of the significant quarter-to-quarter changes was the merchant account fees that we incurred with our channel partners. In this quarter, these fees were notably higher, primarily due to the program mix. I would prefer not to delve into too much detail, but as Lawrence mentioned, there were clear supply chain challenges that our largest partner faced during the period from April to June.

That's our team.

Yes, they — yes, they tend to — they have a mix of business they do with us that includes direct import from our partners overseas as well, as shipping from our inventory in our warehouse here in the U.S. We could speculate why that happened, but they were required to ship almost exclusively from our inventory in our warehouses. So, that was us drop shipping on their behalf. Hence, the programs that we supported contained some of the higher merchant account fee programs. This was likely the highest mix of that type of business we've had, which generated these higher than normal fees. We believe this won't continue as we won’t have direct imports while all shipments will be from our locations. Thus, those fees will decrease. The second item involved advertising; we had curtailed advertising for various new products launched in the first half of the year in anticipation of our IPO, but once the IPO was complete, we ramped it up quickly. We had anticipated earlier in the year that the IPO would conclude sooner. Lastly, we spent catch-up funds with our co-engineering partners, which needed to be brought back up to speed. Many of these expenses will decline going forward. The most notable change was the merchant account fees driven by program mix, and we believe it has reverted back to a more typical environment this quarter. Finally, I think you had some questions about outlook and the revenue cadence for the year. Is that right, Mike?

Yes, exactly.

Yes. I would like to avoid specific quarter-to-quarter color or commentary. But the best way to answer it is yes; we benefit from having visibility on the first three months of this fiscal year, which gives us confidence in stating our floor for growth should be 25% for this year. How it plays out exactly, I’d prefer not to speculate. But to put it simply, we are in a strong position as we wrap up this quarter, with several factors influencing our preparations for the current circumstances. It helps having inventory and being able to find products that we want availability for. Therefore, we feel good about where we are.

Okay. Thanks, Kevin. That's helpful. I appreciate it.

Sure.

Thank you. I'm showing no further questions at this time. So I'd like to turn the call back over to management for any closing remarks.

Great. I want to thank everyone for joining us today. We look forward to discussing our fiscal Q1 and the rest of the year in our next call. Thank you.

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you all for participating. You may all disconnect. Have a great day.