Transcript
Good afternoon everyone, and thank you for participating in today's conference call to discuss iPower's Financial Results for its Fiscal Fourth Quarter and Full Year ended June 30, 2022. Joining us today are iPower's Chairman and CEO, Mr. Lawrence Tan; and the company's CFO, Mr. Kevin Vassily. Mr. Vassily, please go ahead.
Thank you, Latif. Good afternoon, everyone. By now everyone should have access to our fiscal fourth quarter and full year 2022 earnings press release, which was issued earlier today at approximately 04:05 PM Eastern Time. The release is available in the Investor Relations section of our website at meetipower.com. This call will also be available for webcast replay on our website. Following our prepared remarks, we'll open the call for your questions. Before I introduce Lawrence, I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any forward-looking statements which are being made only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements. With that, I'd now like to turn the call over to iPower's Chairman and CEO, Lawrence Tan. Lawrence?
Thank you, Kevin. Good afternoon, everyone. Fiscal 2022 was a record year of growth and profitability for iPower, highlighted by almost a 50% increase in revenue, over 40% gross margins and a positive net income, all in excess of the guidance we issued for the year. Throughout the year, we focused on prioritizing our in-house product mix which accounted for over 80% of revenue compared to approximately 73% in fiscal 2021. More recently we have begun to strategically diversify our product offerings into categories outside hydroponics, with products such as commercial fans, shelving equipment and chairs to name a few. In fact, our non-hydroponics business nearly doubled in the fourth quarter and accounted for about half of all sales in fiscal 2022. This reflects both our ability to leverage data to identify new fast-moving product categories, as well as our ability to utilize our extensive supplier network to create products that can fill gaps in the market and bring greater value to customers. Looking back at the year, we delivered on multiple strategic initiatives, including the expansion of our business to Europe and closing our first M&A transaction. At the start of 2022, we launched our business into Europe and the UK with the completion of our first-quarter delivery for consumers abroad, which included trimming devices, air filtration systems, tents and other accessories that service the DIY hydroponics market. As we have previously mentioned, we believe the European market presents a medium to long-term opportunity for us as that market develops. During the fourth quarter, we extended our geographical reach with sales to Asia and South America as well. Although our business in these markets is nascent, we are keen on expanding our geographical presence as we are able to leverage our global supply chain expertise to effectively enter this market. We acquired global co-engineering partner DHS from China, and with the volatility in the supply chain over the last year, we relied heavily on our global partner to source consistent high-quality products in a timely manner. For that reason, we made a strategic decision to acquire 100% interest in the company. The acquisition expanded our supply chain and e-commerce capabilities with in-house product sourcing, manufacturing network management, quality assurance processes and R&D expertise. As mentioned on the last conference call, we are in the process of revamping our core image to properly showcase our business, as well as the various components that make up the iPower brand. This rebranding initiative will enable us, as well as our product portfolio, to optimize how we are perceived and positioned in the market. We expect to launch our rebrand in the coming weeks and look forward to going to market with a more consistent image and branding. Given the broader macro pressures in the market, including supply chain challenges throughout the year, and the inflationary impact on consumer wallets, I'm incredibly proud of the team for executing our plan and delivering exceptional financial results in the face of these challenging market conditions. We continue to increase our in-house product mix, expanded our geographic presence and diversified our product portfolio to include several new categories beyond hydroponics. We are excited to build on this momentum and deliver another strong year of results in fiscal 2023. I'll now turn the call over to our CFO, Kevin Vassily to take you through our financial results in more detail. Kevin?
Thanks, Lawrence. As Lawrence mentioned, our fiscal Q4 was another strong period of growth for the company. Total revenue was up 50% to $22.1 million compared to $14.7 million in the year-ago period, driven by greater demand for iPower's non-hydroponic product portfolio, including commercial fans, shelving products, chairs among other products. iPower's non-hydroponic portfolio accounted for approximately 54% of revenue in the fiscal fourth quarter compared to approximately 37% in the year-ago quarter. Gross profit in the fiscal fourth quarter increased 39% to $9.1 million compared to $6.4 million in the year-ago quarter. As a percentage of revenue, gross margin was 41.2% compared to 44.4% in the year-ago quarter, the increase in gross margin driven by both product and channel mix, as well as elevated freight costs, which were partially offset by our decision to increase purchases and add to our inventory. Total operating expenses for fiscal Q4 were $10.6 million in the quarter compared to $6.3 million for the same period in fiscal 2021. As a percentage of revenue, operating expenses were 48% compared to 42.8% in the year-ago quarter. The increase in operating expenses was primarily driven by additional warehouse selling and fulfillment costs. Net loss in the fiscal fourth quarter of 2022 was $1.3 million or $0.05 per share compared to a net loss of $1.9 million or $0.08 per share for the same period in fiscal 2021. Although our net loss improved year over year, it's worth noting that we had less direct import business with our largest channel partner during the June quarter compared to earlier in the fiscal year, which had an impact on operating margins. Moving to the balance sheet, cash and cash equivalents were $1.8 million as of June 30, 2022 compared to $6.7 million on June 30, 2021. The decrease was attributed to our strategic decision to add inventory to offset some of the supply chain risk and volatility that we have seen earlier in the year and effectively fulfill customer demand. We saw the benefit of this approach so far in July and August where we've recorded some of our strongest months of sales in company history. As of June 30, 2022, total long-term debt had been around $14.1 million compared to $500,000 in the same period ending June 30, 2021. This increase was attributed to the notes associated with the acquisition of our global engineering partner DHS, as well as the function of timing as we utilized our revolving credit facility to better manage working capital. As we look to the rest of fiscal 2023, we plan to continue driving significant growth in the business while remaining prudent with our capital allocation and expense management. That said, it's no secret that the global landscape has shifted fairly materially so far in 2022. Additional business risks driven by supply chain challenges and inflationary pressures have created a level of uncertainty in projecting exactly what our business will do in the next 12 months. We always strive to provide a useful and accurate depiction of our business each quarter. However, at this point, we have decided to hold off on providing specific financial guidance for fiscal 2023 until visibility on the macro improves. That said, we do want to be clear here that we have expectations of continuing to drive meaningful growth in the business, as well as profitability. And we think that we're in a really good position to execute on all of our growth objectives for the year. With that, we will now open the call for questions. Operator, please keep them coming.
Thank you. Our first question comes from Scott Fortune of ROTH. Your line is open, please go ahead. Scott Fortune.
Could you elaborate on the hydroponic revenue product mix, which you mentioned has reached 54%, and explain what is fueling the growth in this area? Additionally, looking ahead to fiscal 2023, can you share your expectations regarding the non-hydroponic versus hydroponic mix for the upcoming year?
Yes, Scott, we didn't quite get all of the first part of your question, but I think we got most of it. Lawrence, do you want me to take this real quick?
Yes, sure.
Yes. In response to the second part of your question, I don’t believe we can currently predict what that mix will look like. To characterize our approach to product development and extensions, I think it’s important to note that a significant portion of our non-hydroponic business stems from what we've learned in hydroponics regarding product development, merchandising, and sales execution. We identified several natural use cases for many of our products outside of hydroponics. For instance, in the ventilation segment, many products we sold for hydroponic fan applications can also be utilized for home and commercial warehouse settings. We've seen an opportunity to expand that product line beyond just wall or floor fans. The same applies to our shelving products, which were initially designed for growing projects but can be adapted for non-hydroponics applications with some modifications. As we analyze categories with growth potential, these extensions make sense to us. Given our margin profiles in both segments, they appear to be promising areas, and we’ve successfully provided products that meet customer needs in those markets. We are pleased with how well these products have performed, and we believe there are additional categories to explore, although we still anticipate significant growth in these areas as well. Does that answer your question, Scott?
Yes. No, I appreciate the color. That's really good. Obviously, you put initiatives that extend beyond the hydroponics side and that's playing out. But can you provide a little more color on the new sales channel initiatives, kind of on the hydroponic side, more specifically looking into the big box kind of partners from that standpoint JVs, kind of little bit more color as you look out to 2022 with different new sales channel initiatives coming on for you or going forward here?
Yes, Laurence, maybe you want to take that one. Go ahead.
Yes, we've been focusing on a new sales channel and I'm pleased with the progress we've made. We expect to see positive developments in these new sales channels. Regarding our hydroponics product line, we have performed well despite challenging market conditions over the past couple of years. We achieved this by capturing more market share and offering valuable products to consumers. As the hydroponics market recovers, we will not only bounce back but also introduce new products we've developed, including both hardware and software solutions. We anticipate interesting applications for our hydroponics product lines compared to our non-hydroponics offerings. These new product SKUs will be beneficial for both online and offline markets.
Yes. And Scott, one other comment on that front. So we have, as Lawrence mentioned, initiatives to develop kind of channel relationships with the big box retailers that you might expect. We can't really talk about them specifically at this point. But I think most people would recognize the people that we are engaged with and beginning to work with. One thing I think we can say is that, without mentioning names, we got our first small set of orders from a fairly well-known channel partner, that once we're in a position to announce will be recognizable by anybody who shops at these types of places. So as you know, getting into big box retail is a much different proposition than selling online. And so, we've put a fair amount of effort and work in the last six months to begin that process. And we're just starting to see the early benefits of that. And so, the way that we like to think about it is that, we achieved kind of this really, really strong growth this year without having significant additional channel partners at our disposal. So all of that is really kind of in the future for us and we're cautiously optimistic that we'll start to see some momentum in 2023.
Great. I appreciate the color, and thanks and congrats on the quarter.
Thank you.
Thank you. Our next question comes from Michael Baker of D.A. Davidson. Please go ahead, Michael Baker.
Thanks, everyone. I have a few questions. First, I understand you're not providing sales growth guidance for 2023. However, could you clarify whether July and August were your strongest sales months in terms of revenue or percentage growth? I'm trying to compare that to the fourth quarter growth of 50% against your long-term goal of 25% to 30%. How should we interpret Q1 in light of you mentioning that those were two of your strongest months ever?
Yes, that comment was about dollars. September is not over yet, so I don't want to be too specific about Q1. However, I think last September was a relatively strong quarter for us. We are likely starting fiscal 2023 in a better position than we did in the first quarter of fiscal 2022. The specific comment in the press release was regarding absolute dollar levels, which were both very strong. This strong performance was part of the reason we chose to maintain a considerable amount of inventory as we exited the June quarter, considering some of the trends we are beginning to see.
Okay. Well, So let me follow up on that inventory part of that answer. How should we think about working capital in 2023, understanding the reason to increase inventory and that is helping sales, but your net cash is way down versus a year ago? Your debt is way up, do you start to work that down now? Your receivables are pretty high, so does that working capital start to get worked down now and you start to generate some cash from that inventory or does the inventory still go up from here?
Yes, I don't think it'll go, at least in the near term, it shouldn't go up from here. I think part of what was happening for us as we kind of worked our way through the June quarter is anybody who's watching the news or reading the news knows, China was continuing to go through a fair amount of volatility relative to citywide lockdowns and there was a fair amount of concern that if we could get our hands on product to avoid any impact given that we felt we were still seeing really strong demand trends that we were going to do it. I think some of the things that have changed since the beginning of that June quarter is that, I think we're starting to see the lead times for both getting product, but also kind of shipping times go down, which means to support similar levels of sales or if we kept sales equal, our ability to kind of get product faster and turn that inventory faster improves. And so, in an ideal world we'll be able to bring that inventory level down, yet still meet sales targets that we have. So I think working capital will change, we should be in a less cash-consuming stance, probably sometime after we exit the September quarter and then we'll just have to see from there. But I think it's likely that we saw again relative to inventory turns is the high watermark for the company.
Okay. There are a couple more points to consider. While I understand you’re not providing guidance, I wanted to discuss your profitability in 2023. The EBIT margin was down this year compared to last, at 2.9% versus 5.4% previously. If I were to ask whether that will improve next year, it might seem like I'm asking for guidance, but what can you share about your operating margin? How do factors like the mix of non-hydroponic products or an increased focus overseas affect that margin? Additionally, is it correct to assume that the long-term margin will be closer to 5.4% or 2.9%? As your business evolves, will it be less profitable than it was a year ago?
No, I don't think it's changed. What has changed over the past 12 months is the lead times to receive products, which have extended. Additionally, we experienced a significant increase in freight costs during that period, which has affected our cost of goods sold. There were also some costs incurred specifically in the June quarter that were necessary to support the inventory we wanted to hold. We required temporary space beyond what our warehouses could accommodate for a short time, which added incremental expenses that we wouldn't normally have if we had our own space or didn't need to carry that inventory for that duration. As supply chains normalize, with shorter lead times for products coming from the Pacific and container costs returning to pre-pandemic levels, we anticipate a natural improvement in the business. Furthermore, the amount of business we facilitated through the direct import program with Amazon was lower in the June quarter compared to previous quarters. We are hopeful that this will improve in the future, although it's not guaranteed. If we can increase our level of participation in that program, it would positively impact our operating margins since Amazon covers many associated costs. The June quarter showed a lower number compared to prior quarters for us. Looking ahead, we believe many of the challenges faced in June can turn into advantages as we move forward through 2023.
Okay. Fair enough. That's encouraging. One more if I could, maybe more for Laurence, bigger picture to describe this new branding a little bit more. So is this sort of branding away from hydroponics or I don't know, or Zen Hydro or anything, you could flush out on that and then what's the goal of that? Well, two things. I presume that's aimed to drive more sales. So if you talk about the goals or how we measure the success of the rebranding it, and what is the cost of that going to be? It's also going to be like a big expense incurred on a marketing line or something along those lines?
Yes. Hey, the rebranding is for us to actually better present iPower as not only just a hydroponic company; we now have more lines, different brand names and different subcategories, not just hydroponics. So we want people to understand that we are beyond just a hydroponics company; we are an e-commerce company, and we also have that services capabilities. So we've been working on rebranding iPower so that we can show everybody what iPower really is and what's inside the iPower organization. The rebranding won't cost us that much as we are not reprinting logos, or even if we need to do that, it will be step by step like it won't be overall like changing all the marketing material. So that's very much controlled. But I think rebranding will make the broader public and the iPower beyond just hydroponics.
Understood. All right, thanks for all the time. Appreciate it.
Thank you.
Great. Well, thanks everyone for joining us for our year-end earnings call. We look forward to speaking with you guys again soon as we're rapidly approaching the end of our fiscal Q1. So we'll be talking to everyone again in November. Thanks again.
Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.