Transcript
Good afternoon, everyone, and thank you for participating in today's conference call to discuss iPower's Financial Results for its Fiscal Second Quarter 2024 Ended December 31, 2023. Joining us are iPower's Chairman and CEO, Mr. Lawrence Tan; and the company's CFO, Mr. Kevin Vassily. Mr. Vassily, please go ahead.
Thank you, operator, and good afternoon, everyone. By now, everyone should have access to our fiscal second quarter 2024 earnings press release, which was issued earlier today at approximately 4:05 p.m. 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. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the state of the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes and circumstances that are difficult to predict and many of which are outside our control. Our actual results and financial condition may differ materially from those indicated 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, including our annual report on Form 10-K, which was filed with the SEC on September 15, 2023. 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 would like to now turn the call over to iPower's Chairman and CEO, Mr. Lawrence Tan. Lawrence?
Thank you, Kevin, and good afternoon, everyone. In our fiscal second quarter, we continue to expand gross margin, drive down operating costs, and generated another period of positive cash flow from operations. We also gained further traction in our SuperSuite supply chain business, which represents an exciting opportunity for us as we continue to work through a robust pipeline of prospects with compelling product portfolios. Due to the improvement in the supply chain environment, our largest channel partner has progressively tightened their inventory management as shipping lead times have become more favorable. Although our order volumes were impacted for the quarter, we believe this channel partner's inventory is now at the preferred level, and we are well equipped to meet the demand with the high-quality market leading products that our customers expect. Over the past several quarters, we have placed a strong emphasis on diversifying revenue, showcased by the launch of our SuperSuite supply chain offerings. We have also created a strong brand presence on social channels like TikTok Shop, where we are an approved seller for both short-form videos and live shopping. Although the sales channel is now in its infancy, the early results are compelling, and we will continue to invest in the channel as it grows both in the U.S. and abroad. As I mentioned earlier, we are building positive momentum in our SuperSuite business, which is growing at a strong clip. The acceleration of revenue alongside a growing pipeline of prospects reflects the strength of our superior supply chain, warehousing, and merchandising expertise. We are optimistic about this area of our business and hope to have a few more partners in the coming quarters. In addition to evaluating new partners for our SuperSuite business, we have also continued to pursue additional sales channels in the U.S. to expand our reach, diversify our client base, and explore omnichannel opportunities. For example, we currently have relationships with Home Depot and Lowe's, allowing us to sell products through their captive e-commerce sites. Although we have initiated the partnership with a small subset of our categories, we believe our portfolio is well-aligned with Lowe's and Home Depot's in-store and online customer base. We are optimistic that these partnerships will bring future omnichannel opportunities, specifically in brick-and-mortar. We look forward to deepening our relationship with Lowe's, Home Depot, and other current partners as well as expanding into new channels across the United States. Turning to OpEx, we continue to drive material savings in our selling and fulfillment operations. We no longer bear the burden of additional warehousing expenses as we have sold through the bulk of our excess inventory. With the normalization of supply chain, we can run our business with lower levels of inventory, specifically due to faster overseas shipping lead times. As of December 31, we have brought down inventory levels by 23% compared to June 30, 2023. We have also begun to outsource our warehouse staffing to a third party, lowering our production overhead. We expect to realize cost savings from this initiative over the medium to long run. Looking ahead, we will continue to evaluate each segment of our business to ensure our cost structure is both lean and positioned for future growth. We are seeing early signs of normalized order volume with our largest channel partner and look forward to continuing providing them with our high-quality products. These actions, coupled with the acceleration of our SuperSuite business, will enable us to deliver on our goals with the aim of returning to profitability in 2024. 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. Unless referenced otherwise, all commentary is in comparison to the prior quarter last year, so let me dive into the fiscal Q2 results. Total revenue was $16.8 million compared to $19.3 million in the prior period last year. The decrease was driven primarily by lower promotional activity as compared to last year, given our normalized inventory level right now as well as lower order volumes from our largest channel partner who is more tightly managing inventory levels due to the improved supply chain environment and shorter lead times to receive product. This was partially offset by growth in our SuperSuite supply chain business. Gross profit in the fiscal quarter of 2024 was $7.3 million compared to $8 million in the same quarter of fiscal 2023. As a percentage of revenue, gross margin increased 220 basis points to 43.6% compared to 41.4% in the year-ago period. The increase in gross margin was primarily driven by favorable product mix as we have worked through the bulk of our higher-priced inventory. Total operating expenses for fiscal Q2 improved 18% to $9.9 million compared to $12.1 million for the same period in fiscal 2023. The decrease was primarily driven by lower selling fulfillment and marketing expenses. As Lawrence mentioned earlier, we've reduced our warehousing space now that we can keep lower levels of inventory on hand given the improved supply chain environment. The net loss attributable to iPower in the fiscal second quarter improved 42% to $1.9 million or $0.06 per share loss compared to a net loss of $3.3 million or $0.11 per share loss for the same period in fiscal 2023. The improvement in net loss was driven primarily by the higher gross margin and lower operating expenses. Moving to the balance sheet, cash and cash equivalents were $1.5 million as of December 31, 2023, compared to $3.7 million in June of 2023. Total debt stood at $5 million compared to $11.8 million as of June 30, 2023. The decrease was driven by our continued efforts to pay down debt, resulting in a 56% reduction in net debt to $3.6 million compared to $8.1 million as of June 30, 2023. And for both fiscal Q2 and year-to-date, we continue to generate positive cash flow from operations. As Lawrence mentioned above, the work we put in place to reduce our supply of high-cost inventory and optimize our cost structures continues to bear fruit as we have achieved another period of 40% plus gross margins and some meaningful OpEx savings. In addition, we reduced total debt by approximately $2 million compared to the last quarter, demonstrating our commitment to strengthening the balance sheet where we can. Between these efforts, we've built a foundation to continue to deliver on our growth objectives and profitability objectives in 2024. This concludes our prepared remarks, and we'll now open it up for questions.
Our first question will come from Scott Fortune from ROTH. Your line is open.
Good afternoon and thank you for your questions. You noted a decrease in promotional activity and tighter inventory from your largest channel partner, which resulted in lower order volumes. Was seasonality a factor in this? Additionally, where do you see us in terms of reaching normalized levels? We would like to understand your perspective on the overall health of the consumer and the ongoing trends in your non-hydroponic category. Also, regarding the do-it-yourself hydroponics segment, has that market stabilized, or are sales still declining while non-hydroponic sales are increasing as a percentage of the overall mix? Are you still investing in the hydroponic space? Lastly, can you provide updates on the significant partnerships with Lowe's and Home Depot and how those efforts are progressing? I know that's a lot to cover, but I'm looking for insight into this quarter's revenue and expectations for normalization moving forward.
Sure. Right. Yes. Go ahead, Lawrence, take the first, and then I'd like to add in after.
To address your question, the inventory levels from our channel partners have normalized. They are now at a point where we expect them to start ordering at pre-pandemic rates. While we have noticed excess inventories and conducted efforts to reduce them, I believe this quarter has successfully brought the levels down to a healthier, normalized state. Regarding hydroponics, the overall market has remained stable for us in recent years. While I don't see a decline in sales, I don’t anticipate significant expansion in the near term; it will align more closely with the broader market trends. During the pandemic, we did gain some market share, even though the entire segment experienced a decline, and we managed to maintain dollar sales. However, as our organization grows, hydroponics will increasingly represent a smaller portion of our overall business due to its slower growth compared to other areas. I hope that answers your question.
Yes. Just a follow-up on the big box partnerships you mentioned. Is that going to become more meaningful here in 2024? How do you view that?
It's still in the early days. We're making slow progress, but steady. That is the right direction. We have built relationships and we have got vendor IDs, and we've been working with multiple vendors through the online platform first. Should the online sales take off, it will naturally introduce our product into their preferred buying for their offline sales channel, meaning in stores. So it's a work in progress compared to 12 months ago, where we had nothing. Now we have sales and we have channels. I think it's making good progress.
Scott, it's Kevin. Just real quickly on your first question as it pertains to seasonality. The December quarter has historically been our weakest quarter seasonally. The reference to promotional activity was in reference to last year's December quarter. If you recall, we entered that December quarter pretty close to our peak in inventory levels. We were pretty aggressive at promoting portions of that product catalog in an effort to bring that inventory level down. So the December quarter last year was probably a little stronger than it would have otherwise been had we not been so promotional. Now that our inventory levels are back to what we think is a healthy level, we made the decision in this quarter not to promote because we are trying to make progress getting back to breakeven and profitability. I think those were the two drivers as it pertains to what happened last year and the seasonality of the business.
I appreciate that color. That's helpful. And then shifting gears, obviously, last year you rolled out the business services offering and you brought on two partners. But can you provide more of an update on the SuperSuite supply chain growth and the partnerships moving forward? I believe last quarter you were generating about $600,000 a month or about $7 million annualized in revenue run rate. Just a little additional color on the next steps or the traction of the offering by adding new partnerships and what categories are really taking more interest from that side of the business here?
Yes. Lawrence, why don't you take that as it pertains to who we're looking at and what we think could happen over the next couple of quarters?
Yes. That part of the business has been growing substantially quarter-over-quarter. For the existing partners, we've been working particularly well with many of them. I believe we'll expand our portfolio with more consumer electronics as well as some other consumer goods, including food and beverage. We have signed more supply chain agreements in the food and beverage part. I think SuperSuite is working well as planned.
Got it. Okay. And for my last question, regarding operations, you are facing higher inventory costs and inflationary pressures such as freight and warehousing. It appears these issues have been resolved now. Can we expect a steady improvement in margins? Please provide an update on what is driving the gross margins and the expected progression throughout 2024. More importantly, as you introduce higher service margins, what is the outlook for returning to profitability? Any insights on the timeline for achieving profitability in 2024?
Sure. Let me take that. We don't give specific guidance. I think we're still committed to the goal of getting to profitability in 2024. The things that we've put in place to help take expense out where we can aren't short-term fixes, but we're making progress. On one front, I'll talk about the cost of product. We've put in place a number of initiatives with some of our key contract manufacturing partners to help lower the cost of goods sold for us, which will over time provide us with even healthier gross margins. I think that's one of the areas where our experience with the supply chain and long-term relationships will allow us to improve on that front. We've never been the lowest-cost provider or the highest premium provider. We've been what we like to call the sweet spot of value for customers, which means our prices do have some room to go up if we choose to selectively do that. There are some areas where we could pursue small price increases that will help boost that gross margin line. While there's going to be variability from quarter to quarter, we still feel good about the idea that we can continue to push gross margins upward from here. Secondly, we are working on a number of other initiatives on the OpEx side that we think can help bring costs down as well. One that I think we can talk about is we've engaged with another logistics/shipping partner, where we feel we can take meaningful cost out of shipping products to customers. As the year rolls out, some of that cost savings will also take effect. I think the foundation has been laid for improvement. Some of the hard work is behind us. We have reduced the inventory, and our inventory now sits at a more normalized level. Aside from some pockets, we haven't completely cleared all of it but can handle the rest in a way that won't be hugely detrimental, and the cost of operating with that lower inventory accrues benefits to us as well. So I still think that we see profitability on the horizon. The question will be how quickly we get to that horizon, but it's there. So we're optimistic.
Thank you. I appreciate the update.
One moment for our next question. And our next question will come from the line of Thierry Wuilloud from Water Tower Research. Your line is open.
Hi. Good afternoon, gentlemen. This is Shawn Severson in for Thierry. Just had a question about the move into kind of the brick-and-mortar side. When you're talking about moving from online to retail, what are some of the criteria that you're looking at over the near term? How would that rollout look? Are there certain metrics or decisions that need to be made by the retailers, or what's the framework for a rollout there?
Once sales on particular SKUs reach a certain volume, the retailer will have the data to support their decision-making. Secondly, the product roadmap is essential, showing how well the line of products can be brought in, not just the ones that lead our way into the store. We are working on both steps simultaneously, where once the sales volume achieves a certain level, we will gain more attention, potentially leading to opportunities for those SKUs to enter the store.
Now would this be just for a limited number of stores initially? Or is this kind of going to be looking across a region or a small region or large region? How would they address the size of rollout?
It depends on specific retailers and the category manager. Usually, I think it will be a trial to a certain number of stores, and then depending on whether the product is a national product, it will go to all the stores.
Great. Thanks. And my last question is, any update on international in the quarter?
There's nothing particular. I think it's similar to what was before. There's not much that I can mention here.
Okay. Great. Thank you, gentlemen.
Thank you, Shawn.
One moment for any more questions. Looks like we have a follow-up from Scott Fortune from ROTH. Scott, your line is open. And there are no further questions in the queue. I'll turn it back to Kevin for any closing remarks.
Okay. I just want to say thank you again to everyone for joining us today. We look forward to speaking with you again next quarter or at an upcoming conference. Thanks again. Bye.
Thank you.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.