Transcript
Thank you, operator, and good afternoon, everyone. By now, you should all have access to our fiscal third 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 in circumstances that are difficult to predict, many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in these forward-looking statements. Our presentation today also includes certain non-GAAP financial measures, including adjusted net income and EPS, as supplemental measures of performance of our business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation tables and other important information in the earnings press release and Form 8-K, which we furnished to the SEC this afternoon. 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 forward-looking statements. With that, I would now like to turn the call over to iPower's Chairman and CEO, Mr. Lawrence Tan.
Thank you, Kevin, and good afternoon, everyone. We achieved strong financial results in our fiscal third quarter as we generated double-digit revenue growth, record gross margins and improved operating leverage, resulting in our return to profitability. We are also gaining momentum in our super suite supply chain business, which contributed to our top line growth in the quarter and now accounts for approximately 10% of the total revenue. In fiscal Q3, our largest channel partner returned to a normalized inventory position and purchasing cycle, which led to stronger order volumes during the quarter. We are pleased with the demand from our largest channel partner and will ensure our product catalog is stocked with the high-quality offerings that our customers expect. Our super suite business, as we have often stated, provides us with valuable insights that we can utilize to enhance our internal capabilities. The acceleration of revenue reflects the value we provide through our superior supply chain, performance and merchandising expertise. We will continue to invest in this new business as we work through our robust pipeline of prospective partnerships, and believe this business will continue to take a greater share of revenue mix going forward. We have always placed a strong emphasis on diversifying revenue demonstrated by the launch of super suite last fiscal year. We have also deepened our online presence with social e-commerce platforms like TikTok Shop, where we continue to see solid growth. In April, we expanded our sales channels by launching on Tmall and have seen promising early results in the kitchen and pet categories. Over the last couple of years, we have purposely shifted our focus from hydroponics to prioritize our core competence as a data-driven consumer products and services company. More recently, we've begun to wind down our legacy commercial hydroponics business where we sold directly to local commercial distributors. We are working through the remaining inventory now and expect to sunset this channel altogether in the coming months. Turning to OpEx. We continue to benefit from our internal initiatives to drive savings in our selling and performance operations. With a healthier supply chain environment, we are no longer required to hold high levels of inventory as we have returned to normalized lead times. We have also sold through most of our high-cost inventory, enabling us to eliminate short-term warehousing costs and improve margins. As of March 31, we further reduced our inventory level by 25% compared to December 31, 2023. We are also in the early stages of benefiting from third-party warehouse staffing and expect to realize additional savings in the future. Looking ahead, we are well-positioned to close out fiscal 2024 on a strong footing between the strong demand from our largest channel partner, accelerating growth in super suite, and expansion into new e-commerce channels such as Tmall.
Thank you, Lawrence. Unless referenced otherwise, all variance commentary is in comparison to the prior year quarter. So let me dive into our fiscal Q3 results. Total revenue increased 15% to $23.3 million, compared to $20.2 million. The increase was primarily driven by greater product sales to our largest channel partner, in addition to growth in our super suite supply chain offerings. Gross profit in the third fiscal quarter of 2024 increased 41% to $10.9 million, compared to $7.8 million in the same quarter of fiscal 2023. As a percentage of revenue, gross margin increased 850 basis points to a record 47%, compared to 38.5% in the year-ago quarter. The increase in gross margin was primarily driven by improved pricing through our key supplier negotiations, as well as favorable product mix. Total operating expenses for fiscal Q3 were $9.3 million, compared to $9.6 million for the same period in fiscal 2023. As a percentage of revenue, operating expenses improved 740 basis points to 40.1%, compared to 47.5% in the year-ago period, reflecting the operating leverage in our business as well as lower selling and fulfillment costs resulting from, among other things, some vendor credits. Net income attributable to iPower in fiscal third quarter improved to $1 million or $0.03 per share, compared to a net loss of $1.5 million or a loss of $0.05 per share for the same period in fiscal 2023. Adjusted net income attributable to iPower, which excludes legal fees for arbitration, net of tax impact, improved to $1.6 million or $0.05 per share, compared to an adjusted net loss of $1.4 million or a loss of $0.05 per share in the same period in 2023. Moving to the balance sheet. Cash and cash equivalents were $2.7 million as of March 31, 2024, compared to $3.7 million at June 30, 2023. Total debt stood at $6 million, compared to $11.8 million as of June 30, 2023. The decrease was driven by our continued efforts to pay down debt, which resulted in a 59% reduction in net debt to $3.3 million, compared to $8.1 million of net debt as of June 30, 2023. Cash flow from operations was essentially neutral in fiscal Q3, largely driven by an increase in our direct import business with Amazon, which carries both higher operating margins but slightly longer payment terms. To summarize, we are beginning to realize the benefits of less high-cost inventory and internal optimization efforts, which drove our record gross margin and improved operating leverage for the quarter. We also continued to strengthen our balance sheet by reducing net debt by nearly 60% during the quarter compared to June 30, 2023. And as Lawrence touched on, we've got multiple initiatives in place to drive further growth as we look to fiscal Q4 and the year ahead. This concludes our prepared remarks, and we'll now open it up for questions.
Our first question will come from Scott Fortune with ROTH MKM.
Congratulations on the strong quarter. It appears that much of this strength is linked to the robust orders, particularly from your largest channel partner, as they have shifted back to a more normalized inventory purchasing cycle. Looking ahead, how should we assess this trend? Can we rely on historical growth rates from previous years as we move forward with this partner? Additionally, could you highlight which products or industries are significantly contributing to this growth with your large channel partner? It seems that consumer demand for your products remains strong, but what insights does your partner provide about expectations for the remainder of the year?
Lawrence, why don't you take the second part of the question, the products and kind of the overall demand, and I can talk a little bit about kind of what this means kind of going forward?
Sure. The largest channel partners have recently faced challenges similar to ours, dealing with high costs and overstocked inventory. However, we have adapted more swiftly than the industry as a whole, and our partners have performed better than other larger channels. Looking ahead, I believe we are returning to a stable and healthy state of replenishment. Our focus on consumer products, which are resilient to economic fluctuations, suggests that demand will continue to grow. Even as we worked to recover from overstock issues, we observed that demand remained strong. I foresee this trend continuing into the future. With the introduction of our super suite, we plan to expand our network of supply chain partners to offer valuable products to consumers, positioning us well for future success.
Scott, regarding how this quarter compares to previous ones, I want to remind everyone that we don’t provide specific guidance. However, I would mention that the order rates from our largest channel partner in the December quarter reflected their inventory management, which was likely more significant than we expected. We anticipated some rebound this quarter, and we did see that. There’s a mix of historical trends and some caution on our part to ensure we’re not experiencing a surge in demand from that channel partner as they may have brought in some extra demand for this quarter. I believe Lawrence is correct; we have several additional opportunities to collaborate with partners on the super suite side, using that large channel partner as a sales avenue for them. It's still early in this quarter, but we’re feeling very optimistic about our direction. I hope that provides enough context for you to adjust your model, and I’m happy to discuss further if you have more questions.
I appreciate the information. Following up on that, the suite of services now represents about 10% of the business. Are you expanding your current partnerships, or has this growth primarily come from the new food industry partners you've onboarded? Can you walk us through your partnerships and the capacity growth without significantly increasing expenses so that you can continue to support new partners and drive gross margins? Also, can you remind us about the gross margins in the service side of the business and whether they are improving, contributing to overall gross margin enhancement? More details on the service suite would be appreciated.
All right. So there were a lot of questions there. Let me try to do a couple of them one by one. I think we've said in the past that early on, as we bring new partners on, our gross margins, in particular as we're using as our entree with a new partner the sales and fulfillment service offering, those gross margins are going to be at or even slightly below our normalized gross margins. But as we grow those individual partners, I think we can get better than our kind of historical gross margin average. And I think we were seeing some of that in this quarter. I'll let Lawrence talk a little bit about some of the kind of opportunities that we have. Most of what we're doing in the quarter was growing was growing our current partners. And so I think when I said, as these partners mature with us, we can see better than corporate average gross margins, I think you're seeing some of that show up in this quarter. I think it's important also to point out that, over the last year, in addition to working hard to bring down inventory, remove the additional cost that we had both from kind of the high freight burden but as well as kind of excess costs associated with temporary warehouse space, we were working with quite a few of our suppliers at ways of taking additional costs out of the products that were being manufactured, such that we can then bring to market products that we're carrying better gross margins. We're seeing the fruit of that as well. So I think we've been working hard on both the cost of goods sold as well as operating costs, and I think we're very pleased so far as to where we are. And we think we still have some work to do going forward. I will remind, and I think we said this on the last call too, there still is some inventory that we have, particularly in our fan business, which is strongest in the summer months, that carry higher freight cost burdens than products that we're buying now in that category. So we're going to have to bleed that through. It's not a ton, and we don't think it will materially impact gross margin, but we were not selling any of that in the January to March period. As you might expect, people aren't buying a whole lot of fans when it's cold outside. Lawrence, maybe you could touch on just the kind of potential companies that we might be working with as we bring additional partners on in the super suite business.
The super suite has emerged from our internal capabilities as an online retailer. Our logistics, software, technology, and business intelligence, developed both in-house and with external suppliers, have enabled us to establish a robust sales, merchandising, and fulfillment platform for supply chain brands. Over the past few years, we have received inquiries from partners interested in collaborating on marketing and merchandising their products. This is the foundation of the super suite. We have already begun working on several categories, including electronics and home products, and we plan to share more details with the market soon. The framework for this has been in development internally for some time, and we have several projects in the pipeline that we believe will yield positive results in the future. Regarding gross margin, it varies by product category. I expect our in-house products to continue growing and significantly drive business for a while, but the super suite has the potential to grow much faster. Therefore, we anticipate that the super suite could experience a higher growth rate compared to our in-house products. While its gross margin may not be as high, the revenue from the super suite will likely be substantially greater. That's what I foresee moving forward.
And Lawrence, real quick, just to follow up on that. You've had super suite in play here for a little while. Are you seeing the pipeline looking to accelerate? Are you having more discussions kind of further down the road on bringing on new clients to the super suite? Just kind of help us understand kind of the expansion opportunity here near term, obviously, long term, pretty good opportunity, but kind of near term, what are you seeing from those discussions?
Near term, I'm working with both the branded supply chain partner to bring on board as well as key strategic partnerships to bring on board. I tend to think that super suite is kind of like open platform where we can bring key partners into this platform and where they can bring more supply chain and brands into the platform. So that's what I see down the road and have been working on it for a while, yes.
Our next question comes from the line of Thierry Wuilloud with Water Tower Research.
Lawrence, Kevin, congratulations on the quarter. You covered quite a bit of ground, but maybe just a few questions. First, on the gross margin, is cost input like a big factor? You get better pricing or lower cost on the input for your product? Is that what I'm reading?
Kevin, you want to take this?
Okay. Yes, I heard that part now. Do you want me to take it, Lawrence, or do you want to take it?
You can take it, that's fine.
Yes, it's both. Every quarter, I try to emphasize that given the size of our catalog, including our super suite partners using our sales channel, there is a range of margins as they are not all sitting at 43%. This quarter, the mix is definitely skewed toward our higher-margin products. Additionally, there have been several initiatives over the past year with some of our largest contract manufacturing partners aimed at reducing the costs of the products they manufacture for us, enabling us to introduce products to market with a lower cost of goods sold. These efforts are beginning to show results. So it's both, Thierry.
In terms of sales channels, you mentioned you started Tmall in April, so obviously, that was not in that quarter's result. But can you give us a sense of which channels are developing the fastest besides Amazon, and if you're going to have any meaningful maybe physical channel also?
Lawrence, do you want to take that?
Yes, Tmall is a very interesting channel. They approached us, and we have been collaborating since April. So far, we’ve seen good early results. The platform focuses on providing value to consumers, which aligns well with our product category and catalog. I believe we will perform well in this channel, and it is growing quickly. On the social media front, we've also seen steady growth on TikTok Shop. While we are doing well there, the future of TikTok Shop remains uncertain. Thankfully, it is not a significant part of our business. We have the necessary infrastructure and methodology in place, and it has been performing well. Additionally, we are working on homedepot.com, lowes.com, and target.com, which have different models compared to Amazon. We collaborate with buyers and work on product selections to enhance our offerings. We are still progressing on that front. Moreover, if we succeed on the dot-coms, there might be an opportunity to enter physical stores, if that is what you were asking about.
And then maybe one last question. You mentioned that the suite business is helping you enhance your internal capabilities. I'm curious about how that's working or what that means.
As we collaborate with our partners on the super suite platform, we are also gaining valuable insights across various industry categories and improving our capabilities in data, software, and performance. We view this as an open platform where we work not just with supply chain partners but also with logistics and other technology partners. Through these collaborations, we have continuously enhanced our abilities and absorbed knowledge and expertise, which strengthens our service offerings and overall capabilities.
Okay. Thank you, everyone, for joining us today. We look forward to either speaking with you when we report our fiscal Q4 and full year results for 2024 in September, and/or seeing you or speaking with you at a conference in the interim. Thanks again, and we'll talk again soon. Bye-bye.
This concludes today's conference call. Thank you for participating. You may now disconnect.