Owlet, Inc. Q4 FY2021 Earnings Call

Good evening. Thank you for joining today's Owlet Q4 2021 Earnings Call. My name is Tania, and I will be your moderator. I will now hand the conference over to your host, Mike Cavanaugh. Please proceed.

Good afternoon and thank you for joining us today. Earlier today, Owlet Incorporated released financial results for the quarter ended December 31, 2021, and the full year 2021. The release is currently available on the Company’s website at www.investors.owletcare.com. Kurt Workman, Owlet’s Co-Founder and Chief Executive Officer, and Kate Scolnick, Chief Financial Officer, will host this afternoon’s call. Before we get started, I would like to remind everyone that certain matters discussed in today’s conference call and/or answers that may be given to questions asked are forward-looking statements that are subject to risks and uncertainties relating to future events and/or the future financial performance of the Company. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in the Company’s most recent public filings with the U.S. Securities and Exchange Commission, including its quarterly report for the quarter ended September 30, 2021, and other reports filed with the SEC, which can be found on its website at investors.owletcare.com or on the SEC’s website at www.sec.gov. The information provided in this conference call speaks only as of today’s live call. Owlet disclaims any intention or obligation except as required by law to update or revise any information, financial projections, or other forward-looking statements, whether because of new information, future events, or otherwise. Please also note that Owlet will refer to certain non-GAAP financial information on today’s call. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures in the Company’s earnings press release, which is also available on the Company’s investor page of its website. I will now turn the call over to Kurt.

Thanks, Mike. And thank you all for joining us today for our first earnings call of the year. We're excited to share an update on the progress we've made as a business. Our Dream Sock and Dream Duo product offerings are now in the market in the U.S. and we're making great progress on our product roadmap. Additionally, we're seeing continued acceleration and adoption of our products in our international markets, and we're confident in the long-term opportunity ahead of us. First, a look back at 2021. Our team met our revenue goals through the third quarter of 2021, exceeding our full-year 2020 revenue in just the first three quarters of 2021. We did experience an unexpected development when at the beginning of the fourth quarter of 2021, Owlet received a warning letter from the FDA alleging that the heart rate and oxygen notifications on the Smart Sock and certain related marketing claims rendered the Smart Sock a medical device requiring pre-market clearance or approval from the FDA. Cooperating with the FDA's requests, we halted sales of all Smart Sock products in the U.S. in October of 2021. From there, in just about 90 days, we developed and launched a new product while focusing on deepening our retail customer relationships to effectively manage the product transition during the holiday season. The efforts of our team here at Owlet speak to our dedication to our mission of supporting parents in the home, our ability to pivot quickly, and the breadth of our technology platform. Over the course of the fourth quarter, we've already accomplished a lot to get Owlet back on track and deliver our truly connected ecosystem for today's parents. We kicked off 2022 by launching the brand new Dream product line in the U.S. on January 5, a major milestone for our team as we continue forward following the FDA letter. This includes the Dream Sock and Dream Duo, which consists of the Dream Sock and Owlet Cam as a bundle. The Dream Duo and Dream Sock monitor babies while they sleep. They help parents understand their little ones' sleep and know when to assist their baby for better sleep, empowering parents with information and insights to support better sleep. The Dream Duo is our most intelligent monitoring system yet. Let me characterize the first few weeks of the Dream Sock and Dream Duo launch. On Owlet online, January 5 and January 6 were our best non-promotional sales days ever. Additionally, all retailers that previously carried the Dream Sock are now selling the Dream Sock line. Our retail rollout is still in progress, and we are pleased with the initial results, both in terms of demand and customer feedback. We'll report back at our next call on the results as we need some additional time to be thoughtful about the outlook for 2022. Outside of the U.S., we continue our international product expansion. International revenue grew by over 100% from 2020 to 2021. Owlet products are now available in 16 countries, with additional launches coming in 2022. In Germany, we just received the news that 91 out of 100 midwives would recommend the Smart Sock. We are excited about recommendations like these as well as continued product adoption around the world. In regards to an update on U.S. regulatory matters, our ongoing conversations with the FDA center around three areas. First, ensuring that the Dream products are not intended for use as medical devices, which could make them subject to FDA pre-market clearance or approval. Second, working toward gaining FDA pre-market authorization on the heart rate and oxygen notification features previously in the Smart Sock product line. And finally, similar to the second point, continuing to pursue the development of a prescription-only sock for babies who need medical monitoring at home. Medical devices are an important strategic focus and area of investment for Owlet, both domestically and internationally. In regards to an international update, we recently received our ISO 13485 and MDSAP certificates as we work towards submitting medical device applications for the Smart Sock in the UK, the European Union, and Canada. We have a robust product roadmap as well. We plan to launch a new version of the Owlet Cam later this year and are also working to grow our sleepwear product line. In Q4 of 2021, we launched the Owlet Sleeper, a wearable blanket, and in 2022, we plan to expand that sleepwear line. We also continue to work on expanding our sleep ecosystem, including a smart crib. We will share more on our roadmap and continued research and development in future updates. From continuing to grow the Dream product line to building out new parts of the ecosystem and continued international expansion, we are optimistic about the opportunities ahead for Owlet. I'll now turn the time over to Kate for a review of the financials from Q4 and the full year 2021.

Thank you and good afternoon, everyone. As Kurt outlined, for the first three quarters of 2021, Owlet demonstrated great momentum towards our operational and financial goals. In the fourth quarter, following the receipt of the Warning Letter from the FDA, the company chose to halt sales of all Smart Sock products in the U.S. and accept returns from U.S. retailers. As a result, for the fourth quarter and year ended 2021, the company recorded a contra revenue adjustment of $23.2 million for received and anticipated returns on the Owlet Smart Sock and Owlet Monitor Duo products. Return estimates were developed in partnership with our retailers, and we do not anticipate material return adjustments for the Smart Sock in the U.S. in future periods. Q4 product gross billings before promotions and reserves were approximately $11 million, a portion of which included initial shipments of Dream products. We define gross billings as amounts invoiced to customers. It does not include the impact of adjustments such as promotions, discounts, and other allowances. The cessation of U.S. Smart Sock and Duo sales and product returns, however, resulted in total net negative revenues of $2.5 million for the fourth quarter of 2021. Q4 cost of goods sold was $3.5 million, including a benefit of $8.2 million related to product returns, and gross profit was negative $6 million. Operating expenses for the fourth quarter of 2021 were $27.3 million compared to $13.5 million for the same period in 2020. The increase in year-over-year operating expenses was primarily for planned increases in spending associated with the scaling of the business and higher marketing spend. Operating loss and net loss for the fourth quarter of 2021 were $33.3 million and $24.1 million respectively as compared with a $3.4 million operating loss and $5.8 million net loss for the same period in 2020. EBITDA loss for the fourth quarter of 2021 was $23.3 million compared to an EBITDA loss of $5.2 million for the same period in 2020. Adjusted EBITDA loss for the fourth quarter of 2021 was $31.3 million compared to adjusted EBITDA loss of $2.4 million for the same period in 2020. As for our balance sheet, cash and cash equivalents as of December 31, 2021 were approximately $95 million. Related to the product returns in Q4 as of December 31, 2021, the company has recorded a $6.7 million asset within prepaid expenses and other current assets for inventory expected to be received, but not yet returned, $1.4 million for inventory that has been returned as of December 31, 2021, and $20.1 million for accrued returns for liabilities. Given that the company began planning for product returns with U.S. retailers late in the fourth quarter, we received little inventory as of year-end and did not begin receiving any product returns in earnest until mid-January to early February, with unique transportation arrangements and timing for each retailer. We are actively in the process of reworking product inventory as it is received. To date, we have received a little over half of the expected product returns. To reiterate, return estimates were developed in partnership with our retailers, and we do not anticipate material return adjustments in future periods for the Smart Sock in the U.S. We do expect additional period costs such as rework to be expensed as incurred. Some selected full year 2021 financial highlights include $75.8 million in revenue, an increase of $0.4 million from $75.4 million for the full year 2020. The $23.9 million year-over-year increase during the first nine months of 2021 was substantially offset by net contra revenue in the fourth quarter of 2021. Cost of goods sold was $40.8 million, including a benefit of $8.2 million related to product returns in Q4, $35.1 million in gross profit and gross margin of 46.2%. On a year-over-year basis, margins declined 140 basis points. Primary year-over-year drivers include approximately 190 basis points due to inflationary headwinds, including increased transportation and material costs over 2020. Approximately 150 basis points of the impact was attributable to higher product returns in Q4 2021, partially offset by a benefit of 170 basis points for lower warranty expense. Operating expenses were $90.9 million compared to $42.9 million for the same period in 2020. The increase in year-over-year operating expenses was for planned increases in spending associated with the scaling of the business, increased marketing spend, and expenses related to the merger. Operating loss and net loss for the full year 2021 were $55.8 million and $71.7 million respectively as compared with a $7 million operating loss and a $10.5 million net loss for the same period in 2020. EBITDA loss for the full year 2021 was $42.7 million compared to an EBITDA loss of $8.2 million for the same period in 2020. Adjusted EBITDA loss for the full year 2021 was $45.2 million compared to an adjusted EBITDA loss of $4.6 million for the same period in 2020. Overall, 2021 was a significant year for Owlet. Q4 2021 presented unexpected business and financial challenges. In a short period of time, we've worked hard to ensure we are able to position Owlet for long-term success to support parents around the world with connected nursery technology solutions. Owlet's long-term objectives remain intact and our business goals for 2022 include increasing our connected nursery market penetration, targeting investment in product innovation to expand the lifetime value of our customers, and focusing on obtaining marketing authorizations in the U.S. and key global markets where required. As we start off 2022, Q1 is an important transitional product quarter in the U.S. for Owlet. We started shipments of our Dream product line in late December for initial selling to our U.S. retailers and our product launch in early January on Owlet online. Quarter to date feedback from retailers and customers has been positive, and we are meeting our initial internal expectations in the marketplace. All of our major U.S. retailers have the Dream product line available online, and many have the Dream product line in their stores. We anticipate all major U.S. retailers will have the Dream product line fully available online and in stores by the end of Q1. Year-to-date, gross billings before promotions and reserves for January and February 2022, are slightly higher than the same time period in 2021. After a very strong international expansion year in 2021, our international business has had a strong start to Q1. We are excited to continue our international growth plans in EMEA with new regions planned to be launched in 2022. In terms of operating expenses, we are continuing to manage variable spend and where possible finding opportunities to mitigate inflationary pressures, and we have sufficient liquidity to support our business. In summary, Q1 will be our step towards building a stronger global business in 2022 and beyond. Because the Dream product line is new, I'm rapidly ramping up across our go-to-market channels online and in stores over the course of Q1, and Owlet is actively in the process of receiving and reworking product inventory. We are not providing guidance for 2022 financial expectations at this time. We anticipate providing an updated outlook when reporting first quarter 2022 results.

The first question is from Charles Rhyee with Cowen. Your line is open.

Hey guys, this is Gwen on for Charles. Thanks for taking the question. So your directional commentary is just 1Q billing to be slightly higher than the '21 rate, but kind of adjusting for the Contra revenue account, it seems like you already did around $20 million in revenue in 4Q, even with the Smart Sock being only out for a month or so. So how much is the seasonality a factor in the 1Q directional commentary and when you say slightly higher, can you kind of give a rough range or magnitude of what that means? Is it low single digits, mid-single digits, anything around that would be really helpful.

Yeah. Thanks for your question, Gwen. I think we were just trying to give some really high-level directional commentary. We're not providing full guidance but just wanted to give some overall idea of how we're seeing things with the new product in the market just being in there over the last few weeks. As we mentioned, most of our channels are open in terms of being online and a number of our retail partners are in the process of getting our product in stores too. So it's not really an apples-to-apples comparison. And so we're going to wait and update when we're ready to, with a full Q1.

Got it. Okay. Thank you.

Thank you. The next question is from the line of Jim Suva with Citigroup. Your line is open.

Thank you. And I have a few questions, but I'll just ask them one at a time. The first one's probably for Kurt. Kurt, in your prepared comments, you mentioned about some accessories or auxiliary items coming out. Just so we can get a sense on it. Are these also going to be in the wellness where they'll give feedback to the user, or are they just kind of more auxiliary to add on, but it's the Smart Sock and the camera that gives the primary feedback of wellness to the user?

Yeah. Good question. Thanks, Jim. When we talk about accessories, we're primarily talking about non-smart accessories, for example, our sleepwear line, the new Owlet Sleeper that we launched in Q4. We have some other exciting updates to that line coming this year. It's actually a pretty big category for parents, and Owlet has some significant innovation that's going to improve on that, and it will work with the Smart Sock. So there's some integrations there. We also talked about the Smart Crib that we're working on. So the camera, the Sock, and the Smart Crib will all work together with our Dream app in one ecosystem. And that's in development as well.

Okay. So it sounds like the Smart Crib indeed is smart and will give feedback, and the other ones are more accessories and kind of non-feedback items. Is that the way to think about it?

That's right. Yeah.

Okay, great. And then a question for Kate, probably more of a CFO financial question. I know with the reversal that you had with revenues, does that make it so Q4 sell-in of new products was basically you take the minus negative revenues of $2.5 million and then you add in addition to that to $23.2 million, so you get like $25.7 million of adjusted sell-in of new products, or because it's such an abnormal quarter, there are more moving parts and more variables like other countries still selling some of the products we shouldn't even rely on or even use that as a guidepost?

Yes, it's definitely the latter. So the gross billings numbers that we mentioned, what I would say if I had to characterize it is the first few weeks of the quarter, before we stopped selling in the U.S., the Smart Sock products. It would also be international as well as Cam. And then we also said that we had a bit of Dream product that sold at the very end of Q4, right? So that's the activity that you see in Q4. And then there's a number of adjustments that take place like as you would naturally have in a quarter. So I would kind of keep that activity very separate from the adjustment that we made for the contra revenue, which really more so reflects a lot of the product that the U.S. retailers had already prior to the warning letter. So, the better place to watch for the contra revenue return is on the balance sheet. So we set on the product returns, where we have some of that material in the prepaid expenses, some of it got a teeny bit back in inventory, and then most of it is in the accrued returns for liabilities. That will be reworking. We're waiting to receive back that inventory. We said to date in Q1, we've received back a little bit over half of that. And so we'll be reworking that, and as that product is sold, we'll be incurring a little bit of cost.

Okay, Kate, my last question is about the gross billings number you mentioned in your prepared comments. Is this a figure we can rely on? I understand it reflects new products, but I assume it includes sales to the channel rather than sales through the channel. You probably need to rebuild some channel inventory and have products on the shelves, right? Should I think of the billings number as indicative of actual sales and sales through, or is there more to consider?

I would consider it that we define that as what we've invoiced the customers. So that's just a very early indication. And it doesn't include any adjustments, promotions, discounts, allowances, or any of the sell-through data.

Okay. Would it be a little bit higher than normal? Is it a little bit higher than normal since you kind of have to replenish all the new products on the shelves?

I wouldn't characterize it either way. We just wanted to give it as a data point.

Okay. Thanks, Kate, and Kurt, for the details. It's appreciated.

Thanks, Jim.

Thank you, Mr. Suva. The next question is from John Babcock with Bank of America. Your line is open.

Hey good evening guys. Just want to quickly follow up on that last question. First of all, is there any way you might be able to provide more directly a kind of revenue figure for the quarter excluding the contra number? And then also, if you could talk about gross margin where that came out on the products sold. I just overall want to get some sense as to, directionally, where the gross margin is headed.

Yeah, thanks, John. So the way that the accounting works, we have to provide a net revenue number, which came out after the gross billings and the adjustments as a negative number. So I can't provide you with a separate exercise to the gross billings. And then in terms of the margin, I also don't have that either because we have to net out all the activity. So, given that the revenue was negative, I don't have a gross margin number for you.

Got you. And then on just actually one more kind of clarification question here, just on the international sales, you mentioned over a 100% growth there. Could you be a little bit more specific on that?

Chris, do you want to comment on that?

Do you mean international percent growth means?

Yeah, a little over 100%. Yeah. Is that like a 110%, 120%, 150%?

We didn't break out overall international sales for the year or for this quarter, just given all the activity that we've gone through in Q4 and for the year. But I would say we had really strong momentum going into the end of the year. And, we think that we have very strong momentum going into '22 as well as we continue to expand into other international markets.

Okay. And now just through some kind of well, I was one more kind of semi-specific broader question, just did you lose any retailers as part of the FDA's actions or are you still serving all the retailers that you were serving before that announcement was made?

Yeah, that's a good question. I would call out our team for the great work they did to build those customer relationships through a really difficult time. We did not lose any retailers, and we did not lose any doors. So we’ll be with all of the same retailers in all of the same doors we had with the Smart Sock, and the team is working on expanding those doors this year.

Okay. And then on the international expansion, it sounds like overall that's continuing to go pretty well. Could you just talk about the rollout across the different countries that you were adding during the quarter? I thought I remembered you mentioned the next countries you're expanding to were Italy, Spain, Belgium, and the Netherlands. How is that rollout going and also talk about Latin America and Asia in your press release. If you could just kind of provide a little bit more detail on overall, that would be helpful.

Yeah. It's really a bright spot for the business right now. We're seeing that this global thesis that parents everywhere need access to this type of information and data is true. The adoption in each of the countries that we've rolled out has been surprisingly good. We launched at the beginning part of last year in the Nordics. We then moved into Germany, France. We've now been working on opening up Italy, Spain, Belgium, the Netherlands, and the Eastern part of Europe. And we're seeing great results. One of the things I shared is that we got the certificate from the midwife group in Germany. This is the group that reviews all baby products there and gives their stamp of approval. And 91% of midwives that use Owlet recommended the product. We're seeing in the UK and Germany and Nordics. The sell-through data is very positive. So we're really proud of the results the team has been driving in that area. We just started opening up South America and we're working towards expansion to Asia this year.

Okay. Thanks for that. And then I guess just two other quick questions. Just on the FDA approval of the OTC sock, can you just remind us of kind of the timeline for that? Has that changed at all?

Yeah. So getting clearance on that OTC sock is a top priority for Owlet. I think the biggest influence we have on timelines is to make sure that our submission has all the information the FDA wants to see. So that's where our focus is right now. We've had numerous meetings and phone calls with the agency over the last few months and are working to make sure that the submission contains everything that they want. We feel good about the technology that we have, and we're not making any assertions on timelines right now because we can't predict the FDA, but we do feel like we're making good progress.

Okay. And then just lastly, just on your products, if you can just kind of talk about the crib, when you expect that to be out in the market and any other kind of commentary on just kind of new products overall.

Yeah, I think the crib and some of the accessory products we're working on are really exciting. We recently had some prototypes in the office of the crib. It was great to see the response from parents on those prototypes. We've received really positive feedback on our consumer surveys, and so the products are in development right now. We haven't announced a date for it yet, but we do feel like it's going to be a really strong part of the ecosystem. The integrations with the Sock and the camera are going to take parenting to the next level. They're going to give parents hours and hours of sleep to have that peace of mind. So we're excited about it. We should have more of an update on the next call.

Okay, great. Thank you, Kurt. Thank you, Kate.

Thank you. Thank you, Mr. Babcock. There are no additional questions waiting at this time. I'll now turn the conference over to Kate for any closing remarks.

Kurt, I'll turn it over to you for any closing remarks.

I would just kind of reiterate the four big growth areas for Owlet. I'm really proud of the team for launching Dream Sock and Dream Duo. We've always had phenomenal feedback from parents. We know it's making a difference in their lives. 82% of parents report getting less than five hours of sleep at night. So anything we can do to help parents sleep better feel more secure, feel more confident in their parenting journey is what our mission is all about. Having that product back on the market and having the support from the retailers we have is great for the business and it's great for families. We're expanding our product ecosystem and are really excited about the crib. We're excited about the foundation of sleep that's going to really glue the ecosystem together and then taking that to the next level with some of the medical clearances and expansion internationally. So I really appreciate everybody joining the call today and I'm excited to continue to build the company.

That concludes the Owlet Q4 2021 earnings call. Thank you for your participation. You may now disconnect your line.