Owlet, Inc. Q4 FY2023 Earnings Call

Hello, everyone. Thank you for attending today's Owlet Fourth Quarter 2023 Earnings Call. My name is Sierra, and I will be your moderator for today. All lines will be muted during the prepared remarks from our management team with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Mike Cavanaugh, Investor Relations.

Thank you, operator, and good afternoon, everyone, and thank you for joining us today for Owlet Baby Care's fourth quarter 2023 earnings call. We appreciate your time and interest in our company. Earlier today, Owlet released financial results for the quarter full year ended December 31, 2023. The release is currently available on the Company's website at www.investors.owletcare.com. Our speakers for today's call are Kurt Workman, Owlet's Co-Founder and Chief Executive Officer; and Kate Scolnick, our Chief Financial Officer. Kurt will begin with an overview of our performance and key developments, followed by Kate, who will provide a detailed review of our financial results. Following their remarks, we will open the call for your questions. Before we get started, we'd like to remind participants that today's discussion will contain forward-looking statements based on current expectations. These statements are only predictions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, but are not limited to, those described in our most recent filings with the SEC and in the Risk Factors section of our annual report in Form 10-K for the fiscal year ended December 31, 2023. Please note that the company assumes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. With that, I would now like to turn the call over to our CEO, Kurt Workman.

Good afternoon, everyone, and thank you for joining Owlet's earnings call. 2023 was a transformative year for Owlet. We set out with three key goals: secure FDA clearances, achieve adjusted EBITDA near breakeven exiting 2023 and revitalize our channel health. I'm incredibly pleased to announce that we achieved all three. These accomplishments are a testament to our team's dedication, the strength of our product portfolio, and the large community of parents, health professionals, and partners that believe deeply in the importance and mission of Owlet. Most importantly though, these achievements position Owlet for substantial growth in 2024. Now let me talk about each. Our recent FDA clearance was a pivotal moment for the business and by launching BabySat and Dream Sock with medical-grade features, we redefined consumer health monitoring and redesigned the market for Owlet. Let me explain why this is so significant. First, it removes purchasing obstacles. FDA clearance addressed the key customer concerns around regulatory status and the efficacy of our products. Specifically for Dream Sock, we added features such as live vital sign displays and health alarms, giving medical-grade comfort to parents wishing to monitor and protect their children. And I'm excited to report that parents responded in kind in Q4, as evidenced by the doubling of our sell-through during the recent holiday period, and our Dream Sock sell-through has continued to maintain double-digit growth over prior periods. Second, it solidifies our market leadership. Owlet is now the first and only FDA-cleared baby monitor in its category, setting us apart from competitors who are basic consumer products and further distinguishing our category from traditional sound and video monitors, also allowing us to draw direct comparisons to trusted hospital-grade technology. Third, it opened the market for medical expansion. These clearances paved the way for our BabySat product to enter healthcare distribution, allowing us to improve the standard of care of monitoring for higher-risk babies. It also allows pediatricians to prescribe Owlet instead of the traditional intrusive and clunky hospital monitoring solutions that increase risk with wires going into the crib. These new channels increase our distribution, strengthen our consumer and medical brand, and improve margins. Alongside our FDA success, we've dramatically improved financial efficiency. Through a combination of strategic actions since the launch of Dream Sock in 2022, we reduced operating expenses by nearly 60%, including consolidating vendors and eliminating unnecessary costs. Over the same timeframe, we significantly reduced marketing expenses by over 70%, and we've been able to effectively maintain those marketing spend levels while still driving a 20% increase in sell-through in 2023. This was done by focusing on targeted channels on social media, specific partnerships, product satisfaction initiatives, and leveraging our credibility behind our FDA clearances. Our marketing team drove over 100 million unique video views and increased our social media following to 1.3 million parents. The sell-through growth in 2023 and significant year-over-year improvement post-FDA clearance demonstrates that we can grow without significantly increasing marketing spend. We also improved gross margins to 47% in Q4, a 1,900 basis point improvement year-over-year, and would have delivered over 50% adjusted EBITDA positive if not for the one-time impact of our former Amazon partner going out of business. The improvement in margins during the year were due to warehouse changes, improving our channel mix, PPV reduction, and the onboarding of Amazon 1P. These were significant operational achievements for our small operations team. These combined efforts of expense reduction, marketing efficiency, and margin improvement brought Owlet to adjusted EBITDA near breakeven and the most efficient operating position in our history. At the start of 2023, we focused intensely on channel health. Key channels like Amazon, Target, and Walmart saw significant reductions in weeks on hand, while sell-through improved, getting to a healthier channel position. An additional 800 Walmart doors fueled over 100% growth in sell-through year-over-year. We added distribution of our Duo 2 product to Dream Sock in all Best Buy stores and onboarded Amazon 1P. The combined sales effort helped fuel the sell-through needed to improve our channel health at retail. We also addressed imbalanced international inventory with strong sell-through in the second half, reducing weeks on hand to manageable levels. Overall, our weeks on hand are now healthy. Owlet navigated this even while overcoming the Buybuy BABY bankruptcy, where liquidation temporarily impacted other channels. Overall, across 2023, we improved weeks on hand with our retailers by over 45% from the beginning of 2023, setting us up for strong revenue growth in 2024. As we enter 2024, Owlet has the best product portfolio in the industry, strong sales momentum, healthy levels of channel inventory, scalable operations, and FDA clearance. We're now focused on rapidly expanding medical distribution, elevating our retail presence, all while maintaining our operational and financial efficiency and discipline. In addition, we're eyeing two important milestones ahead of us to further unlock growth and market access. First, European expansion. CE Medical clearance, a focus for early 2024, will propel continued European momentum and open new markets. Second, software and services. Providers are now able to use our data to better enable care at home. And Owlet will be developing software and services behind this new theme that will empower parents with new insights and better close the loop between healthcare and the home. These new services will be introduced in 2024 and begin to shape our revenue and margin story in 2025. I'm incredibly proud of our team's perseverance and the amazing work done in 2023. Our mission to empower parents fuels our dedication during challenging times. This was evident in our donation to our foundation partners of over $1.4 million worth of Dream Sock to families in need. In addition, fundraising for Switch Research, which raised over $150,000 and support for grieving parents. Owlet and our partners donated and planted over 500 trees in memory of these parents' precious little ones. We are dedicated to serving the families and communities who need Owlet the most. And I'm grateful and proud of the team that took time to give back while also pulling Owlet through very difficult times. I'm incredibly excited about the growth and opportunity we've unlocked for 2024 and beyond. I've been on this journey with Owlet and our community of over 2 million parents for over 10 years now, and I can tell you Owlet has never been in a better market position. Our time is now. Thank you. Kate, over to you for the financial highlights.

Thank you, Kurt, and thanks for everyone joining us today. In the fourth quarter of 2023, Owlet demonstrated strong financial performance. I'll spend the next few minutes walking through key financial metrics and providing some additional detail. Gross billings for the fourth quarter were $32.9 million. Product promotions and discounts were $5.9 million, and returns and allowances reserved were $5.7 million. Within this, $3.1 million was related to the transition of our business on the Amazon platform. Excluding the Amazon platform, returns and allowances were approximately 8% of gross billings within our average range. Q4 revenue, which excludes returns and sales discounts was $21 million. Gross billings for the full year 2023 were $73.2 million. Revenue, which excludes return to sales discounts was $54 million. Entering into 2023, our sell-in to distributors had outpaced sell-through to consumers, and during the course of the year our partners were able to work through their excess inventory, bringing sell-in and sell-through into a healthy balance by year-end. Q4 sell-through units were up 32% sequentially, demonstrating four consecutive quarters of sell-through growth in 2023. We ended 2023 with overall sell-through increasing 27% year-over-year at the top four retailers. Our gross margin for the fourth quarter was over 47%, a significant increase from 27.8% in the same period last year. Gross margin for the full year 2023 was 41.8%, a significant improvement over margins of 33.7% from 2022. Our strategies to expand gross margins have been multifaceted. We've been focused on improving our sales product mix and optimizing our promotional strategy. We've also been working diligently to reduce our cost of goods sold where possible, including negotiating better terms with our suppliers and improving our shipping and warehouse processes. Operating expenses in Q4 were $13 million, including stock-based compensation of $2.3 million, representing a 46% decrease from $11.1 million year-over-year. Excluding stock-based compensation, Q4 operating expenses were $10.7 million. Within these expenses, we accounted for a net $1.3 million bad debt expense regarding our former Amazon distribution partners. For the full year, operating expenses were $51.2 million, including stock-based compensation of $9.9 million, representing a 53% decrease from $56.7 million year-over-year. Excluding stock-based compensation, 2023 operating expenses were $41.3 million. The year-over-year decrease in operating expenses was primarily due to employee-related costs and marketing spend. The measurable progress towards operating profitability in 2023 is an important foundational shift for Owlet's business. Fourth quarter net loss was $6.9 million for the quarter, a 65% decrease from $19.5 million in Q4 2022. For the full year, net loss was $32.9 million, a decrease of $46.4 million year-over-year. Adjusted EBITDA loss for the fourth quarter was approximately $0.7 million, down 95% from $15.2 million year-over-year. For the full year, adjusted EBITDA loss was $16.3 million, compared to $68.3 million in 2022. In terms of our balance sheet and cash flow, we ended the year with $16.6 million in cash and cash equivalents, coupled with our recent $9 million financing announced in February, we're beginning the year with good financial flexibility to invest in our 2024 growth initiatives and the necessary working capital resources to meet growing customer demand for FDA-cleared products. We remain focused on executing our strategic initiatives to further strengthen our commercial and financial performance in 2024. With revenue growth, sustained gross margins and controlled expense management, we believe we can continue to drive shareholder value. 2024 is off to a strong start. Looking ahead, we will again refrain from providing specific quarterly guidance. We are focused on executing on the core business activities in 2024 that will maximize supporting Dream product commercialization and driving continual balance of sell-in and sell-through retail inventory. From a linearity perspective, we anticipate a seasonal sell-in step down in Q1 from Q4 and particularly with the strong Amazon 1P sales with past Q4 followed by sequentially strong sell-in Q2 for Mother's Day holiday promotions and Prime Day. Second-half sell-in for the November-December holiday promotions usually takes place in December holiday promotions. Using strides in ramping BabySat commercialization with new DME partnerships. BabySat revenue will begin ramping as we develop our important long-term DME partnerships in 2024 and align for revenue model impact in 2025. Driving gross margins within our target range of 45% to 50% through unit volume, product mix and ongoing operational efficiencies and driving our operational planning towards breakeven and sustainable profitability. We are targeting operating expenses excluding stock-based compensation between $10 million to $20 million per quarter. With that, I will turn the call over to the Q&A portion. Operator, please open up the call to questions.

Absolutely. We will now begin the Q&A session. Our first question comes from Charles Rhyee with TD Cowen.

And congratulations, guys, on the end of the year strong here. Kate or Kurt, maybe just touch on Amazon a little bit here. Obviously, the direct selling to Amazon. What's the importance of that? And why should we view this as a real significant step forward for the company?

Thank you, Charles, for the question. It's important to note that Amazon is our largest channel, accounting for nearly 30% of our revenue. This makes it a crucial channel for us. Traditionally, we've collaborated with third-party sellers on Amazon to handle logistics and compliance with Amazon's fulfillment process, and they've also assisted with some marketing efforts. As we move through 2023, we've seen an increase in Owlet's sell-through, positioning us more favorably. We had concerns about the financial strength of some partners, and then Amazon reached out to us. They typically collaborate with the top 70 brands in each category, and Owlet wasn’t one of those top brands in the baby category. So, we are very excited about this opportunity because it offers improved financial stability and margins. The unit economics through Amazon are more favorable than going through third-party distribution. We also gain additional marketing placements as part of our agreement, enhancing our visibility. All of these factors contribute to a significantly better margin profile for our business within this channel as we enter 2024. With the FDA clearances, we anticipate substantial growth in this channel.

Yes, let's start with the clearance. You are the only FDA-cleared product available in stores. Can you discuss the competitive environment? I know Massimo has a product available, and could you provide an update on what you're observing in the rest of the market?

Yes. The primary concern our customers had heading into Q4 was the confusion regarding the FDA. We were able to announce that Owlet is the first and only FDA-cleared monitor for over-the-counter use, and that remains true today. No other monitor has FDA approval for sale over-the-counter and in retail channels, which directly empowers parents with health information. This positioning opened up the bottom of the funnel. The top of the funnel has been robust, and awareness has been strong. However, there were questions about Owlet's approval and whether it was a suitable purchase for babies. In Q4, we clarified this for consumers, and they responded positively. This is why our sell-through doubled during the holiday period year-over-year, aided by our specific messaging and the related press coverage. We are excited about this opportunity. Owlet has now entered a new category as the only FDA-cleared monitor available on shelves. Our retail partners are enthusiastic and are providing Owlet with more shelf space while differentiating it from competitors. We're accomplishing this through our marketing and labeling, which is very exciting. As a result, Owlet has become the number one monitor in the category, and we anticipate this lead will continue to grow in 2024.

That's great. Let's talk about BabySat for a moment. I believe you mentioned collaborating with a direct medical equipment distributor. Can you provide us with an update on that? I think you may have already chosen one or partnered with one; could you share more details?

Yes, we announced a partnership with AdaptHealth at the beginning of January. Adapt is a nationwide distributor of medical devices with relationships with every national insurance payer in the United States and a presence in many hospitals across the country. This makes them an ideal partner for Owlet as we start selling BabySat. They are integrating with all the insurance companies and have connected with our website to ensure a seamless checkout experience for our customers. They handle all prescription and insurance verification. Their sales team, made up of hundreds of sales representatives, is now promoting Owlet to hospitals. This channel takes some time to establish, and progress can be slow, but we are very excited about this partnership. You can expect to hear about more partnerships announced every quarter this year as we expand our medical distribution, and we are particularly enthusiastic about this initial step in that direction.

Great. Sorry, I have a couple more questions. First, regarding international expansion, you entered the European market early on despite some delays. Can you provide an update on your progress with the CE mark? Once you obtain the CE mark, will it apply to an over-the-counter product or a prescription product? I'm interested in understanding the difference.

Good question. It's for an over-the-counter product. Europe is a bit different regarding the prescription over-the-counter tier for Pulse Oximetry. You can obtain medical distribution and have an over-the-counter product, but it is specifically for over-the-counter use; we will sell it through all our retail channels that we've established there. We believe this will significantly impact the expanded distribution efforts we've been working on, as well as opening up the lower part of the funnel. We've worked hard for a few years to build awareness, and we are confident this will drive additional conversion rates and more partnership opportunities. We're very close to finalizing it. We've leveraged much of the work and studies we've conducted for FDA clearances, and we feel we're in the final steps to obtaining clearance.

Great. Kate, if we examine the quarter and consider the one-time items you mentioned related to the shift to Amazon, it appears that gross margins exceeded 50% and adjusted EBITDA was positive for the quarter. I understand you’re not providing forward guidance, but could you share your thoughts on margin progression and the path to profitability?

Yes. As I said, we're looking at the trajectory that we have through the year. What we're trying to get to for our long-term model is really margins between 45% and 50%. Some of the undulation just kind of comes with the pace through the year, as we talked about the Q1 being a step down from Q4 just given volumes and then as it ramps up in Q2, Q3 with the different holidays and the promotions in Prime Days. So I think that what we're seeing is the more gravitation that we have towards our Sock product. That is obviously the hero product as it relates to margins. So mix moving towards there is a benefit. Looking further out, as I mentioned, as BabySat ramps out further, into 2025, that will be a margin benefit to the model as well. In terms of adjusted EBITDA, we're not changing our profile as it relates to expense. So excluding stock-based compensation, operating expense being between $10 million to $12 million per quarter. We're looking at leverage in the model that way. Depending on where the revenue kind of lay on each quarter, we'll see that improving, too. Our goal is to be in a sustainably profitable company and benefits of 2023 that we made in taking as much expense as we did. We don't want to lose that momentum that we have. So the opportunities that we have to put our working capital towards the FDA-cleared products this year having revenue growth that will get us to that over the sustainable line, if you will, in 2024 and beyond to make this really a company that is focused on being that independent growth company with a profitability lens. So still some work to do in 2024, but I think what you'll see is that improvement continues as we go through the year.

That's great. I'm sorry, maybe one more here. You talked about opening up the bottom of the funnel, and you saw that kind of double in the fourth quarter. Can you give us a sense on what that trend looks like on the sell-through here in the first quarter so far? Are we still seeing...

Yes, I would say it hasn't been a double kind of in the first quarter of 2024, but we've seen definitely double-digit growth year-over-year for Dream Sock, which is part of the sales mix that's really starting to outperform and do is close to that. So we have seen sustained sell-through lift that's really promising as we go into 2024, we can build on, and it's significant.

There are no further questions in the queue. So I will now pass the conference back over to Mike Cavanaugh for further questions that came in via email.

Thank you very much, operator. We have received some questions from investors, particularly our retail investors, that we wanted to address during the Q&A session today. The first question is congratulations to the team on achieving 13 trillion heartbeats. Are there any efforts underway to explore the correlation between heartbeats and various medical conditions or sleep quality? Additionally, what can you share about the product roadmap and other products like the band and crib, especially in light of both FDA clearances and your extensive data set compared to competitors, which should provide you with a competitive advantage?

Yes, I'll address this. Owlet possesses one of the largest datasets on infant health at home and a strong data science team. We've recognized the vast potential of our data, technology, and the valuable insights we can generate for a long time. Until now, our progress has been constrained as we've primarily operated as a consumer device. However, with FDA clearance, we can now begin to fully utilize our data and technology for parents and healthcare providers. This will be a significant focus this year. In 2024, our efforts will concentrate on two main areas: increasing the adoption of our medical devices, where we're already seeing positive momentum, and launching software and services that utilize Owlet data. We believe there is considerable revenue and margin growth as we advance in these areas, particularly given that approximately 140 million babies are born worldwide. We are just beginning to explore Owlet's long-term potential, so stay tuned for more updates. This is an exciting area for us, and we will share more information as we progress.

The next question, as an investor, I appreciate the strong support from Eclipse as well as the active participation of the Board and the recent offering. That clearly demonstrates confidence in Owlet going forward with the public float at only about 20% of total shares. Do you have any thoughts on the best way to build shareholder value? And then in the current macro environment, how does Owlet push forward and stick out from the others?

Yes, I can take that question. As a microcap company, I think along with others, we've been impacted by these conditions of the capital markets, especially since they've continued to be drawn out over what seems like a long period of time. We've had the financial support of our largest investors and our banking and trade partners. So we've been able to continue to also execute against our mission and vision. I think this support has been really helpful in our ability to deliver against our business and operational plans in 2023 that we've just spent time discussing today and these accomplishments set us up for even more success in 2024. So we believe that the execution of last year and also the executional plans that we talked about for is what puts us in the best position to continue to build shareholder value right now.

Next question, does Owlet plan to launch in India or other Asian countries? And if so, what is the potential timeline for that?

Yes, I mentioned that we're very close to receiving CMS clearance. I'm really proud of the team's work on this. It has been a near-term focus. Every year, 140 million babies are born around the world, and parenting has universal needs. It doesn't matter where your baby is born; parents care about their child's safety, health, and getting a good night's sleep. Our technology has a significant opportunity to make an impact globally, and we're really excited about this. In 2024, we will focus specifically on expanding Owlet's medical device in Europe, where there is a lot of room for growth. We also plan to enter other markets in the coming years.

Great. Thanks, Kurt. Next question, given the demographic of Owlet's target market, how important is social media and influencer marketing? And can we expect celebrity-type marketing of the Owlet in the future?

So we work really hard to meet parents really where they're at with messages that resonate with them in channels that they spend their time. And one shining example for us recently is the TikTok strategy that we've put in place, putting a large emphasis on getting Owlet stories out into the communities. And those stories include really funding creative content about parenting very serious and emotional content around the parent or the child story, their health journey or Owlet detecting that the baby had low oxygen and parents being able to intervene in time. Those stories have a big impact. We've even had a lot of user-generated stories and partner stories; somebody wrote a song about Owlet and about their child, and they included Owlet. And so we do a lot of work on social media, hitting over 100 million video views and engagement last year. And we want to be a very authentic connection with parents. It's obvious that parents telling real stories and real-life examples and the word of mouth behind our product is always meaningful to Owlet. It's been a big part of growing our brand and our awareness and being able to do that also while cutting marketing expenses. So a lot of opportunities with that. And there are a lot of celebrities who use Owlet organically and share about AI because they absolutely love the product. And so we feel like that's the approach that resonates the best with parents.

All right. Great. And we have one final question that we received. I noticed there was a public relations firm that is public relations firm hired towards the end of the year. Can you speak to that and the strategy behind it?

Yes. I would just simply say that I'll let really, again, we're in a first and only position. We are the first and only approved FDA monitor for over-the-counter distribution, and we're taking advantage of that in the market today by driving awareness and clearing up any confusion in the market that's existed. We've had hundreds of articles written at Owlet in just the last few months. Millions of parents engaging with that message, thanks to our social PR team that's doing a fantastic job. And that's a big reason why we're seeing this organic lift in sell-through. People now know that Owlet is in that position, and we're the best available option. So this is a massive year for us.

All right. I think that's it for our supplemental questions. Operator?

Thank you. I will now pass the conference over to Kurt Workman for closing remarks.

Thank you. Yes. As we look ahead, we're excited about the opportunities that are ahead of us. We're focused on expanding our product footprint, driving revenue growth, improving operating leverage, and achieving further profitability. Our strategies and initiatives are designed to capitalize on our recent product introductions and regulatory successes and to continue to deliver value to our shareholders. In conclusion, I want to express my sincere gratitude to our shareholders, to our clients, and our dedicated employees for their unwavering support and loyalty. Your belief in our mission and commitment to our vision has been instrumental in our achievements this past year. Thank you. As we look forward to 2024, we are energized by our progress and the momentum that we've built, and we're committed to our mission of helping children live long, happy, and healthy lives. We're excited to continue our journey with all of you. Thank you once again for your continued support and for joining us on this call today.

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your lines.