Owlet, Inc. Q3 FY2024 Earnings Call

Thank you for standing by and good afternoon. Thank you for attending today's Outlet Q324 Financial Results Conference Call. My name is Reagan and I will be your moderator today. All lines will be muted during the presentation portion of this call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Jay Gensko, Vice President of Investor Relations. Jay, you may now proceed.

Good afternoon, everyone, and thank you for joining us. Earlier today, Allett released financial results for the third quarter ended September 30th, 2024. I'm pleased to be joined today by Kurt Workman, Allett's co-founder and CEO, Jonathan Harris, President and Chief Revenue Officer, and Amanda Tweed Crawford, our CFO. Before we begin, please note that our financial results press release and presentation slides referred to on this call are available under the events and presentation section of our investor relations website at investors.alletcare.com. This call is also being webcast live with a link at the same website. The webcast and accompanying slides will be available for replay for 12 months following this call. The content of today's call is the property of Allet. It cannot be reproduced or transcribed without our prior consent. Before we begin, I'd like to refer you to our Safe Harbor disclaimer on slide three of the presentation. Today's discussion will contain forward-looking statements based on the company's current views and expectations as of today's date. 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 on 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, it's my pleasure to turn the call

over to our ceo kurt workman kurt thanks jay good afternoon everyone and thank you for joining us i'm very proud of the team's effort and execution to deliver another outstanding quarter following the fda clearance of both babysat and dreamstock including triple digit year-over-year revenue growth our sixth consecutive quarter of year-over-year gross margin expansion and second consecutive quarter of adjusted evita profitability our performance throughout 2024 is a testament to the team's commitment and the passionate community of parents, health professionals, and partners that believe deeply in Alice's mission. More and more parents are sharing in our vision of bridging technology, safety, and connected data to modern parenting, and that is enhancing our ability to execute on our growth strategies. I will begin on slide five. During the third quarter of 2024, we achieved net revenue of $22.1 million, representing strong year-over-year growth of 141% driven primarily by global dream stock sales. We also saw continued gross margin expansion as third quarter gross margins increased to 52% up 1,590 basis points versus third quarter 2023. This is our highest gross margin since going public in our sixth consecutive quarter of year-over-year gross margin expansion, a reflection of our ability to combine top-line growth with the operational improvements we've been driving the past couple of years. Third quarter adjusted EBITDA was 0.6 million, an improvement of 6.1 million versus third quarter 2023. Adjusted EBITDA for Q3 was both a record for Owlet and our second consecutive positive quarter, delivering on our commitment to maintain at or near adjusted EBITDA break-even. Moving to a few recent business highlights, I'm excited to share that we continue to see strong momentum with Amazon following our FDA clearance and shift to Amazon 1P as our distribution partner. As we shared last quarter, we had our most successful Amazon event at Prime Day in July. I'm excited to share that we followed up with a record Prime Big Deal Days event in October. Both events set company records for revenue and sell-through that Jonathan will touch on later in the call. Turning to BabySat. As a reminder, BabySat is our prescription monitor for high-risk babies. We continue to gain traction in the medical community and we added five additional durable medical equipment manufacturers, or DMEs, to support additional expansion into the medical and healthcare channels. Owlet is in a unique position to be both a consumer as well as a medical-grade solution. As we further combine brand strength with increased awareness and adoption of BabySat, we expect to drive complementary growth for DreamStock in the consumer channels. While it will take time for BabySat to scale in the medical market, there is a clear need for Owlet technology as the first FDA-cleared wireless and wearable at-home solution to replace traditional bulky, wired, and expensive medical equipment. Finally, the rollout of Owlid's subscription service continues to make great progress. We successfully launched the beta version to thousands of caregivers in the third quarter. Early results and feedback are off to a great start, including achieving a strong 85% retention rate after the first month, with approximately 60% of subscribers engaging as daily active users. we're excited to provide parents with health insights by leveraging our unmatched health and sleep data set subscription represents an exciting margin accretive growth driver furthering outlet's ability to define the category of infant health and safety finishing up on the first quarter earnings call i outlined three strategic focus areas we believe were critical to increasing our growth opportunities and driving margin expansion and profitability these were first drive continued adoption of dreamstock globally second expand medical and healthcare channels to offer an insurance reimburse monitor and third transition outlet into a service helping parents from infancy into the toddler years thereby increasing ltv we've made strong progress this year across these initiatives and i'm proud of the team's efforts and commitments i'll now turn the call over to jonathan to walk through these focus areas in

detail. Thanks, Kurt. I'm excited to start with our first strategic focus area, global adoption of DreamSOC, as we've made really incredible progress both in the U.S. and internationally. Domestically, the momentum since we've received FDA clearance of DreamSOC continues to be outstanding. DreamSOC achieved another strong quarter of domestic sell-through growth at 55 percent versus prior Q3 of 2023. Customer satisfaction supports this growth as Outlet's blended NPS score across all products was slightly less than 70 and DreamSox NPS score leading the way at 74 in the third quarter. Like we saw last quarter, returns continue to trend down to just above 4 percent compared to historical averages of 7 to 9 percent, resulting from continued product improvement and customer satisfaction also in the third quarter we increased press unique monthly visitors 110 percent quarter over quarter in addition to 50 million organic social impressions with over 1 million engagements we're also starting to translate outlet's leading infant health brand and market enthusiasm into tangible market share games According to consumer research firm Serkana and Owlet's own data, Owlet's share of total dollars spent on baby monitors has increased to approximately 31 percent in the six months trending September 2024 versus 23 percent for the same period in 2023. Finally, as Kurt highlighted in his remarks, in July, we had our most successful Amazon on Prime Day ever, setting records for revenue and sell-through units. We followed that impressive Prime Day event with a record-setting Prime Big Deal days with DreamSock revenue up 75% and total sell-through revenue up 70% year over year. Our international adoption continues to be very strong, most notably in Europe and the United Kingdom, following the launch of DreamSock with CE MedMart clearance in June. In the third quarter 2024, we saw international revenue growth of 96% year-over-year, our third consecutive quarter of outsized growth. This includes shipping the medically certified DreamSock to nine additional European markets this quarter, taking us to 26 countries in total across Europe and the United Kingdom. With approximately 140 million babies born worldwide every year and less than three percent currently having access to a dream stock we believe that we are just scratching the surface of the international opportunity in our second strategic focus area we're making important strides following fda approval of babysat to expand our medical and healthcare channels to offer an insurance reimbursed monitor for high-risk babies adding distribution partners is critical to expanding outlets reach in the medical channel in the third quarter we made important progress towards this strategy expanding our distribution insurance coverage with five additional dmes with national reach all specialized in at-home maternity and newborn insurance offerings in combination with our first successful dme signed earlier this year adapt health these partnerships are expanding access to babysat to caregivers throughout the United States, increasing opportunities for infants with medical necessities to conveniently and reliably leverage our innovative technologies. Insurance reimbursement is an important component of the medical strategy. Integrating with insurance plans will open up this category, reducing price barriers, increasing accessibility, and bringing babysat safety and security to at-risk infants. Our insurance partners are also seeing the value in this technology. As an example, Cigna now recognizes BabySat as a single patient technology and are reimbursing at a single patient payment rate, making the process for reimbursement easier, quicker, and more palatable for our DME distributors. We are still very early in how it's medical and healthcare opportunity, and these channels will take time to grow. But we're investing the resources as we expect this category to be an important long-term growth driver, as well as being margin accretive to our overall business. Finally, as we continue to drive core growth in DreamSock and build our medical channels with BabySat, the third important focus area and long-term growth driver will be Owlet's subscription service. As previously discussed, Owlet has a massive infant health and sleep data set, truly unmatched in the market today. and we're just beginning to unlock the potential of this opportunity. Specifically, Owlet's subscription service leverages our growing data set of trillions of heartbeats and millions of hours of sleep to help parents better assess their infant's health and sleep performance. Additionally, we believe a compelling subscription offering will extend the potential LTV per customer by increasing the value proposition of Dreamsocks and Owlet cams extending us beyond just infant safety into infant health we've made solid progress on our subscription initiative in the third quarter successfully launching the beta version of the service we offered early access to thousands of caregivers and from this sample we saw over half the subscribers using health insights on a daily basis importantly 85 percent of subscribers renewed We're beginning to evolve this service and experiment with pricing, messaging, and features to optimize the value to our customers, but the early results and feedback we see are exciting and will continue to update investors on our progress in the coming quarters. Now I'd like to turn the call over to Amanda to discuss the third quarter results and our outlook. Amanda, take it away.

Thank you, Jonathan, and good afternoon, everyone. I'll begin on slide 12. Unless noted otherwise, I'll be comparing our 3rd quarter 2024 results to the 3rd quarter of 2023. We wrapped up Q3 with another quarter of strong financial results. Outlet continues to execute on the financial goals we set out for in 2024. Net revenue in the 3rd quarter was $22.1 million, a year-over-year increase of 141%. revenue growth was driven primarily by sales of DreamSock and Duo as a reminder in the third quarter of 2023 we signed a new distribution agreement with Amazon that offered more favorable terms and better execution as a result all sell in revenue was pushed to the fourth quarter of 2023 which impacted the third quarter revenue growth when comparing year-over-year results and will impact year-over-year revenue growth in the fourth quarter 2024 as well. Gross margin in the third quarter was 52.2%, an increase of 1,590 basis points year-over-year. This was our highest gross margin since going public and our sixth consecutive quarter of year-over-year gross margin expansion. The significant gross margin improvement reflects strong volume growth, favorable product mix towards dream stock, a reduction in return rates, lower direct product and fulfillment costs, and improved fixed cost absorption. Total operating expenses in the third quarter were $16.4 million, including stock-based compensation of $2.7 million, representing an increase of $5.2 million versus the same period last year. Operating costs increased primarily due to a 1.9 million non-cash impairment charge related to internally developed software. In addition, we had higher compensation expense including accrued bonuses and severance related expenses and higher marketing spend. This was partially offset by cost capitalized related to subscription app development. Operating loss in third quarter was 4.8 million compared to 7.9 million in the same period last year. Net loss in the third quarter was 5.6 million versus 5.6 million in the same period last year. Third quarter adjusted EBITDA was a record for outlet at 0.6 million, a significant improvement of 6.1 million compared to the same period last year. Top line growth in combination with our focus on operating efficiency drove the increase in adjusted EBITDA. Turning to our balance sheet, cash and cash equivalents as of quarter end September 30, 2024 were 21.5 million, up sequentially from 15.4 million in second quarter 2024. In September, we successfully completed a follow-on equity offering raising net proceeds of approximately 9.8 million. The capital raise provides additional funding to strengthen our cash position, grants us further balance sheet flexibility, and just as important, engages a new group of supportive outlet investors that we're hopeful will be long-term partners as we hit an exciting inflection point in our business. In combination with the equity offering, we also completed a debt restructuring for total proceeds of up to $35 million. The restructuring included upsizing our asset-based line of credit for up to $20 million, as well as refinancing our term loan for up to $15 million. This comprehensive debt restructuring improves the health of our balance sheet and increases our operational flexibility. At the end of Q3, we had drawn down $9.9 million on the line of credit and $7.5 million on the term loan. Now, turning to an update on our financial outlook. Given our performance in the seasonally strongest third quarter and our outlook for the balance of year, we now expect to land at the higher end of our initial 2024 guidance ranges. For the full year 2024, we now estimate net revenue of $74 million to $77.5 million, gross margins of 48 to 49%, and adjusted EBITDA loss of $5 million to $3 million. At the midpoints, this implies a guidance raise for the full year 2024 outlook that will be provided on the second quarter earnings call. As we look ahead to 2025, while it's early, we're expecting ongoing momentum across our business including driving further growth in our core business, exciting opportunities with medical channels and subscription, and prioritizing profitability in the years ahead. We look forward to discussing 2025 expectations in more detail on our fourth quarter earnings call in March. With that, we will now take your questions. Operator, please open up the lines. Of course.

We will now be moving into our Q&A session, so if you would like to ask a question, please press star followed by 1 on your telephone keypad. To remove your question, press star followed by 2. Again, to ask your question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will now briefly pause as questions are being registered. We have a question from Charles Wright of TD Cowan. Charles, your line is now open.

This is Adam on for Charles. Thanks for taking our questions. Wondering, to start, if you can provide some insights on how you're seeing the state of the consumer environment and what, if any, changes you've seen over the course of the year in the health of the consumer environment, and in addition, how this has translated, if at all, to maybe you've seen differentiated growth in certain channels over others this

Thank you for that. We are seeing actually continued strong state of consumer environment. We believe that our FDA clearance in the United States and our CE MedMark across Europe and the UK are really resonating with our customers, and they're continuing to purchase our products in record numbers. So, we see continued growth and are cautiously optimistic for the future.

Got it. That's helpful. Thank you. Wondering if you can also discuss your manufacturing exposure geographically and how you're thinking about the potential impacts now with the new administration and potential tariffs, the potential impact that might have on margins or whether if there are again potential tests to come in place would that drive you to consider potentially

manufacturing elsewhere yes and we do currently we have our camera manufacturing in China and then our stock and duo comes through Thailand we're well aware of the proposals that are coming through the new administration for tariffs and are looking strategically at our business at ways we can minimize that exposure um we're looking at possibly moving our manufacturing of the camera to vietnam um and just other options to minimize exposure and i would just add to that that the

vast majority of our revenue comes from stock and duo those are hero products and are not in china and there's several in addition to what amanda said there's several ways that we're able to to mitigate that ahead of those tariffs coming in.

And lastly, I'd like to emphasize that our products are considered medical devices, the Duo and SOC. And it's up to this point, they have been excluded from any sort of tariffs that they are in medical device.

Very helpful, thank you. And regarding Babyset, great to hear about Signal Reimbursing for Babyset. Can you remind us about the path forward and timeline, what it looks like for integrating with other major payers and regional payers and additionally how exposed or sorry uh how exposed now you are with multiple dmes uh to the points of care that are key for babysat such as children's hospitals yeah that's

a that's a great question um we we continue to see additional dmes come on board we have five additional that we've signed um each of those have different relationships with re-insurers or insurers, and we're leveraging those relationships to drive that reimbursement to the patients. So, each of them represents a slightly different channel of opportunity, all within the new mother space and or the caregiver space. We're beginning to build relationships directly with NICUs and hospitals directly. And we're spending time and money integrating into those hospital networks so we believe that we can really reach a larger majority of those children coming out of

at-risk environments. Got it. And last one for us is on the international side, the opportunity that you guys see where they be set there, if existing partners can help with commercialization there or if that would be kind of seeking new relationships versus what you guys have now on the retail side for commercializing Europe yeah right now

we're primarily focused on on the driving the consumer side of the business we're expanding we're now in 26 different countries including throughout Europe and including the UK again there are approximately a hundred and forty million babies born around the world and today only three percent of those have access to the dream stock so we see international as a is a very large opportunity for us moving forward and we're exploring various countries and various relationships throughout the world very helpful thank you guys thank

you we currently have no other questions so I will pass it over to management for any closing remarks and any other questions that we may have yes right

we've also received a few relevant questions from investors that we wanted to share during the Q&A first one is given the new Amazon partnership signed last year how much of q4 2023's amazon revenue would have been recognized in q3 2023 yeah so

just as a reminder to everyone on the call and um alluded to this but we did sign a new distribution agreement in late q3 of last year the impact on last year's q3 is that we ended up shipping product to amazon the first week of october so when we think about comparing year-over-year results we had about six million of net revenue that would have been recognized in q3 had we been able to ship on time just due to the timing of the agreement so that was shifted to q4 so if we adjust for that the year over year growth this quarter would have been about 45 percent which is in line with the overall growth trends we're seeing in the business and in our updated guidance

for this year. Next question. With all the momentum and opportunities Al had seen, is it possible to get some more color around expectations for 2025? Yeah, I'll grab this.

First, our core business is better than it has ever been. We're selling more dream stocks, both domestically and internationally. We're monitoring more babies, capturing more market share than we've ever done before. Secondly, our ability to operate our core business into next year's scale is clear we're in a very strong position our expense profile is in a very good place we're turning the corner on profitability and our balance sheet is healthy and strong we have the right to retail partnerships we have incredible awareness and reach within our consumer base and we're opening up new healthcare channels and i would just add to that that the opportunity

we have with our data sets is absolutely immense we're turning those insights right now into real value through our subscription service parents are able to better understand how their child's sleeping how to get them to sleep longer we're enabling parents to move kind of that level of care that you see in the office into the home and we expect that's a trend that we'll be able to to continue and capitalize on for years to come we're also um you know specifically with the launch of subscription there's real ltv opportunity that we can build over time with the business and uh just very excited about 2025 in the years that follow and we're confident that this this is a this is a long-term opportunity and last one how should we think about

ls revenue seasonality in a typical year yeah in a normal year q1 is the lightest quarter so when we think about our our business babies are born all throughout the year but the seasonality is truly coming from um promotional activities so for q1 it's the lightest in terms of promotions. We see the second quarter pick up because of the load-in for Prime Day, which is typically a high volume, high discount load-in. So we load-in for Prime Day in Q2 to support the promotion that is typically in July. So then from there, Q3 is our seasonally largest revenue for the quarter. We have a lot of activity happening. We have September Baby Safety Month, a load-in for prime big deal days, which is typically in October, and then most of our retailers load in for holiday during Q3. And lastly, Q4 comes a little bit down from Q3, just because there's fewer retailers loading in for holiday in Q4, and then what we really see is replenishments in December following the Black Friday, Cyber Monday promotions. That's all the questions we have for

today please don't hesitate if there's any more that come up post call at this time i'd like to hand the call over to kurt for some closing remarks yeah i just want to thank everybody

for joining the call today owlett is leading this category we've made incredible progress to become a healthier company we're set up to perform over the long term we're actively expanding our ltv and the healthcare channels and with subscription there are subtle changes in the business that are going to have really big impacts over the years to come and we're just set up with a really unique opportunity to be the leader in infant health so we're seeing that significant revenue growth right now we're seeing meaningful margin expansion and we're supporting all that with the commitment to drive to profitability and sustainable growth in the future so we really appreciate everybody's support for the business and for the families that we

serve. Thank you so much. Thank you. That will conclude today's call. Thank you for your participation. You may now disconnect your line.