Earnings Call Transcript - OWLT Q2 2021

Operator, Operator

Hello and welcome to Owlet's Second Quarter 2021 Earnings Call. My name is Lauren and I will be coordinating your call today. I will now hand you over to your host, Mike Cavanaugh from Investor Relations. Mike, please proceed.

Mike Cavanaugh, Investor Relations

Good afternoon and thank you for joining us today. Earlier today, Owlet Inc. released financial results for the quarter ended June 30, 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 in the U.S. Securities and Exchange Commission, including its registration statement on form S-1 filed with the SEC on August 5, 2021, 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 investor page of its website. I will now turn the call over to Kurt.

Kurt Workman, CEO

Thanks Mike, and thank you to everyone for joining the call today. We appreciate your ongoing support of Owlet, and I'm thrilled to host Owlet's first earnings call as a public company. Last month, our listing announcement at the New York Stock Exchange centered around the theme "this one is for the babies," which captures our excitement about the future of parenting and the opportunities within the Owlet ecosystem. In today's call, I will provide an overview of our second quarter performance and the momentum we've built in 2021. We will also discuss our plans for the remainder of the year and beyond. Following my remarks, Kate will review our financial results, and we will conclude with a question and answer session. The second quarter of this year was a record one for Owlet, with $24.9 million in revenue, marking a 14% sequential increase over the first quarter. Our gross margins reached 54%, reflecting an increase of over 600 basis points from the same quarter in 2020. We are pleased to report that over 1 million babies have now used Owlet, reaffirming our position as the number one brand in our category. Since transitioning to a public company, we have received significant coverage and strong interest from top banks and investors. This is a pivotal moment for Owlet, and we are leveraging this momentum to achieve impactful results. For those who might be new to the Owlet story, our mission is to tackle fundamental challenges for parents through innovative technology and resources. There are over 24 million caregivers in the U.S. from conception to kindergarten, and parents spend an average of $12,000 per child each year. Compounding the issue, urgent care and emergency room visits for children aged zero to four exceed $30 billion annually in the U.S. As a parent of three, I understand firsthand that caregivers become responsible overnight with limited training and resources. Owlet aims to address these challenges by shifting the center of care to the home, empowering parents with the best technology and resources to ensure their babies’ health and happiness. Our vision is to democratize access to hospital technology and modernize nurseries with integrated telehealth services, a platform we call OwletCare, which represents a market opportunity of up to $81 billion. We believe we have the expertise in technology, branding, and healthcare to lead this category and drive over a billion dollars in revenue by 2025. With a recent influx of over $135 million in net cash to support our vision, we are concentrating on a few key areas. First, we aim to deepen Owlet's market penetration in the U.S. Second, we seek to grow our global footprint through strategic market expansion, and lastly, we plan to leverage our position as a market leader to enhance lifetime value by expanding our connected nursery ecosystem with integrated services, bridging the caregiver gap at home. Now, let's explore some highlights regarding our U.S. market penetration. Four states have recorded penetration above 20% with the Smart Sock, particularly in the Midwest, indicating strong product adoption beyond traditional tech-centric areas like California and New York. This signals significant growth potential as awareness increases. As the market leader, we have a considerable opportunity to amplify our domestic awareness, and our increased marketing spend in 2021 reflects this goal. Website traffic in July rose over 50% year-over-year. We are also proud to collaborate with parent-led nonprofit organizations that donate our Smart Sock to families in need while advocating for greater access to technology like Owlet. We have established relationships with nearly 30 such organizations across 20 states. Additionally, we are actively pursuing FDA clearance for both the RX version of our sock, designed for sick babies, and an over-the-counter version for healthy babies. If we achieve FDA clearance, we plan to seek insurance reimbursement, which we believe would enhance accessibility for more families. Next, I am pleased to report on our international market expansion efforts, which align with our mission to make health-sensing technology accessible to every baby and parent at home. In the second quarter, international sales constituted 7% of our revenue, the highest percentage we’ve recorded. We officially launched in Sweden, Germany, and Austria in the second quarter, followed by a launch in Switzerland. In the early weeks following our German launch, we achieved 64 million impressions in press coverage, equating to the stature of top-tier outlets like the Wall Street Journal. We aim to continue expanding within the EU throughout 2021, with more geographies planned for 2022. Lastly, we are focused on enhancing our lifetime value through the expansion of the Owlet ecosystem of innovative products and services. I am thrilled to announce the launch of Smart Sock Plus this week in North America, with international launches anticipated next month. The Smart Sock Plus extends usage from 18 months to five years, allowing us to maintain customer relationships for a longer duration. Our core products remain robust, with an aggregate NPS of 69 and product ratings on Amazon exceeding four and a half stars. We are also progressing with the beta testing of the wellness version of the Owlet pregnancy band, a device that fosters Owlet's relationship with parents during the pregnancy phase. This initiative embodies our vision to care for families early on, and I am happy to report that we are making headway in our connected nursery and telehealth solutions. Together, these offer over $3,000 in potential lifetime value per customer, extending our engagement with each household for up to six years. Owlet's next steps in this critical focus area include growing the Smart Sock Plus, fully launching the wellness versions, and making strides toward our new telehealth service. Overall, we believe Owlet is well-positioned to dominate this category, with the potential to create a parent-centered and tech-enabled healthcare platform at home. The Owlet ecosystem offers genuine value, creating high switching costs for customers. We have developed a significant competitive advantage underpinned by an extensive dataset of health information, and we are the first movers in this space. We are committed to deepening our geographical penetration, supported by additional funding from our public company transition. In Q2, we welcomed Kate Scolnick as our CFO and added new members to our Board of Directors, including experienced leaders from prominent companies. We are confident that with the right capital, momentum, and team, we can successfully execute our plans aimed at enhancing our market reach, expanding globally, and developing the OwletCare ecosystem. Now, I'll turn the call over to Kate to discuss our financial results.

Kate Scolnick, CFO

Thank you, Kurt, and good afternoon everyone. Total revenues in the second quarter of 2021 were $24.9 million, a year-over-year increase of 36% and a sequential increase of 14% from the first quarter of 2021. We're pleased with our continued sales momentum and the demand for our products in the first half of 2021. Q2 revenue growth was driven primarily by our flagship Smart Sock and Monitor Duo, our Smart Sock and camera combination products. For year-over-year growth comparison purposes, it's important to note that approximately $2.2 million of Q2 2020 revenues related to initial selling of new inventory for Smart Sock version three and Monitor Duo version three ahead of launching the products in Q3 2020. Excluding this Q2 year-over-year revenue growth would have been 54%. Cost of goods sold were $11.4 million in Q2, resulting in a gross margin of 54.2%, an increase of 600 basis points compared to a gross margin of 48.2% in the second quarter of 2020. The year-over-year improvement in gross margin reflects continued strengthened sales of our Smart Sock and Monitor Duo products and business efficiencies. Sequentially, gross margins were down as Q2 was a more seasonally promotional quarter than Q1, with Mother's Day and Father's Day. In addition, we participated in Amazon Prime Day in June. Operating expenses in the second quarter were $19.4 million compared with $9.5 million in the same prior year quarter. The increase in Q2 operating expenses was primarily due to planned increases in spending associated with the scaling of our business. These investments include strategic talent hiring across the organization, increased investments in sales and marketing, product development costs as we expand our product portfolio, and expenses related to our public company business combination. Operating loss in the quarter was $5.9 million compared with $0.6 million in the second quarter of 2020. Net loss in the second quarter was $5.3 million, compared with $1.1 million in the second quarter of 2020. EBITDA loss for Q2 2021 was $4.6 million compared to $0.5 million in the same prior year period. EBITDA margin for Q2 2021 was negative 18.4% compared to negative 2.9% in the prior year, and adjusted EBITDA margin for Q2 2021 was negative 10.4% compared to negative 0.5% in the same prior year period. Look into our balance sheet, cash and cash equivalents as of June 30, 2021 were approximately $12.2 million. In July, we raised 135 million in capital net of transaction expenses through our public company business combination. This funding strengthens our balance sheet for the future and will enable us to invest in scaling our business and fuel future growth. As we head into the second half of 2021, we have momentum in our business that we believe will enable us to achieve results consistent with the top line goals provided in May as part of our Q1 2021 earnings communications. For the full year 2021, we plan to achieve revenues of approximately $107 million and gross margins of approximately 54% to 55%. Achieving our 2021 top line growth objectives would represent over 40% revenue growth and gross margin expansion of over 600 basis points compared to 2020. In summary, Owlet executed well in our growth objectives in Q2 and the first half of 2021, and we're optimistic about the near-term and long-term opportunities for our connected nursery ecosystem.

Kurt Workman, CEO

Thanks, Kate. Before we open up the call for questions, I'd like to thank Owlet customers, employees, Board of Directors, and shareholders for supporting our mission and vision. I also want to share a recent experience I had a few weeks ago. I was invited to speak at an event in rural Iowa hosted by a nonprofit organization that is focused on getting smart socks to more families and daycares throughout the state of Iowa. It was a great event. Hundreds of people were in attendance from this incredible small community, including top local celebrities. It's so clear to me that Iowa, the U.S., and the rest of the world are ready to bring the center of care to the home. And Owlet is here to help you that we believe that every parent deserves access to the very best care available. Thank you. Operator, let's open up for questions.

Operator, Operator

Thank you. Our first question comes from Charles Rhyee from Cowen. Charles, your line is now open.

Charles Rhyee, Analyst

Yes, thanks. Thanks for taking the questions and Kurt and Kate, congrats on your first quarter here. I wanted to jump in a little bit sort of big picture, given that a lot of your historic growth has been done largely through word of mouth and I think people can see it in how low your customer acquisition cost has been. You've laid out some pretty ambitious growth targets, particularly as we get out into the other years and as you branch more internationally. You raised 135 million here through the fundraising. Can you kind of talk about how you are looking to deploy this capital, both here in the short term, now that we just launched the Smart Sock Plus and as we think about sort of the next couple products, at least as you think about your pipeline here.

Kurt Workman, CEO

Yes, thanks, Charles. Appreciate it. We have three big opportunities for growth ahead of us that we're focused on in terms of the investment. The first is getting much more aggressive in deepening penetration in the U.S. with existing products. To your point, today, we have really efficient marketing, high NPS, mostly driven by word of mouth. We're going to get more aggressive in demand creation through online marketing, expanding our channel distribution, and omni-channel marketing programs. Then as we get into expanding the Owlet ecosystem, using Owlet media to drive lifetime value, parents use our app seven to eight times per day, social media platforms. And so, we believe we're in a really great position to be able to do that and to drive penetration. We're also expanding beyond the U.S. It's kind of a second big area of focus for capital investment. I mentioned that international is accelerating and already making up 7% of our total revenues, we feel really good about the international opportunity. And then the third big focus is continuing to expand on our connected nursery ecosystem, particularly adding services in between our telehealth service and our new smart crib, the lifetime value potential per customer really increases in the length of that relationship goes up to six years, potentially. And so we see three really clear opportunities for growth, and those are the areas that we're going to really drive investments in both R&D and some of the digital marketing spend.

Charles Rhyee, Analyst

Appreciate that, and then maybe to the first point, then in deepening penetration, at least, particularly here locally, you noted earlier that in four states, that the last adoption is about 20%. Maybe talk about what is it in the rest of the country that perhaps we have not seen that level of adoption yet. And what does particular as you think about putting your marketing spend towards to help drive that greater awareness to get the adoption rates up elsewhere in the country?

Kurt Workman, CEO

Yes, I think, and we've done studies on this. The main driver here is awareness. We did a study in Nebraska, Texas, and New York as representative states. And it's highly correlated with awareness. And so what that means is for us to get a lot more aggressive in our awareness-creation activities, we've already started doing that. We have a fantastic new CMO. And he's built billion-dollar brands, in really marketing to this customer. And so it's about getting more aggressive with online marketing. We're expanding our channel, online marketing channels, and we're expanding our retail channel relationships. And I think as we build that awareness and make the product more accessible, what we're seeing is that the response from parents, regardless of geo, has been fantastic. I think when you understand in marketing, and you start to see the clustering effect that we're seeing happen in the Midwest. We're also getting more aggressive with some of the advocacy work that we're doing and in publishing more data around the Smart Sock, which we think will help with word of mouth as well.

Charles Rhyee, Analyst

Thanks. And then lastly, for me I think the healthcare opportunity is a big one particularly I understand you have a few of your products submitted to the FDA. Could you give us sort of the latest here in terms of timelines of what we might expect? I think the babysat is the first one up. And any kind of update there you can provide. That'd be great. Thank you.

Kurt Workman, CEO

Yes, I mean, I can't speak for the FDA. But I will say that we have a fantastic team led by Jim Fidacaro, our new healthcare GM. Really a great team, joining the board from Longo. We have a new head of regulatory that has joined in the last nine months. And we have great products with babysat. It's completed all of the clinical accuracy testing, pulse oximetry testing, safety testing, and biocompatibility testing. Human factors is all complete, and we're making great progress. So we feel really confident about that program. I can't really speak for the FDA at this point, but internally, we're feeling confident about our ability to move forward.

Charles Rhyee, Analyst

Great, thank you and congrats.

Operator, Operator

Our next question comes from Jim Suva from Citi Group. Jim, your line is now open.

Jim Suva, Analyst

Thank you, and congratulations on a good first quarter. Your team should feel very proud. I have two questions, and you can answer them in any order you want. The first question is regarding kind of supply chain. For some of us who cover technology, everything from shipping costs have gotten more expensive. Components for cameras have gotten harder to get. Can you talk about your supply chain? And is it equilibrium? Is it a challenge? Is it getting better or worse? And then the second question is, after you get FDA approval, if we get that, what's the timeline and process then for the insurance payment clearance? Is that a pretty easy thing or is that a long multiyear thing? I'm just not that familiar with once you get FDA approval about insurance payments. Thank you.

Kurt Workman, CEO

Awesome. Thanks, Jim. Good question. So I think I'll take the supply chain one first. I just want to note the gross margin improvement. I think I'm just going to congratulate our team, especially our supply chain and operations team, for driving such an efficient program with a 600 basis point improvement over last year, even given the macro environment we're in right now where there are chip shortages and supply chain constraints. I think our team has done a fantastic job navigating that, and it's represented in the gross margins that we're seeing. So I think our team feels confident that we have good line of sight, and we don't feel like we need to change any sort of forecasting for the supply chain. And there's positive news to share on the gross margin side. In terms of insurance, I mentioned the two different Smart Sock products we're working on. One is the Baby Sock, that we'll get RX clearance for and will be eligible for existing insurance reimbursement codes where it's applicable for pediatrics, and that will be able to piggyback on existing current reimbursement codes. The OTC Sock is something that we would develop and work with insurance to get coverage for.

Jim Suva, Analyst

Thank you so much. And congratulations to you and your entire team.

Kurt Workman, CEO

Thanks Jim.

Operator, Operator

That's all the time allotted for questions. So I will now hand back over to Kurt Workman, Owlet co-founder and Chief Executive Officer.

Kurt Workman, CEO

Thank you. I just wanted to end by saying, the father, there just isn't anything more important to me than my children and the opportunity to help parents better care for their children. And so this is just an incredible opportunity. Owlet gets thousands of stories every year from parents whose lives have been changed because of having access to the technology that we provide. So thank you everyone for taking an interest in this and thank you for joining the call today. Have a great week.

Operator, Operator

This concludes today's call. Thank you for joining and I hope you have a lovely rest of your day. You may now disconnect.