Earnings Call Transcript - OWLT Q3 2023

Operator, Operator

Good afternoon, ladies and gentlemen. Thank you for joining today's Owlet Q3 Earnings Call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Mike Cavanaugh, Investor Relations. Please proceed.

Mike Cavanaugh, Investor Relations

Good afternoon, and thank you all for joining us today. Earlier today, Owlet Incorporated released financial results for the quarter ended September 30, 2023. The release is currently available on the company's website at www.investor.owletcare.com. Kurt Workman, Owlet's Co-Founder and Chief Executive Officer; and Kate Scolnick, Chief Financial Officer, will host this afternoon's call. As a reminder, some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements, and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. Please refer to the company's SEC filings for further guidance on this matter. With that, I will now turn the call over to Kurt Workman, Owlet's Co-Founder and Chief Executive Officer. Kurt?

Kurt Workman, CEO

Thanks, Mike. And good afternoon, everyone. Thank you for joining us today for Owlet's Q3 2023 Earnings Call. I'd like to start the call with a reminder of our main 2023 strategic objectives. First, obtaining FDA clearances for both BabySat and our consumer Dream Sock monitors; and driving towards EBITDA breakeven. Owlet is spearheading new standards for consumer and medical solutions, allowing caregivers to provide better care at home for their babies through access to advanced digital health technologies. In Q2, we were thrilled to announce that we received FDA clearance for our BabySat monitoring device. As a reminder, BabySat is a home monitor for use with babies under a doctor's care and will be available by prescription. Early feedback from pediatricians has been overwhelmingly positive, and we are targeting market introduction by the end of this year. Following on that positive momentum, last week, we announced clearance for the Dream Sock as the first and only over-the-counter pulse oximetry solution for infants. Dream Sock will monitor and display Baby's Live Health Readings, including pulse rate and oxygen saturation level, and will provide health notifications which will alert caregivers with lights and alarm sounds if their infants' readings fall outside of preset ranges. These new medical-grade features will be available to all existing and new Dream Sock users and will be launching soon. Achieving de novo marketing authorization from FDA means the Owlet Dream Sock was clinically tested in both home and hospital environments and proven to be as accurate as medical-grade baby monitoring technology and compliant with all relevant performance and safety standards by independent laboratories. This new technology will equip caregivers with the right information at the right time and will provide them with the confidence and clarity on their baby's wellbeing. Securing over-the-counter clearance for the Owlet Dream Sock is poised to catalyze substantial growth for us in three key dimensions. First is the evolution of our value proposition. The clearance marks a pivotal shift in the value proposition of our Dream Sock. It transforms from being solely associated with sleep tracking to assume a more critical role as a health monitoring device. This transformation empowers us to communicate directly about our capability to accurately and safely monitor vital signs, providing caregivers with a heightened level of assurance through timely alarms. We believe this will increase the consideration and conversion of customers who are researching Owlet as a solution for their family. Second is category leadership. The attainment of FDA clearance for Owlet establishes a clear distinction in the market. This regulatory validation not only addresses numerous queries and apprehensions potential customers may have, but also positions Owlet as the world's foremost FDA-cleared health monitor for babies at home. This regulatory status underscores our commitment to product safety and efficacy. We believe this will help catalyze word of mouth among parents and open up significant retail opportunities. Third is enhanced connectivity with healthcare providers. With the regulatory hurdle cleared, data emanating from our devices can now be seamlessly shared with pediatricians. This newfound capability equips parents with a valuable tool for assessing and triaging their child's health at home, recognizing that there are 92 million healthcare visits in the U.S. for babies and toddlers, providing parents with access to safe and accurate technology becomes an indispensable asset, facilitating informed decision-making and proactive health management. We believe this will add enhanced benefit both to parents and physicians as they consider the value of our products. Both BabySat and Dream Sock clearances are significant foundational breakthroughs in our journey to bring care to the home and empower parents, to signify not only our commitment to innovation in the infant health category, but more importantly, our dedication to helping ensure the health and well-being of every baby. I'm extremely proud that Owlet is setting new standards in at-home infant care, arming parents with reliable real-time information and providing enhanced peace of mind. In the medical market, the FDA clearance of BabySat was a pivotal step as we penetrate this critical market. BabySat is our prescription monitor for home use that extends our wireless pulse oximetry technology to babies who need it most through a prescription from their doctor. We've already seen demand from parents, providers, and DME channels, which is both gratifying and unsurprising as remote patient monitoring becomes more important in the delivery of healthcare. This innovative addition fosters growth in several crucial dimensions. First, it broadens distribution channels into healthcare. BabySat facilitates an expansion of our distribution network to include durable medical equipment or DME providers and hospitals. By reaching these key healthcare institutions, we enhance accessibility to Owlet technology for critical care needs at home, ensuring that our solution is readily available where it is needed most. Second, it will be made accessible to families in need. BabySat aims to democratize access to Owlet's technology, particularly for families facing medical challenges with their children. Through insurance reimbursement, BabySat becomes an attainable solution for families who require it most, ensuring that financial barriers do not impede access to vital monitoring technology and expanding Owlet's customer base. Third, it allows us to address a new customer segment directly. BabySat allows Owlet to provide a targeted solution for infants deemed high risk for facing health challenges. This presents an opportunity to communicate directly about the medical accuracy of our solution to both parents and physicians. By honing in on the unique needs of this demographic, we can emphasize the precision and reliability of our technology, offering peace of mind to caregivers and medical professionals alike. More information about BabySat is now accessible on our website, and we are working to announce a partnership soon that will enable quick and efficient access to hospitals and online, similar to breast pumps. Additionally, the app is available on Apple devices where physicians can request a demo and additional information on our website. Internationally, our CE Mark submission is progressing and remains on track, and we believe our successful relationship with the FDA will translate over to our work with non-U.S. regulators. Revenues for the quarter came in at approximately $9.2 million. I'd like to offer some color on our go-to-market strategy and the revenue dynamic we experienced in Q3 by starting with an announcement that Owlet has signed a significant distribution agreement with Amazon that will drive increased gross margin, enable better access to the customer, and will give Owlet significant marketing credits to drive future growth globally in our largest channel. While our agreement was signed at the end of September, shipments under the Amazon.com arrangement began the first week of October. The timing of this transition impacted our total revenue in Q3 as no selling revenue was recognized related to the former distributors of Amazon.com in Q3. All Amazon selling revenue for Q3 and Q4 will be recognized in Q4. For comparison, gross billings in October this year were 3.5 times higher than the gross billings in October of 2022, and so far in Q4 this year, we've already shipped into the Amazon channel 90% of the volume we did in Q3 and Q4 combined last year. In addition, we believe we are finishing the year with strong momentum across the rest of our retail channels as we head into the holiday season. As a result of the shift in Amazon sales from Q3 to Q4, adjusted EBITDA loss is expected to improve in Q4 with higher gross sales and relatively flat operating expenses. We remain focused and optimistic on our adjusted EBITDA loss profitability objective exiting the year. From an overall brand health perspective, our customer satisfaction and ratings continue to maintain high Net Promoter Scores across multiple products. Dream Sock with CAM usage continues to grow quarterly along with the mobile use of our sock in CAM products. We've grown our sell-through sequentially every quarter this year while reducing our marketing spend by 75%, reflecting our strong focus on channel health and inventory levels. Combining the new FDA clearances with continued growth in demand and a more efficient operating base will set Owlet for a healthy, profitable, and growing business in the future. From a leadership perspective, in Q3, we announced the appointment of Marc Stoll to our Board of Directors, and Jonathan Harris as Owlet's President and Chief Revenue Officer. Marc and Jonathan have already made an impact with insights and corporate strategy and operational excellence and are working closely with the team to drive growth and expansion with our new medical device clearances. I'm thrilled about the continued progress we've made towards creating an efficient and profitable organization. We remain committed to building a strong foundation for sustainable growth as we move forward. We believe that the FDA clearances of our BabySat and Dream Sock products will accelerate the adoption of our products and position us through the platform that bridges the gap between the hospital and the home. Thank you for your continued support of Owlet, and I look forward to updating you in the coming quarters. On that, Kate, over to you.

Kate Scolnick, CFO

Thank you, and good afternoon, everyone. Kurt addressed a number of our financial highlights in his overview. So I'll repeat a few items with some color and provide some additional financial commentary. Gross billings for the third quarter of 2023 were $11 million and did not include any selling revenue for Amazon distribution as those purchasers and shipments were recognized in October. Product promotions and discounts were $1.3 million, and returns and allowance reserves for Q3 2023 were $700,000, or 6% of gross billings. Q3 revenues were $9.2 million. Total revenues were driven primarily by sales of Dream Sock and Dream Duo. Q3 sell-through was up 7.4% sequentially, demonstrating a third consecutive quarter of sell-through growth in 2023. This year, we offered less promotional discounting with Prime Day in July to maintain overall channel sell-through health versus last year when we had recently launched Dream Sock and had loaded in significant inventory to support channel restocking. As Kurt discussed, the main difference in Q3, both sequentially and last year on a gross billings and revenue basis, was a shift in timing of Amazon selling revenue from Q3 to Q4 this year. As we have discussed previously, we've been managing selling revenue with retailers over the course of the year as they target lower inventory levels across our balance sheet, primarily reflecting macroeconomic conditions. We also lost a category-leading retailer with the buy-buy Baby bankruptcy and, as discussed today, had a timing shift in our Amazon selling revenue from September in Q3 to October in Q4. Our total revenue has been impacted by some macro and business transition headwinds year-to-date. Sell-through has improved 7% year-to-date over last year across retail channels. At the same time, our cost per acquisition is down 75%. This is an important aspect of our channel health focus efforts as we become more efficient in reaching parents and driving demand for our products. We anticipate sell-through for Q4 to grow sequentially again, demonstrating four quarters of sell-through improvement in 2023. Cost of revenues were $5.9 million in Q3, resulting in a gross margin of 36.3%. This compares to 40% gross margin sequentially and margins of 26.6% in Q3 2022. The year-over-year improvement in gross margin was primarily due to improvements in purchase price variance costs, prior period inventory adjustments, and improvements in product mix. Sequentially, outside the total lower revenue, margins were stable with a focus on operational efficiency, product mix, and lower purchase price variance costs. Moving forward, we remain committed to driving margin improvement with the goal of stabilizing gross margins within a range of 40% to 50% through optimizations of product mix, reducing costs in our warehouse and shipping, reduction in our PPV as we reduce inventory levels, and managing our return rates and discounts. Operating expenses in the quarter were $11.2 million, including stock-based compensation of $2.2 million, representing a $15.2 million decrease year-over-year. Excluding stock-based compensation, Q3 operating expenses were $9 million. Year-over-year decrease in operating expenses was primarily due to employee-related costs and marketing spend. Operating loss in the quarter was $7.9 million, and net loss in the quarter was $5.6 million, compared with $21.8 million and $19.4 million year-over-year. Adjusted EBITDA loss for Q3 was $5.5 million, compared to an adjusted EBITDA loss year-over-year of $18.4 million for Q3 2022. Our focus on operational efficiency has delivered multi-quarter improvements in our expense management. We will continue to identify areas to leverage as we work towards adjusted EBITDA breakeven later this year. Turning to our balance sheet. Cash and cash equivalents as of September 30, 2023 were approximately $15.2 million. We remain focused on our stated goals of managing our costs and use of capital as we move into the final weeks of 2023. Looking ahead, we will again refrain from providing specific guidance for the year. For those areas that are within our control, we are focused on the core business activities in 2023 that will maximize supporting and achieving improvement in sell-through of our core products and, therefore, driving balance in retail inventory for future selling opportunities, making strides in ramping our BabySat and new Dream Sock product commercialization, and efficiently managing our operational plans towards breakeven and profitability. Thank you for your time today. Operator, let's open the call for questions.

Operator, Operator

We will now start the Q&A session. The first question comes from Charles Rhyee with TD Cowen. Please go ahead.

Charles Rhyee, Analyst

Thank you for taking my question, and congratulations on the progress made so far. I would like to ask about the Amazon agreement and the products that were shipped. Were those the new Dream Sock that we packaged with FDA approval, or was it the original Dream Sock?

Kurt Workman, CEO

Yes. Great question, Charles. So the underlying product is the same between the cleared products and the product that's available today. The same hardware has the same app. The FDA-cleared features will begin rolling out towards the end of this year. So what we shipped was the current product that's compatible with the FDA-cleared features. The main reason for the shift to Amazon 1P is we felt like that was a better business arrangement for Owlet, provided better gross margins, the ability to grow the business, and connect more directly with our customers through Amazon. So it's really kind of a business shift that led to transitioning from third-party sellers on Amazon to selling to Amazon directly.

Charles Rhyee, Analyst

I appreciate that. I was just curious about what customers will see when they search for Dream Sock on Amazon. Will they find information about its FDA approval as a key differentiator? What messaging will indicate that they will gain additional functionality by purchasing the sock?

Kurt Workman, CEO

Yes, it's a great question. So we've already started to message around the FDA clearance and make it clear to all of our current existing customers that they'll have access to all of those features, and that their Dream Sock will be an FDA-cleared Dream Sock, and future customers. So we're working on rolling out into all of our retail channels that same messaging, so that somebody knows, as we're approaching the holiday season, that the Dream Sock they're buying is compatible with and will get access to all of these FDA-cleared features before the end of the year. Does that answer the question?

Charles Rhyee, Analyst

Yes, it does. That's helpful. Kurt, you mentioned that, and Kate, you might be able to answer this as well. You said you shipped 90% of the volume in gross billings from the last half of the year. Looking back, gross billings for Q3 and Q4 last year were around $39 million. So, am I correct in thinking that you sold in $35 million as of October? Is that the right way to look at it?

Kurt Workman, CEO

Kate, you want to take that one?

Kate Scolnick, CFO

Yes. Just for clarification, that's just regarding the Amazon to give an understanding of where we are in terms of the pace of the Amazon business.

Charles Rhyee, Analyst

Not total gross billings is the Amazon portion.

Kate Scolnick, CFO

Right. Exactly. So just to indicate where we are in the Amazon pace of business, yes.

Charles Rhyee, Analyst

Okay. If we consider the $9.9 million that was related to Amazon, can we conclude that had the Amazon segment been included, we would have seen more typical revenue as previously discussed? Instead, will the remaining revenue be captured in the fourth quarter? Should we anticipate a significant increase in Q4 since we are accounting for the Q3 sales to Amazon?

Kate Scolnick, CFO

I think that's accurate.

Charles Rhyee, Analyst

Okay. Just to clarify, when you mentioned a 7% year-over-year increase in sell-in, is that referring to the full year, including the timing shift?

Kate Scolnick, CFO

That's sell-through. The 7% was in sell-through. So we've seen sell-through, yes.

Charles Rhyee, Analyst

Oh, sell-through.

Kate Scolnick, CFO

Yes. To address the main focus, we've observed some fluctuations in the sell-in demand; however, on a year-over-year basis, this does not accurately reflect the demand from parents for our product. We've concentrated on sell-through and collaborating with retailers. As we approach the latter half of the year and the start of 2024, the clearance of both products positions us well for next year, particularly regarding the sell-through rate we've prioritized. Furthermore, we've managed to lower customer acquisition costs compared to other industries, which is helping us effectively promote our products. The reduction in spending alongside an increase in sell-through suggests that the net promoter score for our products is returning to previous levels. We believe we are entering 2024 with solid channel and product health.

Charles Rhyee, Analyst

Great. And maybe last question for me. With BabySat, Kurt, you talked about we should expect an announcement at some point for a distribution channel. The way I understand it, getting coverage, getting reimbursement codes and all that sort of stuff, that takes time typically and working with all the payers. Is this distribution partner channel meant to kind of accelerate that and relying on the partner to kind of get those approvals and stuff for you? Or maybe kind of explain that a little bit more, because I would think that when you think about devices coming into the market and getting coverage, that tends to take time. Just curious on what the strategy is here to kind of accelerate that, such that physicians can start prescribing the product.

Kurt Workman, CEO

Yes, that's a great question. There are several complexities and challenges with introducing BabySat into the market, such as shipping and fulfilling a medical device through providers, handling prescription verification, and ensuring customers receive the correct prescription. These are significant challenges. Owlet has interviewed many different partners in the space, and we believe we have found one that can help significantly reduce that complexity. This partner will assist in managing the back-end processes, making it seamless for consumers, and will also expedite our distribution with providers and hospitals for the take-home monitor. We are very excited about this. In the near term, BabySat has the opportunity to utilize existing insurance codes for home monitoring, which means we won't need to create a new code. Currently, babies are sent home with bulky wired monitors that can be intrusive for parents. Owlet's solution is less expensive, wirelessly connects to smartphones, and offers several benefits. BabySat will qualify for existing reimbursement codes, and this partner is helping us navigate that with various insurance carriers and companies in the United States right from the start. We are looking forward to this development and will share more details in the future.

Charles Rhyee, Analyst

Got it. And sorry, one last question for Kate. You mentioned earlier. Are we still on track for EBITDA breakeven by the end of this year or early next year?

Kate Scolnick, CFO

Our primary focus is on operational efficiency. Regarding our operating expenses, we're in a stable position and are still exploring opportunities to optimize our operations, particularly concerning margins and costs. Employee costs have remained steady, and we've been careful with our marketing investments. It's crucial to overcome hurdles related to our clearances, which have incurred additional regulatory costs. This will be our next area to manage, and we aim to maintain this trajectory into 2024. Therefore, our major goal for 2024 will be to drive growth profitably as we prepare to discuss our business model's next phase in the upcoming earnings call.

Operator, Operator

We will now turn the call over to Mike Cavanaugh to ask questions that came in via email. Mike?

Mike Cavanaugh, Investor Relations

Thank you, operator. Kurt and Kate, the first question that we received is, now that Owlet has a medical and consumer product, how does that play into your go-to-market strategy with the retailers that are expanding into healthcare, such as Best Buy, Amazon, which has been mentioned, and Babylist with the purchase of a DME?

Kurt Workman, CEO

Yes. Thanks, Mike. So the gap between consumer and medical technologies and channels continues to shrink. And I think the timing could not be better for Owlet with big box, your e-commerce sites and specialty baby all moving into the DME opportunity. It's kind of the perfect overlap of existing channels with our new medical focus. So Babylist recently acquired a DME to expand its breast pump offering, and Best Buy is significantly expanding its capabilities into healthcare. We're having active conversations with each one of these players to roll out BabySat and Dream Sock next year in addition to exploring new channel opportunities that BabySat opens up.

Mike Cavanaugh, Investor Relations

Great. Next question. Are you expecting to see a revenue lift from your FDA clearances this year in 2023? Or are they 2024 events? And what you need to spend differently to support the launch of those products?

Kate Scolnick, CFO

I can take that question.

Kurt Workman, CEO

Kate, do you want to take that one?

Kate Scolnick, CFO

We were planning to launch both the BabySat product and the FDA clearance features before the end of the year. Currently, we anticipate only modest revenue growth this year, with the majority of benefits expected to materialize in 2024 and beyond. The support for these opportunities will mainly come in 2024. However, we expect that with the support of Dream Sock, the software is set to be available before the year ends.

Mike Cavanaugh, Investor Relations

Great. Thanks, Kate. The next question is, are you experiencing any impact from your competitor launching a consumer monitoring product at select retailers?

Kurt Workman, CEO

Yes. So Owlet is the clear leader in this category. We've invested millions of dollars into establishing this category. And Owlet's de novo FDA clearance sets a new standard for our category that other pulse oximeters and health monitors are going to have to adhere to. This is a clear benefit to Owlet in terms of our market leadership and availability moving forward.

Mike Cavanaugh, Investor Relations

Great. The next question is, given your recent FDA clearances and future entry into remote patient monitoring, what is the current long-term vision for Owlet? And has that changed at all?

Kurt Workman, CEO

I think we've shared this before, but we really believe that just like every baby has access to a breast pump, reimbursed by insurance, or goes home from the hospital to a car seat, we believe every baby will have access to a health monitor at home. And Owlet created this category; we've now established it with the recent FDA clearance. Our vision is to drive that tipping point both in the U.S. and globally, and we'll see that as a significant opportunity over the coming years. We also know that every year in the U.S., we spend tens of billions of dollars on primary care for children in this age group, just in the first few years of life. And I think that's a tremendous opportunity to move the center of triage from the clinic into the home, and Owlet's well-positioned with our data to become the platform. With our data set, we believe we can create the services and the platform that speaks both to parents in the home and the healthcare provider. So there's so much we can do right now with our current regulatory approvals, our distribution that's expanding, our data, and our community, and that's our focus right now to drive growth.

Mike Cavanaugh, Investor Relations

Okay. Great. And then the next question, this is probably for Kurt. Do you think that Dream Sock, the over-the-counter monitor, would eventually have a telehealth component? Or would that kind of feature be limited to BabySat?

Kurt Workman, CEO

So I think both products will have interesting telehealth opportunities. They'll be a little bit distinct. With BabySat, it would be focused on monitoring babies who have known health conditions. With Dream Sock, the opportunity is to focus on home triage for healthy babies. There's 92 million primary care visits in the first few years of life, and partnerships with telehealth could help parents and physicians better understand baby's health at home, without having to expose them to more sickness in the clinic.

Mike Cavanaugh, Investor Relations

Okay. Great. And one last question. How has the product roadmap changed over the past few years compared to what was shared previously with the Band and Crib, for example?

Kurt Workman, CEO

Yes. So kind of like I just mentioned, we believe that there's a significant opportunity to become the health platform in pediatrics, similar to other well-known patient monitoring companies in their markets. Our focus right now is to dramatically increase adoption of home monitoring, both for well babies and at-risk babies with Dream Sock and BabySat. Both in the U.S. and in Europe, we believe we can significantly grow market share over time and position Owlet for LTV expansion with our data and services. And so we want to see healthy growth with improving gross margins that allow us to grow from our strength. And for us, that means increasing adoption of our sock and our CAM launching value-add features with our data that consumers and providers are willing to pay for, and then lengthening our customer relationships for extended LTV.

Mike Cavanaugh, Investor Relations

Great. Thanks, Kurt. And that's all the questions we received. So operator, back to you.

Operator, Operator

That is all the time we have for questions. Handing the call over to Kurt for closing remarks.

Kurt Workman, CEO

Yes. Just as we wrap things up, I want to express my gratitude and thanks to each and every one of you who joined us today. Your presence on this journey means a lot. Owlet's obviously overcome a lot as a business. The recent news of FDA clearance is an exciting milestone, probably the most exciting milestone along this journey. When it comes to the world of pediatric care, the future looks incredibly promising. Owlet is driving that progress, and we're making meaningful strides that bring us closer to our vision of better care for our little ones. So thanks once again for your time and your belief in Owlet.

Operator, Operator

That concludes today's conference call. Thank you. You may now disconnect your lines.