Q4 2023 Owlet Inc Earnings Call

Participants

Mike Cavanaugh; IR Contact Officer; Owlet Inc

Kurt Workman; Chief Executive Officer, Co-Founder, Director; Owlet Inc

Kath Scolnick; Chief Financial Officer; Owlet Inc

Charles Rhyee; Analys; TD Cowen

Presentation

Operator

Hello, everyone. Thank you for attending today's Owlet fourth quarter 2023 earnings call. My name is Thea, and I will be your moderator for today. All lines will be muted during the prepared remarks, my management team with an opportunity for questions and answers. At the end, if you'd like to ask a question, press star, one on your telephone keypad. I would now like to pass the conference over to our host, Mike Cavanagh, Investor Relations.

Mike Cavanaugh

Thank you, operator, and good afternoon, everyone, and thank you for joining us today for ALEC baby Care's Fourth Quarter 2023 earnings call. We appreciate your time and interest in our Company.
Earlier today, ALEC released financial results for the quarter and full year ended December 31st, 2023. The release is currently available on the Company's website at www.investors dot AlphaCare.com.
Our speakers for today's call are Curt Workman, Alex Co-Founder and Chief Executive Officer, and Kate Skolnik, our Chief Financial Officer. Curt will begin with an overview of our performance and key developments, followed by Kate 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 31st, 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 outlook, now I'd like to turn the call over to our CEO, Curt worked.

Kurt Workman

Good afternoon, everyone, and thank you for joining our earnings call, 2023 was a transformative year for outlet. 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 a large community of parents, health professionals and partners that believe deeply in the importance and mission of outlet. Most importantly, though, these achievements position outlet 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 babies that Andreas talk with medical-grade features. We redefined consumer health monitoring and redesign the market for Alex, let me explain why this is so significant. First, it removes purchasing obstacles, FDA clearance, address the key customer concerns around regulatory status and the efficacy of our products and firmly specifically for Dream SoC. We added features such as live vital sign displays and helpful are giving medical-grade comfort to parents wishing to monitor and protect their children. 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 SoC sell-through has continued to maintain double digit growth over prior periods.
Second, it solidifies our market leadership. It is now the first and only FDA-cleared baby monitor in its category selling us apart from competitors to our basic consumer products and further distinguishing our category from traditional sound and video monitors also allowing us to drive direct comparisons to trusted hospital grade technology.
Third, it opened the market for medical expansion. These clearances pave the way for our baby SAP product to enter healthcare distribution, allowing us to improve the standard of care of monitoring for high-risk babies. It also allows pediatricians to prescribe outlet 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 strength in our Consumer and Medical brand and improved 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 initiative and leveraging our credibility behind our FDA clearances. Our marketing chief team drove over 100 million unique video views and increased our social media falling to 1.3 million pair seltzer growth in 2023 and significant year-over-year improvement. Post-fda clearance demonstrates that we can grow without significantly increasing marketing expense. We also improved gross margins to 47% in Q4, a 1,900 basis point improvement year over year and would have delivered over 50% and 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 reductions, marketing efficiency and margin improvements, brought our debt to adjusted EBITDA near breakeven in the most efficient operating position in our history.
At the start of 2023, we focus intensely on channel health key channels like Amazon Target and Walmart saw significant reductions in weeks on hand, while sell-through improve getting to a healthier channel position, an additional 800 Wal-Mart doors fueled over 100% growth in sell through year over year we added distribution of our Duo two products to dream stocked 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 producing weeks on hand to manageable levels. Overall are weeks on hand are now healthy. It navigated this even while overcoming the buybuy BABY bankruptcy were liquidations 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, our has the best product portfolio in the industry, strong sales momentum, healthy level of channel inventory, scalable operations and FDA clearance. We're now focused on the 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 of 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 outlet will be developing software and services behind this new theme that will empower parents with new insights and better close the loop between health care in 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 their dedication during challenging times. This was evident in our donation to our foundation partners of over $1.4 million worth of Dream socks to families in need. In addition, fundraising for Sid's research, which raised over $150,000 and support for grieving parents were outlet and our partners donated and planted trees over 500 trees in memory of these parents precious little ones. We are dedicated to serving the families and communities who need it. The most and I'm grateful and proud of the team that took time to give back while also pulling outlets through very difficult times. I'm incredibly excited about the growth and opportunity we've unlocked for 2024 and beyond have been on this journey with CAD and our community of over 2 million parents for over 10 years now. And I can tell you Alan has never been in a better market position.
Our time is now. Thank you, Kate, over to you for the financial highlights.

Kath Scolnick

Thank you, Curt, and thanks to everyone joining us today in Q4 2023, our 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 reserves 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 returns and sales discounts was $54 million entering into 2023. Our sell-in to distributors it 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 healthy balance. By year end, Q4 sell through units were up 32% sequentially, demonstrating a fourth consecutive quarter 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 margin of a 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 the fourth quarter were $13 million, including stock-based compensation of $2.3 million, representing a 46% decrease of $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 of $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 our U.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 of $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 of $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 and signed 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 Bowne's 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 one-piece sales this past Q4 fall 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 take place in Q3, making strides in ramping babies that commercialization with muted DME partnerships fairly set revenue will begin ramping as we develop our important long-term DME partnerships in 2024 and aligned for revenue model impacts 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.

Question and Answer Session

Operator

Firstly, we will now begin the Q&A session. If you'd like to ask a question, please press star followed by one on your telephone keypad. To remove your question, press star followed by two again to ask a question, press star one. And if you are using a speakerphone, please pick up your handset before asking your questions.
Our first question today comes from Charles Rhyee with PT Cowen. Please proceed.

Charles Rhyee

Thanks, and congratulations, guys. On a split ended the year strong here on Kate or Curt, maybe just touch on Amazon a little bit here. Obviously, the direct selling to Amazon, what's the importance of that and what you what why should we see this as a real significant step forward for the Company?

Kurt Workman

Yes. Thanks, Charles, for the question. And I think one of the big things to note is that Amazon is our largest channel, something close to 30% of our revenue is driven through Amazon. So this is a really important channel for us. And traditionally, we've been working with third-party sellers on Amazon. They help manage the logistics and compliance with Amazon's fulfillment process. And then they also help with some of the marketing on Amazon for us as we progress through 2023, we realized the holiday sell-through was growing for getting into a healthier position. We are worried about some of the partner's financial strength. And at the same time, Amazon approached us they usually work with kind of the top 70 brands in every category of the kind of the top brands in every category. And outlet was one of the brands that they weren't working with the top in our in the baby category. And so we're really excited about the opportunity. What it provides is better financial stability, better margins, the unit economics through Amazon are better. And then going through third party distribution, we get additional placements as part of our agreement for advertising and marketing fund and give us better elevation. And so all of that combined puts a much better margin profile for the business, specifically within that channel as we move into 2024. And then combining that with the FDA clearances, this channels is one, we expect to see a lot of growth.

Charles Rhyee

Yes. And maybe just sticking with the clearance, obviously, you're the only FDA cleared have a product that's available in stores. Maybe talk a little bit about the competitive landscape. I know Massimo has a product out there or maybe just give us an update on what you're seeing in the rest of them?

Kurt Workman

Yes. I would say the number one concern our customers had heading into Q4 was it was around the confusion with the FDA. And so being able to announce that Allied is the first and only FDA-cleared monitor for over-the-counter use. That's still the case today. There's no other monitor that has FDA approval to sell over the counter and through retail channels to empower parents directly with all the health information. So outlets, outlets in that position. And what we saw as a result of that is that it opened up the bottom of the funnel, the top of the funnel has been pretty healthy. The awareness around it's been really good. And there's just been this question mark around, is it FDA approved? Should I buy this from ABB. And we will able to answer that very clearly for consumers in Q4 and they respond. And that's why our sell-through doubled during the holiday period year over year with that specific messaging and the press around that, we're really excited about that opportunity. I think this year, it's been put into a new category. We are the only FDA-cleared monitor on shelves. Our retail partners are really excited about that. They're giving outlet more shelf space for differentiating element from the competition. We're able to do that through our marketing and and labeling, which is really, really exciting. So what we're seeing is now that was the number one monitor in the category, and we expect that distance to continue.
Kris in 2024.

Charles Rhyee

That's great. And maybe switching over to Lisa, a little bit quickly on this one. I think you had talked about of partnering with a direct medical equipment distributor. Maybe give us an update there where you're at with that? I think you had already selected one or you've been you partnered with one. Maybe give us a little bit more details there.

Kurt Workman

And yes, of course, we partnered we announced a partnership with AdaptHealth at the beginning of January adapters and nationwide and distributor of medical devices. They have relationships with every national insurance payer in the United States. They're in a big portion of the hospitals throughout the country. And so there's a perfect partner for Allied to go to market with as we begin to sell babies that they're integrating with all the insurance companies. They've integrated with our website so that the checkout experience through our website as seamless for our customers, they do all of the prescription verification, all the insurance verification. We've got a sales group of hundreds of sales reps that are taking our lead now to and to hospitals. That's obviously a channel. That takes a little bit of time to build things move a little bit more slowly, but we're really excited about that partnership deal. You'll hear more partnerships announced probably every quarter this year as we're building out that medical distribution. But we're really excited about this first step into that into medical distribution.

Charles Rhyee

Great. And sorry, two more questions from me. The first one on international, that's you kind of moved into Europe early on before some of the things that kind of got delayed here. Maybe give us an update on where your ICE. mark. And when you get to CE Mark, is that for an over-the-counter product or is that for a prescription product? Just curious on the distinction.

Kurt Workman

Question is for an over-the-counter product, Europe's a little bit different in terms of their we have prescription and over-the-counter here for pulse oximetry. There, you can get medical distribution and have an over-the-counter product but it is specifically for over-the-counter use. We'll be able to sell it through all of our retail channels that we've set up there. And we think it's going to have a huge impact on not only the expanded distribution that we've been working on, but also the same thing, the opening up the bottom part of the funnel. We've worked hard for a few years to build awareness. And we believe this is going to drive additional conversion and more partnership opportunities. So we're very close to it. We've been able to leverage a lot of the and a lot of the work in a lot of the studies that we did for FDA clearances. And we feel like we're in that kind of final steps. You're getting clearance.

Charles Rhyee

Great. And maybe my last question, Kate, if we kind of look at the quarter here and you kind of back on sort of the one-time items that you kind of noted with particularly with the shift to Amazon, it looked like gross margins were north of 50% and adjusted EBITDA would have been positive for the quarter. I know you're not really giving afford guidance per se, but maybe you could help us think through sort of how margins are you thinking about margin progression and sort of sort of if we move to profitability?

Kath Scolnick

Yes. Yes. As I said, we're looking at the trajectory that we have through the year.
And what we're trying to get to our long-term model is really margin between 45% and 50%. Some of the isolation just kind of comes with the on the pace through the year as we talked about. The other is the Q1 being a step down from Q4 just given volumes and then as it ramps up in Q2, Q3 with the different arms holidays and promotions and prime days. So I think that what we're seeing is more on gravitation that we have towards our Soffe product. That is obviously the hero product as it relates to margin. So mix moving towards there is a benefit on looking further out, as I mentioned, as Baby Phat ramps out further into 2025 on 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 were looking at leverage in the model that way. You know, depending on where the revenue currently on each quarter, we'll see that improving to our goal is to be in a sustainably profitable company. And I think the benefits of 2023 that we made in taking as much expense as we did out, 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 on 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 that improvement continues as we go through the year.

Charles Rhyee

That's great. And I'm sorry, maybe one more here. You're talking about opening at the bottom of the funnel and you saw that going to double in the fourth quarter. Can you give us a sense on what that trend looks like? Obviously, here in the first quarter so far? Are we still seeing? Yes, returns of.

Kurt Workman

Yes, I would say no, 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 PSoC, which is the part of the sales mix that's really starting to outperform and do those close to that so we have seen sustained sell through left. That's really promising as we go into 2024 and we can build on. And is it significant?

Charles Rhyee

Yes. Appreciate all the questions. Thank you.

Kurt Workman

Thanks, Charles.

Operator

Thank you for your question. There are no further questions in queue. So I will now pass the conference back over to Mike Cavanagh for further questions that came in via e-mail.

Mike Cavanaugh

Thanks very much, operator. Yes, we did have we have received some questions from investors and particularly some of our retail investors that wanted to share during the Q&A session today.
So the first one, congratulations team on the third on 13 trillion heartbeats. Are there efforts to identify potential correlations between heartbeats and various medical conditions or sleep quality what can you tell us about the product roadmap and some of the other products like band and crib, considering both FDA clearances and your extensive dataset compared to competitors that should be an advantage for you?

Kurt Workman

Yes, I'll take this one and yes, it has one of the largest data sets of infant health at home and a fantastic data science team. We've known for a long time that the potential of our data and our technology and the value we can drive from those insights is immense. We've really been eliminated for years just being a consumer device and limitations around being in the consumer device space.
So now with FDA clearance, we can really start to unleash our data and technology for parents and providers that's a big part of this year. I talked a little bit about software and services. So our focus in 2024 is really two things. It's to drive adoption of our medical devices, and we're seeing the momentum in that area and launching software and services to leverage our data. So we really do believe that there's significant revenue and margin growth and as we progress here by focusing on those two specific areas with about 140 million babies born globally, we're just scratching the surface of our long-term potential. So stay tuned for more of this is a really exciting area that we'll be sharing more and more about.

Mike Cavanaugh

Okay. Thanks, Curt. The next question as an investor, I appreciate the strong support from Eclipse as well as the active participation of the Board in the recent offering. And that clearly demonstrates confidence in our 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 what in the current macro environment, how does outlet push forward and stick out from the others?

Kath Scolnick

Yes, I can take that question because 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 Vito, 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 2024 is what puts us in the best position to continue to build and shareholder value right now.

Mike Cavanaugh

Okay, thanks, Kate. Next question, does outlet plan to launch in India or other Asian countries? And if so, what is the potential time line for that?

Kurt Workman

Yes. I mentioned that we're very close on the CMS clearance. I'm really proud of the team's work there. That's the near term focus, but there are 140 million babies born across the world every single year. And parenting really has universal, meaning there's it doesn't matter where your babies born parents care about their child safety and their health and and then being able to get a good night's sleep. And so our technology has a really big opportunity to have an impact across the globe. We're really excited about this in 2020 for our specific focus is on expansion of our medical device in Europe. There's a lot of room for growth there, and then we'll open up other geographies in coming years.

Mike Cavanaugh

Great. Thanks, Kurt.
Next question, given the Democrat, the demographic of our target market, how important is social media and influencer marketing? And can we expect celebrity type marketing for the outlet stock in the future.

Kurt Workman

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

Mike Cavanaugh

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

Kurt Workman

Yes, I would just simply say that outlet 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 cleaning up any confusion in the market. That's existed. We've had hundreds of articles written about it and just the last few months, millions of parents engaging with that message, thanks to our social and our PR team that's doing a fantastic job. And that's a big reason why we're seeing this organic lift and sell through people now know that it is in that position and we're the best available option so this is a massive year for us.

Mike Cavanaugh

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

Kurt Workman

Operator?

Operator

Thank you. I'll now pass the conference over to Craig Whitman for closing remarks.

Kurt Workman

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 and 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 felt 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.

Operator

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