Owlet, Inc. (NYSE:OWLT) Q2 2022 Results Conference Call August 11, 2022 4:30 PM ET
Company Participants
Mike Cavanaugh – Investor Relations, ICR Westwicke
Kurt Workman – Co-Founder and Chief Executive Officer
Kate Scolnick – Chief Financial Officer
Conference Call Participants
Steve Braun – Cowen
John Babcock – Bank of America
Jim Suva – Citigroup
Operator
Ladies and gentlemen, thank you for standing by. Welcome to Owlet Second Quarter Earnings Call. My name is Irene, and I will be your coordinating this event. [Operator Instructions]
I’d now like to pass the conference over to your host, Kurt Workman. Kurt, please go ahead.
Mike Cavanaugh
Good afternoon and thank you for joining us today. Earlier today, Owlet Incorporated released financial results for the quarter ended June 30, 2022. The release is currently available on the company’s website at 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 US Securities and Exchange Commission, including its Quarterly Report filed May 13, 2022, and other reports filed with the SEC, 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 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 most comparable GAAP measures in the company’s earnings press release, which is also available on the company’s quarter results page of its website.
I will now turn the call over to Kurt.
Kurt Workman
Thank you, Mike. Good afternoon, to all who are joining us today, as always, we’re grateful to you and to the millions of parents who continue to root for and support Outlet, as we work to build a connected nursery ecosystem. My remarks this afternoon will focus on our results for the second quarter and year-to-date and our plan forward is we work to deliver on our vision to every day and every parent. We remain steadfast and committed to that, and we’re proud of the business we’ve built. Later in the call, I’ll detail our approach for the remainder of the year, how we’re navigating current headwinds and updates we’re making to our business as we work toward profitability.
I’ll look at the second quarter of 2022, Owlet generated net revenues of 418.3 million, which fell short of the guidance we shared in Owlet’s last earnings announcement. We did not achieve the gross billings results as we expected in Q2, largely due to two main reasons. I’ll first address the Owlet specific dynamics and second discuss the macroeconomic headlines. Since we’ll be referencing this throughout the call for a quick baseline definition, we refer to sell-in as a measure of the number of units retailers purchased from Owlet to stock their shelves and sell-through is when the unit is actually sold to the end consumer.
Q2 was our first full quarter of dream product availability online and in store at all of our retail partners, Owlet online and with our Amazon distribution partners. As a reminder, following the launch of the dream products in January, much of the initial sellin and online in-store availability of our dream products took place late in Q1. From Q1 to Q2, we experienced over 40% growth in sell-through units for our dream products across our channels. While this rate of growth was good from an initial product launch standpoint, it was a slower pace of sell-through than we had expected and consequently, we had more aggressive Q2 selling sales expectations.
In addition, along with many consumer brands, in Q2, Owlet began experiencing the effects of macro headwinds with retailers, adjusting their projections and ordering cadence in terms of weakening of supply as they began to defensively position their balance sheets compared to last year. This combination of factors resulted in lower than expected gross billings for the second quarter of $22.7 million. With the second quarter revenue results and current macroeconomic factors in mind, we’re realigning our operating plan for the second half of 2022.
Owlet three primary areas of focus are: first, achieving strong sell-through of our core products, including our Sock and Camera lines. Second, making strides in our medical device submissions and finally, efficiently managing our balance sheet and expenses to reach, breakeven adjusted EBITDA.
First, our focus on achieving strong sell-through of our core products to drive top-line revenue. We are seeing encouraging signs of our underlying strategy for our Dream products taking hold that affirm our product market fit and demand. The sell through rate over the past few months is similar to and starting to pace ahead of the volume we did in 2020, that is the same business we took public. So we are confident in our ability to continue our brand leadership in the connected nursery ecosystem, and market fit for the value proposition of our dream product.
Additionally, we started the year with a brand new product. We now have an average of four plus stars on all of our products, which is extremely important to ongoing consumer sales. Dream Duo was recently named as Best Baby Monitor by CBS News, and the number of expecting parents adding dream products to their baby registry continues to grow. Post-purchase metrics, including net promoter score remains strong and rival what we previously saw with the Smart Stock.
We continue to drive new levels of marketing support and retail partnership with the Owlet brand. Our recent Amazon Prime day in July was Owlet’s best ever, where the number of units sold were double our internal forecast and Owlet ranks as the number one baby monitor on Amazon in the US. We’re also expanding to about 1200 Walmart doors and adding the Dream Duo as a product offering to 600 existing target doors.
Internationally, we’re pleased with the progress we’ve made in launching our product in the parts of Asia with South Korea market opening this month. Year-to-date international gross billings are up over 60%. Combined we believe these are leading indicators with a solid foundation of sell-through that we build on with consumers and retailers through the remainder of the year.
In July, we launched our newest technologies domestically, including the next generation nursery Owlet Cam 2, and the predictive Sleep Technology tool. We’re continuing to load into our retail partners through the remainder of Q3, and Cam 2 will officially launch in international markets this quarter as well. The dream platform we’re building today for our sock line as part of what we will leverage in our medical devices, expanding on our core technologies to accelerate adoption and add use cases for our monitoring technologies.
Our team is working on several medical device submissions, including in the U.S. and internationally. Notably, we plan to submit our 510(k) application to the FDA for our BabySat device in the coming weeks. BabySat is intended to be a prescription product for use with sick babies under the care of a physician, and will address the most vulnerable population. With existing CPT codes available, we believe the babysat could be reimbursable, which will also improve accessibility to this critical technology.
We have also recently aligned with FDA on our submission for our software as a medical device features as an over-the-counter product that offers heart rate and oxygen notifications on top of the existing Dream Socks’ sleep tracking capabilities. We believe we are on track to submit our application in Q4.
Finally, international clearances are part of our measure of success, as we work towards submissions in Europe. Adding cleared medical devices to our offering will further enhance the Owlet value proposition and better empower parents to provide care at home. I believe we have the right team in place to execute against these submissions and we will continue to report on these milestones on future calls.
The third area of focus for Owlet is to efficiently manage our operating model as we navigate the sell-in and sell-through demand trends effectively with our retail partners within macroeconomic headwinds, and as we resolve the working capital hangover from the FDA warning letter process. Prior to taking our company public, we were driving lean leverage in our business and adapted our investment strategy when we went public last July.
In 2021, and the first half of 2022, we invested in scaling our business, marketing spend and future investment in our product portfolio. Based on macroeconomic conditions in the market, we are adjusting our 2022 operating plan to reduce our operating costs, and accelerating our plans to drive the business to breakeven adjusted EBITDA in 2023.
Towards these goals in late July, we implemented a restructuring program to streamline our organizational structure, reducing operating expenses, and managing and conserving our cash resources. So in the second half of 2022, we’re focusing on being the Baby Monitor of choice for families, which includes further enhancements and improvements to the Dream Sock and adding features that make this the monitor for every baby.
This means we’re elongating our launch timing for some new product portfolio initiatives like Smart Crib. However, it remains an important part of our future roadmap. We believe this focus on operating efficiency will allow us to better control our destiny and be more nimble in the face of a changing economy and business environment. We’re optimistic these pivots will put the business on track for profitability sooner as we build on the foundation of our core technologies, accelerating adoption and expanding use cases with medical devices.
Finally, I want to take a moment to thank Mike Abbott for his years of service at Owlet. Mike announced today that he’s resigning from his role as President and Board member at Owlet to spend more time with his family and pursue new opportunities. Mike joined Owlet over 4.5 years ago. And in his time here, he was instrumental in our expansion to a global public company. We wish him well in his next chapter.
I’m grateful for a passionate team that’s been dedicated to improving lives and helping parents navigate this incredibly important part of their journey. Owlet is empowering parents with information they need to better deliver care home. And our vision is that every family has access to the tools and technology they need to keep babies safe, healthy, and happy. Thank you again for your continued support of Owlet and our mission. I look forward to sharing more updates and future calls.
Kate, I’ll now turn the time over to you.
Kate Scolnick
Thank you, and good afternoon, everyone. Turning to our Q2 results. Gross billing for the quarter were 22.7 million below our expectations for the quarter. As Kurt stated, it’s our first full quarter for our dream products in the marketplace and we did not see the anticipated rate of sell-in and sell-through following our successful launch into retailers in Q1. In addition, retailers began to reduce our inventory productions as they work to reposition their balance sheets, more defensively for macro headwinds.
Q2 product promotions and discounts were 2.5 million, relatively consistent with the prior year. Within this included 2.3 million associated with our July Amazon Prime Day. Return adjustments for Q2 2022 were 1.8 million, a 41% reduction for the first quarter and in line with the prior year. Direct to consumer return rates normalized to levels similar to our smart fact products, which we believe is driven by consumers’ better understanding the dream value proposition. Within this approximately $1 million was for adjustments for FDA return to vendor activity associated with our Smart Sock product.
In summary, Q2 net revenues were $18.3 million, including the impact of adjustments such as promotions, discounts and other allowances. Cost of goods sold in Q2 was $11.7 million and gross profit was $6.6 million. Q2 gross margin was 36.1% compared to 54.2% gross margin in the prior year. Compared to the same period in 2021, our gross margin was impacted by macro inflationary pressures, including product costs, shipping and fulfillment. In addition, promotions, discounts and returns remain at similar levels to the prior year.
Operating expenses for the second quarter 2022 were $27 million compared to $19.4 million for the same period in 2021. The increase in year over year operating expenses was primarily for planned increases in spending associated with the scaling of the business, public company costs and stock based compensation. In July, the company implemented a restructuring program to streamline the company’s organizational structure, reduced operating expenses and manage and conserve cash resources to strive for profitability.
As part of the restructuring program, we commenced a workforce reduction of approximately 74 employees that is expected to be substantially completed in Q3, and we expect to incur costs of approximately 1.1 million consisting primarily of severance, one time termination benefits and other related costs.
As a result of the restructuring actions, we expect to reduce run rate operating costs, excluding share based compensation and incentive compensation to approximately $15 million to $19 million per quarter exiting the fourth quarter of 2022. Operating loss and net loss for the second quarter of 2022 were $20.4 million and $11.7 million respectively, as compared with $5.9 million operating loss and $5.3 million net loss for the same period in 2021. Q2 adjusted EBITDA loss was $16.7 million compared to adjusted EBITDA loss of $2.6 million for the same period in 2021.
Turning to the balance sheet, cash and cash equivalents as of June 30th were approximately 37 million. Accounts receivable were $24 million, up 7.4 million sequentially from $16.6 million in Q1. Inventory at the end of Q2 was $29.4 million, up $4.7 million sequentially from $24.7 million in Q1. Nearly all return authorizations for RTB was closed for retailers at the end of the second quarter, the company is in the process of working with its customers to apply liabilities against outstanding invoices were applicable. From a working capital perspective, we planned to heavily utilize existing inventory on hand.
With regards to our financing arrangements, we did not meet our revenue covenant for the second quarter, which was waived by Silicon Valley Bank. As part of our waiver agreement, our liquidity covenant was reduced to #22.5 million, and our line of credit was reduced to $5 million. The waiver agreement is intended to function as a bridge arrangement, and we’re actively working with SVB on further restructuring our loan and line of credit, including amending future financial covenants, which we expect to complete during the third quarter. All of our outstanding partnerings with SVB are represented as a current liability on the June 30th, 2022 balance sheet, including our second quarter earnings release.
Looking ahead, as current outlined, we have 3 primary areas of focus: achieving sell-through of our core products, making strides in our medical device submissions, and officially managing our operational plans towards breakeven and profitability. While we continue to believe in and invest in our strong relationships with our retail partners, we’re entering the back half of the year with caution given retailer signals on reducing inventory and managing balance sheets, more defensively and cautionary consumer spending in this macro environment.
Given our reduced forecasting visibility, we are not providing revenue guidance for Q3. We are planning for Q3 operating expenses to be lower sequentially, reflecting operating expense actions that began in mid-July.
Operator, let’s open it up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Charles Rhyee of Cowen.
Steve Braun
Hi. This is Steve Braun, on for Charles. Just had a quick question on the guidance that you just provided on the back half of the year. So it seems like you’re a little bit more cautious on consumer spending and the outlook for the rest of 2022. But given where, I guess like the — we’ve been seeing some moderation in the producer price index and also inflation this month, I guess like, can you unpack like some of the assumptions there and kind of like what’s going into that outlook. Thank you.
Kurt Workman
Yes. Kate, do you want to take that one?
Kate Scolnick
Yes, sure. I think, part of what we’ve tried to provide is similar discussion as we launched new products at the beginning of the year, which we’re really excited about. And what we’ve been able to manage is really the perception and adoption of that product, right? So the NPS scores, the consumer ratings and the overall transition to the Dream product platform, that sell-in for us really happened late in Q1. And so we are monitoring very closely, the sell-through in Q2, which happened at the rate that we described, but was slower than anticipated, which also created slower sell-in for ourselves.
So, a lot of the dynamic that we’re talking about is for Owlet specific, but then also looking at the macro condition set that our retailers have expressed to us as well as the consumer spending. So I think that just given both of those dynamics, we’re entering the back half with optimism around our portfolio, but also with the macro environment that other retailers and the consumer spending index are presenting. So we don’t have a unique point of view on it, but we’re sharing that caution that others express.
Operator
Our next question comes from John Babcock from Bank of America.
John Babcock
I guess to start out on the demand front, could you talk about when things started to slow? I mean, I think we’re hearing from others at least on the consumer front that it seemed like most of that began in June, but just kind of curious to hear what you’re seeing? And then also, if you could talk about trends, how that’s kind of continued in July and into August? That’d be helpful.
Kurt Workman
It’s been kind of a unique year for Owlet, right, because we were out of the market for a quarter in Q4 of last year, where we weren’t selling products. We launched the Dream Sock in Q1, and it took us like a full quarter to get back to market, get back into all of our stores and all of our online channels. And then Q2, we were really measuring, sell-through growth. I think our hope was we’d be moving in a faster clip. We’d be back in the market faster, the sell-through would ramp faster. But what I would say is overall in terms of just general sell-through growth, we’ve seen really good improvement Q1 to Q2, and then July, as we’ve noted was one of our was our best Prime Day ever. And we saw really good sell-through in July as well.
So there’s kind of two stories here, but to your point, in June we did have some retailers pull back on their forecast and reduce the amount of inventory that they were willing to hold as part of our expansion activities and growth with them. And we’ve heard kind of similar sentiment moving forward that they’re being a little bit more cautious about how much inventory they’re going to hold and how that’s flowing?
So hopefully that answers your question. There’s sort of good momentum because we’re coming back to market and we’re seeing that, but at the same time, there’s some of these macro pressures that are more coming from the retailers than the consumers themselves at this point in time.
John Babcock
And just to make sure on the inventory front, what are you guys doing to manage that? Are you adjusting any sort of production schedules or inventory is generally in good shape? What can you comment there?
Kurt Workman
We’re working with our partners to make sure that yeah, we’re bringing the inventory down. That’s one of our goals to bring it more in line with where sell-through and sell-in is today, and that’s part of the activity. We’re also working with our partners to continue to sell the — through with the product and to grow the business and to grow that sell through. So, but yes, to your point, we are working to reduce our inventory levels.
John Babcock
Okay. And then just the last question I have — at least I think so is generally you talked about, wanting to get to breakeven, how quickly could that occur. And then also I would assume this is going to have some impact on growth. So on that front I was just wondering if at this point you’re waiting for the macro situation to improve before wrapping up investments again, or how you’re thinking about that?
Kurt Workman
Yes. Kate, do you want to pick that?
Kate Scolnick
Yes. So John, really the investments that we were making in the first half that we’re contributing to the run rate of operating expense were investing in the product portfolio for next year. So as we talked about for example, bringing out our Smart Crib will elongate the time to market there. Some of the other investments would correlate to let’s just say discretionary spending anything to do there. We did have a reduction in force, so we brought back the number of employees that we have is much closer to where we were in 2020.
And so what you’ll see in the back half of the year in terms of our operating expense run rate is going to be much lower than it was in the first half lower in Q3 than Q2. And then again, lower in Q4 trying to exit the year then in that range of $15 million to $19 million in operating expense, excluding the stock-based comp.
In terms of bringing in that kind of breakeven and getting into profitability, we had said that we were targeting kind of exiting 2023, and as long as we maintain that run rate will be much earlier in the year next year. And that we’ll see how things moderate with the macro and when we’re able to turn back on in terms of marketing and sales, we’ll continue to look at that.
But I think that what’s important is that, we were able to refresh our product portfolio this year with the dream platform. Both in terms of our Sock and Cam, and also, as we talked about with our regulatory clearances, we have a couple of those processes underway still through the end of this year and then those will be on track as well.
So a number of the things that we have in front of us are with — are our fresh portfolio and also our super near term objectives will be in place early next year that will contribute to our opportunities in the back half of ’23.
John Babcock
Okay. And then I’d just like to clarify, I assume you’ve cleared out at this point, most of the high cost inventory from last year?
Kate Scolnick
So the inventory that we had from last year, you’re referring to Smart Crib inventory?
John Babcock
Yes, exactly. The — yeah the retool for —
Kate Scolnick
Yes. So the inventory that we brought back in — some of the comments that we made that we’re through that process of return to vendor. And so we’re selling that back into the market, or we have that in inventory on our balance sheet, but that process is we believe we’re through it or nearly all the way through it.
Operator
Thank you. Our next question comes from Jim Suva from Citigroup.
Jim Suva
There were some commentary in the press release that gross margins were impacted by higher returns. Can you walk us through, because I thought the returns were more kind of
October, November, December of last year. So maybe I’m — my memory is off on that or maybe there’s additional factors. And it sounds like is that the end of it or could those kind of continue on?
Kate Scolnick
So, the return rate that we saw in Q2 as it relates to the run rate of our product, our general sales returns, actually was back to where our original product was. So on a sequential basis, that rate actually declined where we had cost related to returns was around the return to vendor program. So about 1.1 million against gross sales was related to the return to vendor program that we won’t see again — that’s part of the rework program and that hit our gross margin in the quarter.
Jim Suva
And then did I hear on your last answer to the prior question, you said breakeven was goal for 2023, was that like exiting or full-year in totality? Or how should we think about that timing and comment?
Kate Scolnick
We’ll try to bring it earlier into ‘23. I mean, I think our primary goal is to reduce operating expenses considerably in the back half of this year. We just took our action over the last couple weeks and we’ll look forward to updating you on that timeline in November, but certainly the actions that we took in the changes in the product portfolio will help us accelerate that much earlier into 2023.
Jim Suva
And that profitability definition, is that like earnings per share or EBITDA or how did you define profitability or capital?
Kate Scolnick
Adjusted EBITDA.
Operator
Thank you. Ladies and gentlemen, currently, we have no further questions. Therefore, I would like to hand back to Kurt Workman, CEO of the Company for any closing remarks. Kurt, please go ahead.
Kurt Workman
Yeah, thank you. I just want to kind of reiterate our commitment to our mission of empowering parents to really give care at home. I think Owlet does that in such a unique way. It’s what motivates our employees and our partners and the commitment that we see there is incredible. We’re excited about the progress we’re making with Dream Sock and the growth in Dream Sock. We look forward to putting our FDA submissions in very soon, and I believe the business is in a much healthier track with the restructuring that Kate mentioned. So thank you for joining. We appreciate your support and looking forward to the next update.
Operator
Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for being with us today. Have a lovely day ahead. You may disconnect your lines now.
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