Owlet, Inc. (NYSE:OWLT) Q1 2024 Earnings Call Transcript May 6, 2024
Owlet, Inc. beats earnings expectations. Reported EPS is $0.1352, expectations were $-0.14. OWLT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. Thank you for attending the Owlet First Quarter 2024 Earnings Call. My name is Cameron and I will be your moderator for today. [Operator Instructions] And I would now like to pass the conference over to your host, Mike Cavanaugh, Investor Relations. You may proceed.
Mike Cavanaugh: Good afternoon, everyone, and thank you for joining us today for Owlet Baby Care, Incorporated first quarter 2024 earnings call. We appreciate your time and interest in our company. Earlier today, Owlet Inc. released financial results for the quarter and full year ended March 30, 2024. The release is currently available on the company’s website at www.investors.owletcare.com. Our speakers for today’s call are Kurt Workman, Owlet’s Co-Founder and Chief Executive Officer; and Kate Scolnick, our Chief Financial Officer. Kurt will begin with an overview of our performance and key developments followed by Kate, who 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 would 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 on Form 10-K for the fiscal year ended December 31, 2024. 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, I would now like to turn the call over to our CEO, Kurt Workman.
Kurt Workman: Thanks, Mike. And also joining us on today’s call is Jonathan Harris, Owlet’s President and Chief Revenue Officer. Good afternoon, everyone, and thank you for joining Owlet’s earnings call today. As always, we appreciate your ongoing support of Owlet. We’re starting off the year with strong double-digit revenue and sell-through growth, gross margin expansion, significant operating cost savings and adjusted EBITDA improvement over last year. In addition to our significant Q1 operational achievements, we met our business objectives in our healthcare business as we launched our go-to-market channels to include medical device sales and have now integrated our first telehealth partnerships with Wheel on owletcare.com.
Our recent announcement of CE Medical authorization in Europe, in addition to the recent FDA clearances are a powerful endorsement of our technology, establishing Owlet as a leader in safe and effective health monitoring for infants. There is robust and discernible momentum for Owlet in the market. We believe this year is the turning point propelling us to our vision of a safe and healthy journey for every baby and a sustainable growth company. In 2024, we have three main growth objectives. First, with the first FDA-cleared monitor on the market, now is the time to drive significant adoption of the Dream Sock. Second, with the approval of BabySat, we are opening medical distribution channels to directly serve the babies who need the convenience and reliability of Owlet the very most with insurance reimbursement.
Finally, we will be launching our new subscription service this year, leveraging our vast and growing dataset to help guide parents through health and sleep challenges they face when caring for their newborn. I’ll turn the time over to Jonathan Harris, our President and Chief Revenue Officer, to talk about the first two areas of focus for 2024, accelerating adoption in our new medical sales channels.
Jonathan Harris: Thanks, Kurt. I’ve been fortunate enough to be a part of numerous hypergrowth companies such as GoPro and Jawbone and some of the key parallels I’m seeing with Owlet are the passion for the brand by the core audience and a strong word of mouth sharing their storage with the global audience. And as Kurt just mentioned, we have some really strong momentum building, not only in the U.S. but across the globe. I’d like to start with adoption. The response to the new FDA-cleared Dream Sock here in the U.S. has been outstanding. We’ve witnessed strong parental engagement with over 30 million organic views of our video content across TikTok and Facebook in the first quarter and over 1.3 million followers across our social channels.
The early response to the FDA clearance of Dream Sock has been strong with sell-through achieving over 60% growth compared to Q1 of 2023. Customer satisfaction supports this growth with NPS scores exceeding 70 and Dream Sock hitting an all-time high in this category. We achieved this market enthusiasm while maintaining strong growth trajectory, including 50% gross billings growth and 35% revenue growth over Q1 last year. Here in the U.S., our partnerships with major retailers, Target and Walmart are growing with expanded merchandising and placements to bring the Owlet experience to life. Specifically, we are seeing sell-through at Target increased by over 31% year-over-year, and our baby list registries grew at over 64% versus the previous year, proving our messaging is resonating with expecting parents.
Owlet is still in the beginning stages of growth for Dream Sock with about 8% of the 3.6 million births every year going home with an Owlet Sock. We believe that just like car seats, breast pumps and strollers, every baby will have access to health sensing technology at home. I’m also very excited to announce that we recently obtained CE medical clearance clearing the way for Owlet to increase reach in the significant European market where over 3.8 million babies are born every year. Owlet is extremely well positioned to take advantage of our EU clearance with key retail partnerships across the European market, U.K. and into Australia, where we’re already seeing sell-through up significantly. For example, Baby Bunting, Australia’s largest baby retailer, we saw year-over-year sell-through increase of over 200% of Owlet products.
Our partners are helping us share our story globally within their markets and in their own languages. We expect continued growth and momentum as we launch Dream Sock as a medical device across these regions. This exciting growth opportunity comes on the back of continuing operating discipline. In 2023, we honed our efficiency showing an impressive near 80% reduction in CPA cost per acquisition compared to prior periods, down to a lean $22. This efficiency extends throughout operations, improving our gross margin by 500 basis points over Q1 2023. We’ve also maintained disciplined control over operating expenses, holding steady at roughly $10 million per quarter, excluding stock-based compensation. All of this demonstrates our commitment to maximizing growth while moving decisively towards profitability.
Secondly, opening new medical channels. In a similar way, the response to pediatricians to Owlet’s BabySat has also been overwhelmingly positive. In the first three months, we’ve seen hundreds of pediatricians prescribing BabySat. The feedback we are receiving from doctor tells us that BabySat is a powerful new tool, which enables not only remote monitoring babies under their care, but also informs more effective ongoing disease management of various conditions. We launched our partnership with AdaptHealth in Q1 to expand our distribution in medical channels. Adapt serves as a cornerstone for successfully entering this vital market. We’ve integrated with all major insurance plans, including Aetna, Cigna, United and many of the BlueCross networks, removing barriers and ensuring families can access BabySat when they need it most.
We’re also streamlining adoption through partnerships with providers like Wheel, offering telehealth services directly through owletcare.com for prescription access. Parents can now seamlessly get a prescription and submit for reimbursement through the Owlet website with nearly 70% of private insurers integrated with BabySat. AdaptHealth then handles all the verification and fulfillment of the BabySat device is a nationwide DME. We’ve also begun educational teach-ins to Adapt’s large sales force with relationships across over 100 hospitals. We expect this channel will take some time to mature, but we see this as a very large opportunity to offer the families with medical necessity, our innovative technology reimbursed through insurance. In 2024, we’ll continue to add new distribution partners to help us reach every baby as they leave the hospital.
I’ll now turn it back over to Kurt to talk about our product development efforts with subscription.
Kurt Workman: Thanks, Jonathan. In addition to our channel expansion, we’re also focused on driving additional value to our customers through a new subscription service. Our unparalleled dataset informed by capturing over 1 trillion baby heartbeats, provides deep insights into infant health and sleep and we’re unlocking its potential. Parents lose over 44 nights of sleep in the first year alone, and there’s over 92 million healthcare visits for kids zero to four years old. We’re navigating these challenges, parents want to know what’s normal and when they need to get professional support. Parents want access to information that can help them better navigate when to visit the doctor and when to stay home, and they want the ability to seamlessly share that information to a doctor from the comfort of their home.
They also want information that can help them personalize sleep coaching for their baby. Health and sleep are the fundamental concerns of every parent. Our subscription service will analyze this data to offer parents personalized recommendations and support. Engineering work on the service is progressing rapidly, and we expect the beta launch this summer that parents can subscribe to for an additional monthly fee. We believe this subscription will address real pain points for families, creating a compelling and valuable monthly offering. Apart from offering data and insights to parents during the initial year of their child’s life, we firmly believe that our products and services can extend their value well into the toddler years and beyond by focusing on core parenting pain points in health and sleep and leveraging our data to drive continued releases of software features, we believe this can expand our TAM and significantly extend our LTV per customer.
Owlet is in a stronger position than ever. We’re a growth-oriented company operating efficiently and bringing innovative solutions that address the fundamental needs of parents. With our landmark FDA clearances, we are established as a pioneer in infant health technology. This unique set of circumstances has the company poised for success, and we continue to deliver value for our families and stakeholders alike. Thank you. We’re excited to share this incredible journey with you. I’m now going to turn the time over to Kate for the financials.
Kate Scolnick: Thank you, Kurt, and thanks to everyone joining us today. In Q1 2024, Owlet demonstrated strong financial performance. I’ll spend the next few minutes walking through Owlet’s key financial metrics and providing some additional detail. Gross billings for the first quarter were approximately $18.4 million, up over 48% year-over-year. Product promotions and discounts were $2.2 million. And returns on allowance reserves were $1.4 million, approximately 8% of gross billings within our average range. Q1 net revenue, which includes promotions, discounts and returns and allowances of approximately $14.8 million, up over 37% year-over-year. Revenue growth was primarily driven by higher sales of Dream Sock products, reflecting an increase in consumer demand and sell-through as compared to the same period in the prior year.
Our gross margin for the first quarter was approximately 44.4% from 38.7% margins in Q1 of last year. Gross margins increased year-over-year primarily due to higher revenue and lower direct products and fulfillment costs. During the quarter, we experienced some cost of good expense impact from elevated transportation costs related to the global disruptions in inventory routing. Along with other companies seeking shipping alternatives, we’re working to mitigate these factors. Operating expenses in the first quarter were approximately $12.3 million, including stock-based compensation of $2.2 million, representing a 19% decrease in operating expenses year-over-year. Operating costs decreased year-over-year primarily due to transaction costs and lower spend in G&A to support the business.
Excluding stock-based compensation, Q1 operating expenses were approximately $10.1 million. First quarter net income was approximately $3.3 million for the quarter compared to a net income loss of approximately $11.9 million in Q1 2023. Net income in the first quarter of 2024 was primarily driven by demonstrating stronger operating results over last year and a gain related to the company’s common stock warrants outstanding of approximately $9.2 million from a decrease in the fair value of common stock warrants outstanding. This compared to a gain of approximately $1.9 million in the fair value of common stock warrants outstanding in the first quarter of 2023. Adjusted EBITDA loss for the first quarter was approximately $3.1 million, improving approximately 46% from adjusted EBITDA loss of approximately $5.8 million in Q1 of last year.
Turning to the balance sheet. Q1 ended with approximately $18.4 million in cash and cash equivalents, including the $9 million financing announced in February. For being here with good financial flexibility to execute on our 2024 growth initiatives and the necessary working capital resources to meet the growing customer demand for FDA-cleared products. We remain focused on executing on our strategic initiatives to further strengthen our commercial and financial performance in 2024 and the year is off to a strong start. Looking ahead, we will be refraining from providing specific quarterly revenue guidance. We are focused on executing on the core business activities in 2024 that will maximize the following initiatives. Supporting Dream product commercialization globally and driving continual balance of sell-in and sell-through consumer retail inventory.
From a sell and linearity perspective, we anticipate a seasonal sell-in revenue increase from Q1 to Q2 for Mother’s Day holiday promotions and Prime Day. Following Q2, selling to retailers for the November-December holiday seasonal promotions usually takes place in Q3. Continuing to make effective strides in BabySat commercialization with new DME partnership and Wheel integration on owletcare.com. As a reminder, we anticipate BabySat product revenue will be ramping in 2024 as we develop these partnerships and will align for revenue impact in 2025. Focusing operationally on driving gross margins within our target range of 45% to 50% through unit volumes, product mix and operational efficiencies in driving leverage in our business operations towards breakeven and sustainable profitability.
Through 2024, we are targeting operating expenses excluding stock-based compensation between $10 million to $12 million per quarter. With that, I’ll turn the call over to the Q&A portion. Operator, please open up the call for questions.
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