iPower Inc. (IPW) Q3 2024 Earnings Report, Transcript and Summary

Good afternoon, everyone, and thank you for participating in today's conference call to discuss iPower's Financial Results for its Fiscal Third Quarter 2024 ended March 31, 2024. Joining us today are iPower's Chairman and CEO, Mr. Lawrence Tan; and the company's CFO, Mr. Kevin Vassily. Mr. Vassily, please go ahead.

Thank you, operator, and good afternoon, everyone. By now, you should all have access to our fiscal third quarter 2024 earnings press release, which was issued earlier today at approximately 4:05 p.m. Eastern Time. The release is available in the Investor Relations section of our website at meetipower.com. This call will also be available for webcast replay on our website. Following our prepared remarks, we'll open the call for your questions. Before I introduce Lawrence, I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the state of the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict, many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in these forward-looking statements. Our presentation today also includes certain non-GAAP financial measures, including adjusted net income and EPS, as supplemental measures of performance of our business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation tables and other important information in the earnings press release and Form 8-K, which we furnished to the SEC this afternoon. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC, including our Annual Report on Form 10-K, which was filed with the SEC on September 15, 2023. Do not place undue reliance on any forward-looking statements, which are being made only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to forward-looking statements. With that, I would now like to turn the call over to iPower's Chairman and CEO, Mr. Lawrence Tan. Lawrence?

Thank you, Kevin, and good afternoon, everyone. We achieved strong financial results in our fiscal third quarter as we generated double-digit revenue growth, record gross margins and improved operating leverage, resulting in our return to profitability. We are also gaining momentum in our super suite supply chain business, which contributed to our top line growth in the quarter and now accounts for approximately 10% of the total revenue. In fiscal Q3, our largest channel partner returned to a normalized inventory position and purchasing cycle, which led to stronger order volumes during the quarter. We are pleased with the demand from our largest channel partner and will ensure our product catalog is stocked with the high-quality offerings that our customers expect. Our super suite business, as we have often stated, provides us with valuable insights that we can utilize to enhance our internal capabilities. The acceleration of revenue reflects the value we provide through our superior supply chain, performance and merchandising expertise. We will continue to invest in this new business as we work through our robust pipeline of prospective partnerships, and believe this business will continue to take a greater share of revenue mix going forward. We have always placed a strong emphasis on diversifying revenue demonstrated by the launch of super suite last fiscal year. We have also deepened our online presence with social e-commerce platforms like TikTok Shop, where we continue to see solid growth. In April, we expanded our sales channels by launching on Tmall and have seen promising early results in the kitchen and pet categories. Over the last couple of years, we have purposely shifted our focus from hydroponics to prioritize our core competence as a data-driven consumer products and services company. More recently, we've begun to wind down our legacy commercial hydroponics business where we sold directly to local commercial distributors. We are working through the remaining inventory now and expect to sunset this channel altogether in the coming months. Turning to OpEx. We continue to benefit from our internal initiatives to drive savings in our selling and performance operations. With a healthier supply chain environment, we are no longer required to hold high levels of inventory as we have returned to normalized lead times. We have also sold through most of our high-cost inventory, enabling us to eliminate short-term warehousing costs and improve margins. As of March 31, we further reduced our inventory level by 25% compared to December 31, 2023. We are also in the early stages of benefiting from third-party warehouse staffing and expect to realize additional savings in the future. Looking ahead, we are well-positioned to close out fiscal 2024 on a strong footing between the strong demand from our largest channel partner, accelerating growth in super suite, and expansion into new e-commerce channels such as Tmall. I will now turn the call over to our CFO, Kevin Vassily, to take you through our financial results in more detail. Kevin?

Thank you, Lawrence. Unless referenced otherwise, all variance commentary is in comparison to the prior year quarter. So let me dive into our fiscal Q3 results. Total revenue increased 15% to $23.3 million, compared to $20.2 million. The increase was primarily driven by greater product sales to our largest channel partner, in addition to growth in our super suite supply chain offerings. Gross profit in the third fiscal quarter of 2024 increased 41% to $10.9 million, compared to $7.8 million in the same quarter of fiscal 2023. As a percentage of revenue, gross margin increased 850 basis points to a record 47%, compared to 38.5% in the year-ago quarter. The increase in gross margin was primarily driven by improved pricing through our key supplier negotiations, as well as favorable product mix. Total operating expenses for fiscal Q3 were $9.3 million, compared to $9.6 million for the same period in fiscal 2023. As a percentage of revenue, operating expenses improved 740 basis points to 40.1%, compared to 47.5% in the year-ago period, reflecting the operating leverage in our business as well as lower selling and fulfillment costs resulting from, among other things, some vendor credits. Net income attributable to iPower in fiscal third quarter improved to $1 million or $0.03 per share, compared to a net loss of $1.5 million or a loss of $0.05 per share for the same period in fiscal 2023. Adjusted net income attributable to iPower, which excludes legal fees for arbitration, net of tax impact, improved to $1.6 million or $0.05 per share, compared to an adjusted net loss of $1.4 million or a loss of $0.05 per share in the same period in 2023. Moving to the balance sheet. Cash and cash equivalents were $2.7 million as of March 31, 2024, compared to $3.7 million at June 30, 2023. Total debt stood at $6 million, compared to $11.8 million as of June 30, 2023. The decrease was driven by our continued efforts to pay down debt, which resulted in a 59% reduction in net debt to $3.3 million, compared to $8.1 million of net debt as of June 30, 2023. Cash flow from operations was essentially neutral in fiscal Q3, largely driven by an increase in our direct import business with Amazon, which carries both higher operating margins but slightly longer payment terms. To summarize, we are beginning to realize the benefits of less high-cost inventory and internal optimization efforts, which drove our record gross margin and improved operating leverage for the quarter. We also continued to strengthen our balance sheet by reducing net debt by nearly 60% during the quarter compared to June 30, 2023. And as Lawrence touched on, we've got multiple initiatives in place to drive further growth as we look to fiscal Q4 and the year ahead. This concludes our prepared remarks, and we'll now open it up for questions. Operator?

[Operator Instructions] Our first question will come from the line of Scott Fortune with ROTH MKM.

Congratulations on the strong quarter. And it seems that a lot is driven from the strong order from, obviously, you've called out the largest channel partner as they returned to more of a normalized inventory kind of purchasing cycle. But moving forward, how should we look at this kind of going forward? Can we kind of take a historical kind of growth from years past as far as going forward with this, moving forward with them? And just kind of call out the products that -- or the kind of the industries that's driving a lot of this growth through that large channel partner. Because it seems like the consumer demand remained strong for your products, but what is your partner telling you as you look out for the rest of the year with them?

Lawrence, why don't you take the second part of the question, the products and kind of the overall demand, and I can talk a little bit about kind of what this means kind of going forward?

Sure, sure. So the largest channel partners, they historically have, in the last couple of years, been at a similar position as us, like going through the high-cost, overstocked inventory. We moved quite a bit faster than the industry. Our partner seems to work better than the rest of comparable larger partner channels. So what this means, that the -- what I think is that going down the road, it has been returning to a steady, normal, healthy, replenished mode. As for our product mix, since our products are focusing on value of the commercial -- I'm sorry, consumer products, those products are pretty resilient to economical change. And what I think is that the demand will continue to grow. So even during the years where we -- iPower has been trying to recover from the overstocking from the high-cost inventory, what we see is the demand is still there, is demand still grow. And I believe this is going to be a trend going forward. As we introduce super suite, we will add on more of the supply chain partners to provide good-value product to the consumers in our network. I believe going down the road, we have a pretty good future to cash on.

And then, Scott, just on kind of how to think about kind of this quarter versus prior quarters. I'll remind everyone we don't give specific guidance. But what I'll say is we -- in a way, I think we talked about this a little bit on the last quarter, the kind of order rates from our largest channel partner in the December quarter were really a reflection and probably a larger than we anticipated work on kind of their own inventory management. And we did expect a bit of a rebound in this quarter, and we saw it. So I think some combination of historical kind of quarterly trends, with some caution on our part because we want to make sure that we're not seeing kind of a bit of a bull whip from that channel partner where they may have potentially brought a little bit of extra demand into this current quarter. But I think what Lawrence touched on is correct. We have multiple additional opportunities to work with, partners on the super suite side, all of which we can use that large channel partner as a sales avenue for them. So still a little early to say in this quarter, but we're very optimistic about where we're headed. So hopefully, that's enough for you to kind of tape your model, and we can talk a little bit more if you've got other questions.

Yes, that's helpful. I appreciate that color. And just following up with that, the super suite of services that now accounts for, what, 10% of the business, but are you expanding your existing partners there? Or will you -- a lot of this came from the new kind of food industry partner that you're bringing on board? Just kind of step us through kind of the partnerships you have and kind of the growth from a capacity side, on the expense side, to kind of -- you have enough room here without adding too much more on the expense side to continue that, and service new partners here, which will continue to drive the gross margin side. And just kind of remind us gross margins on service side business, and is that ticking up or kind of the overall gross margins as it helps for that gross margin improvement? Just kind of more color on the service suite would be helpful.

All right. So there were a lot of questions there. Let me try to do a couple of them one by one. I think we've said in the past that early on, as we bring new partners on, our gross margins, in particular as we're using as our entree with a new partner the sales and fulfillment service offering, those gross margins are going to be at or even slightly below our normalized gross margins. But as we grow those individual partners, I think we can get better than our kind of historical gross margin average. And I think we were seeing some of that in this quarter. I'll let Lawrence talk a little bit about some of the kind of opportunities that we have. Most of what we're doing in the quarter was growing was growing our current partners. And so I think when I said, as these partners mature with us, we can see better than corporate average gross margins, I think you're seeing some of that show up in this quarter. I think it's important also to point out that, over the last year, in addition to working hard to bring down inventory, remove the additional cost that we had both from kind of the high freight burden but as well as kind of excess costs associated with temporary warehouse space, we were working with quite a few of our suppliers at ways of taking additional costs out of the products that were being manufactured, such that we can then bring to market products that we're carrying better gross margins. We're seeing the fruit of that as well. So I think we've been working hard on both the cost of goods sold as well as operating costs, and I think we're very pleased so far as to where we are. And we think we still have some work to do going forward. I will remind, and I think we said this on the last call too, there still is some inventory that we have, particularly in our fan business, which is strongest in the summer months, that carry higher freight cost burdens than products that we're buying now in that category. So we're going to have to bleed that through. It's not a ton, and we don't think it will materially impact gross margin, but we were not selling any of that in the January to March period. As you might expect, people aren't buying a whole lot of fans when it's cold outside. Lawrence, maybe you could touch on just the kind of potential companies that we might be working with as we bring additional partners on in the super suite business.

Sure, sure. So the super suite really come out of the internal capabilities we've been developing as a retailer online. So with the logistics ability, the software and technology and business intelligence where we developed both internally and working with external technology suppliers, enabled us to become an effective sales and merchandising platform and fulfillment platform for supply chain brand. We started to get inquiries from these partners in a couple of years, starting a couple of years ago, about working together and marketing and merchandising their products. So where the super suite, that's -- where the super suite comes from and the few categories we've been already working on, including electronics and home products, we'll probably share with more details in the coming short time to see -- to give more details to the market. Now what I -- the framework has been working on by -- internally for a while. And I do see -- I do have quite a bit of a down the road in the pipeline where we are actively working on and hopefully start to see good results going down the road. As for the gross margin, it all -- it actually depends on the product categories. But what I see this is our in-house products will continue to grow and will still drive the business substantially for a period of time, until the super suite start to explode. But the super suite side can grow much, much faster than our in-house parts of the business. So that's why we have a pretty good -- we feel like that part might start to see much, much better growth rate than the in-house part. Now as for the gross margin, as it grows faster, it may carry -- it may not carry as high as the gross margin of the in-house product, but the revenue side going to be a lot higher. That's what I tend to see down the road.

And Lawrence, real quick, just to follow up on that. You've had super suite in play here for a little while. Are you seeing the pipeline looking to accelerate? Are you having more discussions kind of further down the road on bringing on new clients to the super suite? Just kind of help us understand kind of the expansion opportunity here near term, obviously, long term, pretty good opportunity, but kind of near term, what are you seeing from those discussions?

Near term, I'm working with both the branded supply chain partner to bring on board as well as key strategical partnerships to bring on board. I tend to think that super suite is kind of like open platform where we can bring key partners into this platform and where they can bring more supply chain and brands into the platform. So that's what I see down the road and have been working on it for a while, yes.

Our next question comes from the line of Thierry Wuilloud with Water Tower Research.

Lawrence, Kevin, congratulations on the quarter. You covered quite a bit of ground, but maybe just a few questions. First, on the gross margin, is cost input like a big factor? You get better pricing or lower cost on the input for your product? Is that what I'm reading?

Kevin, you want to take this?

I didn't hear the question.

There's 2 reasons for improved margins: favorable product mix and then improved pricing. Does it mean the input costs have been going down or have been better than expected?

Okay. Yes, I heard that part now. Do you want me to take it, Lawrence, or do you want to take it?

You can take it, that's fine.

Yes, yes. So it's both. Every quarter, I think I tried to emphasize this, we -- given the size of our catalog, now as well including the super suite partners that are utilizing our sales channel, there is a distribution of margins as they're not all, obviously, sitting at 43%. And so the mix is skewed towards our higher-margin products, for sure, this quarter. The other thing that has been at work though, and I think I referenced this in my answer to Scott, was that there have been a number of initiatives underway for the last year with some of our largest contract manufacturing partners to take costs out of the products that they're manufacturing for us, that allows us to bring products to market with a lower cost of goods sold. And those efforts are starting to show up. So it's both, Thierry.

In terms of sales channels, you mentioned you started Tmall in April, so obviously, that was not in that quarter's result. But can you give us a sense of which channels are developing the fastest besides Amazon, and if you're going to have any meaningful maybe physical channel also?

Lawrence, do you want to take that?

Yes, sure. Tmall is a very interesting channel. Now they approached us and we are working with them since April. So far, we've been seeing pretty good results early on. And the platform is pretty value-centric. So it's more -- like very similar to Amazon, where they're trying to bring the best value to the consumer. And that fits our category and our catalog pretty well. So I think we're going to do well there on this channel. So, so far, I think this channel is growing pretty fast. On the social media side, on TikTok Shop, we've been seeing a steady growth and we've been working pretty well on there, but we all know that the uncertainty of the TikTok Shop going down the road -- is uncertain. But fortunately, it's not a big part of our business so far. So we'll play and see. We already have the infrastructure developed. We already have a methodology. And so far, it's doing well, so we'll see. We've also been working on homedepot.com, lowes.com target.com, where we -- those have pretty different model, working with these platforms, than the Amazon, give a comparison, where we work with buyers and we work with product selections, and we've been getting more product be improved. We're still working on that. Now, but at the same, that, is once we do well on the dot-com, we may get an opportunity to enter in the physical stores, if that's what you've been asking, yes, questions.

And then maybe one last question. You mentioned that the business -- suite business is helping you enhance your internal capabilities. And I'm kind of curious how that's working or what that means.

Okay. So along the way where we're working with our partners on the super suite platform, we're also gaining more knowledge on industry different categories and we're also enhancing our abilities of data, software, as well as performance. So we -- think that of that as an open platform where we not only just work with the supply chain partners, we're also working with logistics partners as well and other technology partners. So along the way, where we're working with everyone, we've been getting better and better, enhanced capabilities and we absorb and working with all these partners. And so not only we service people, we also gain knowledge and expertise and other strengths along the way.

That concludes today's question-and-answer session. I'd like to turn the call back to Kevin Vassily for closing remarks.

Okay. Thank you, everyone, for joining us today. We look forward to either speaking with you when we report our fiscal Q4 and full year results for 2024 in September, and/or seeing you or speaking with you at a conference in the interim. Thanks again, and we'll talk again soon. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.