Owlet, Inc. (OWLT) Q3 2021 Earnings Report, Transcript and Summary

Hello everyone and welcome to Owlet Q3 2021 Earnings Call. My name is [Nadia] and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host Mike Cavanaugh, from ICR/Westwicke Investor Relations to begin. Mike, please go ahead.

Good afternoon and thank you for joining us today. Earlier today, Owlet Inc. release financial results for the quarter ended September 30, 2021. The release is currently available on the Company’s website at www.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 U.S. Securities and Exchange Commission, including its respective stated August 24, 2021, 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 also note that Owlet will refer to certain non-GAAP financial information on today’s call. You can find reconciliations of these non-GAAP financial measures to the most comparable GAAP measures in the Company’s earnings press release, which is also available on the Company’s investor page of its website. I will now turn the call over to Kurt.

Thanks Mike. And thank you all for joining us today. The third quarter of this year was our strongest ever in terms of revenue and delivering $31.5 million in revenue. This represents 48.8% year-over-year growth and 26.3% sequential growth for the second quarter of this year. International revenue accounted for 10.6% of this and it is exciting to see the contributions from outside of the U.S. continues to grow and account for even more of the overall pie. We officially launched to both Switzerland and France in July and September respectively and in the fourth quarter. We are well on our way to our next launches in Italy, Spain, Netherlands and Belgium. Kate will go deeper into our Q3 2021 financial results later in this call. I’m incredibly proud of all that we have accomplished at Owlet to the first three quarters of the year. We achieved everything we set out to do at the start of the year, our domestic penetration awareness continue to grow organically and that growth has accelerated with increased investments. Moreover, I’m happy to report that adoption and growth rates internationally has outpaced our expectations and our progress toward key platform expansion opportunities are on the doorstep. I would also like to highlight some additional key accomplishments so far in 2021, which include we delivered over $78 million in revenue in the first nine-months in 2021. This represents a 44% increase over the same period in the year prior and exceeds our full-year 2020 revenue. We delivered over $6 million in revenue from our international business in the first nine-months of 2021, representing 8.3% of total revenue and an increase of 159.6% over the same time period in the prior year. We successfully delivered on the global launch of our new products the Smart Sock Plus, which gives us the opportunity to extend our relationship with parents and their babies from 18-months up to five-years. At the end of September their global Net Promoter Score or NPS for the Smart Sock was 75, which is best-in-class and which people leave highlights how powerful word of mouth is for our brand. We also completed our business combination taking the company public and infusing more than $130 million of new capital into the organization to fuel continued innovation and to grow our offerings and international expansion. It is clear from the results we have achieved, that giving parents access to the tools and technology they need to better care for their babies is resonating. And we believe we are just beginning to scratch the surface. Parents deal with a lot of challenges and this market is ready for innovation. I would like to take a moment to address the recent communication Owlet has had with the Food & Drug Administration regarding our Smart Sock products in U.S. For those who are newer to the Owlet story, we launched Smart Sock in 2015. It is a consumer product in the baby monitor category. Initially selling direct to consumers from our website and shortly after expanding to retailers smart baby monitoring offerings. We believe that the product was not subject to oversight by the FDA, as a wellness product. But we knew that our Smart Sock could have broader impacts in infant monitoring by pursuing FDA clearance as a medical device to enable us to market it for medical device uses. Over the last few years, we have been in discussions with the FDA regarding our efforts to obtain clearance for prescription use only version of the Smart Sock for sick babies under the care of this physician. And most recently, with respect to an over-the-counter medical device Smart Sock for healthy babies. After six-years on the market with four versions launched and over one million babies monitored on October 1st Owlet received a warming letter from the FDA. In a letter the agency stated, it believes the Smart Sock is a medical device because of its heart rate and oxygen notification functionality and the marketing of the product around that functionality, which FDA believes requires pre-market authorization. We have cooperated in good faith with the FDA’s request to cease distributions for Smart Sock in the U.S. while we work to obtain marketing authorization for the Smart Sock, with these functionalities and claims. It is important to note that the FDA did not identify any safety issues in this letter, rather it focused solely on the regulatory classification of the product in the United States as a result of the heart rate and oxygen notifications and related claims. Since receiving the letter and taking prompt action to address FDA’s concerns, we have been in ongoing collaborative discussions with the FDA to discuss the path forward for our medical device application for the version of the Smart Sock we had historically been selling for use in healthy babies with notifications for heart rate and oxygen based on preset values. Though the team has done the best medical device and regulatory experts working together on our medical device submission, I’m pleased to share that in October we completed our final audit for ISO-1345 certification, which is a third-party certification for medical device manufacturers, as a step toward preparing to become a company marketing medical devices. We expect to have more meetings with the FDA before we officially submit a marketing application. We will keep you updated and plan to share more on the timing and application status at our next earnings call in February, 2022. One thing is for sure, we are not starting from scratch. Owlet has been working on the validation of our safety and accuracy for several years, and we feel confident in the technology, the team and the progress we are making now more than ever. I’m really excited to share more about our newest product, Owlet Dream Sock which we plan to announce in the coming weeks. The average parent needs is 40 full nights of sleep in the first year. We know sleep is a huge pain point for parents, myself included as a dad of three kids. We are designing the new Owlet Dream Sock to be a revolutionary baby sleep monitor and empower parents to build better sleep routines and habits to improve sleep for baby and the whole family. The Owlet Dream Sock will be designed to teach what to do, and when, tells little ones up to 18-months old and their parents sleep better. Combining the power of Owlet’s award-winning technology and fleet program the Owlet Dream Sock is meant to empower parents to build better sleep habits from day one. We planned to launch this new product with the duo as well with the Owlet Cam similar to the Smart Sock Duo we had previously. With the upcoming edition of the Dream Sock for our suite of products, we are doubling down on our focus on sleep with our character services, which we expect will include coaching courses, and other service integrations. We are building this app to initially focus on wellness offerings, specifically sleep related services in 2022. If we attained marketing authorization for the notification features of the Smart Sock the FDA believes rendered in a medical device we plan to expand into more telehealth focus integrations and services. Kate will now take us through the financial results for the third quarter of this year.

Thank you, Kurt and good afternoon everyone. Total revenues for the third quarter of 2021 was 31.5 million a year-over-year increase of 48.8% and the sequential increase of 26.3% from the second quarter of 2021. Q3 revenue growth was driven primarily by our flagship Smart Sock and Monitor Duo, our Smart Sock and camera combination product. Cost of goods sold were 16.6 million in Q3 and gross profit was 14.9 million up 51.5% from Q3 2020. Gross margin for Q3 2021 was 47.2% representing sequential decrease attributed to seasonal sales acceleration and a few macro factors related to supply chain in increased transportation costs. Year-over-year, Q3 2021 gross margin increased from 46.4% in Q3 2020. In Q3, we experienced a significant increase in demand in September, primarily related to retailers placing orders earlier than expected for the holiday season. As a result, we incurred increased air freight shipping costs, seasonal related promotional costs and return allowances associated with retailers sell-in activity, we have usually seen in Q4. The seasonal sales acceleration activity was approximately two thirds of the sequential decrease in margin. The remaining one-third of the sequential margin decrease was macro in nature, materials pricing increases we did not pass on the customers and overall heightened costs in shipping. Operating expenses in the third quarter were 28.6 million compared with 10.9 million in the same prior year quarter. The increase in Q3 operating expenses was for planned increases in spending associated with the scaling of our business, including strategic talent hiring across the organization, increased investments in sales and marketing. Product development costs as we expand our product portfolio and expenses related to our business combination. Operating loss from the quarter was 13.8 million compared with operating loss of 1.1 million in the third quarter of 2020. Net loss in the third quarter was 34.5 million compared with net loss of 1.5 million in the third quarter of 2020. EBITDA loss for Q3 2021 was 7.6 million compared with EBITDA loss of 0.9 million in the same prior year period. EBITDA margin for Q3 2021 was negative 24.2% compared to negative 4.1% in the prior year. Adjusted EBITDA margin for Q3 2021 was negative 36.3% compared to negative 2.9% in the same prior year period. For our balance sheet cash and cash equivalents as of September 30 2021 were approximately 114.9 million. As Kurt outlined year-to-date, Owlet has executed very well against our business and financial growth goals as we said in the beginning of the year. Some selects year-to-date 2021 financial highlights and year-over-year growth metrics include 78.4 million in revenue, up 44% and representing more than all the revenue achieved in full-year 2020, 41.1 million in gross profit, up 59.8% and gross margin of 52.4% up from 47.3%. The momentum we have seen in the marketplace for our Connected Nursery Solutions in 2021, demonstrate the value parents see in our products and our ability to drive significant growth through targeted investments in our product roadmap and go-to-market initiatives. As we head into Q4 2021, the domestic regulatory factors we are working through far Smart Sock products are created near-term headwinds for our product sales growth trajectory in the U.S. As we prepare to announce our new Dream Sock and do all products domestically in the coming weeks. We are continuing to sell our camera and accessory products. Internationally, our growth plans remain in place for our existing product lines. And we are optimistic about the number of countries we will have expanded to EMEA through the end of 2021. In terms of operating expenses, we are managing variable span, while planning to support our new Dream Sock and Dream Duo product announcements and we have a strong balance sheet to support our business. Given the near-term business factors we are working through in Q4. We are not providing guidance for a full-year 2021 financial expectations at this time. We anticipate providing an updated outlook when we report our Q4 and full-year 2021 results in February 2022. In summary, we remain confident in the value Owlet provides to our growing customer base and we are optimistic about the long-term opportunities for our connected nursery ecosystem products. Operator, let’s open up for questions.

[Operator Instructions] And our first question today comes from Charles Rhyee of Cowen & Co. Charles please go ahead, your line is open.

Hi, this is [indiscernible] on for Charles. Congratulations on the quarter. Just the first quick question with the new Dream Sock. I mean, is - from what you wanted to incorporate the Smart Sock before and is that something that your parents would really ask for or talked about? And second question is you mentioned that there was some pull forward of holiday orders from retailers in the third quarter. So as we are kind of thinking about the fourth quarter and the fact that you got the warning letter around 20-days into the fourth quarter, how should we be thinking about revenue recognized in those first few days? Was there some positive impact of a pull forward as well? Thanks.

Thanks and I will go ahead and take the first question and Kate if you want to take the second. Yes just to answer that question. The average parent loses 44 nights of sleep in the first year alone and Owlet collected one of the largest data sets of infant sleep available and sleep has been a big part of our focus for several years now. We launched the sleep tracking person or app a few years-ago, we recently launched our sleep learning program Dream Lab. And it is a message that is resonating as we are getting ready to announce Dream Sock. It is also something that we are testing with customers and there is a lot of excitement around. I think Owlet’s ability to use this technology to help solve real problems in sleep is something that is resonating with parents and we are excited to do that. As a category leader here and as the number one brand I think, our mission and vision haven’t changed, we are really excited about the long-term opportunity to fundamentally sound sleep and then add health and safety to that as we get the FDA clearances.

Yes. And then regarding the additional demand that we saw in Q3 and what was happening at the beginning of Q4, what I would say is that we would have anticipated strong growth in Q4 just given the timing of that seasonally. So, while we saw some increase in demand in Q3 the early part of the quarter was as we would expect it until we needed to see it shaping.

Okay. That is helpful. And then one last question is just around your kind of ability to sell internationally in the UK. I mean, does the FDA decision change anything internationally at all, have you guys come and spoken to European regulators since the update decision?

Yes. The FDA advisory letter is only specific to the U.S. and our international business continues as usual with the Smart Sock available. We are really proud of the progress we have made towards our international expansion and this year alone we have launched into eight new countries with additional countries on the horizon. We also continue to see international revenue grow and account for a larger portion of our overall revenues. So, we are excited about the international opportunity.

Got it. Thanks.

Thank you. Our next question comes from John Babcock of Bank of America. John, please go ahead. Your line is open.

Hi, good afternoon or evening, I guess, just starting out. Can you talk about the extent to which the FDA is aware of Dream Sock coming out and ultimately any thoughts on timing on when you might get FDA approval for the Smart Sock?

Yes. We have been in communication with the FDA about the proposed Dream Sock. And we have outlined how we believe that fits within the agency’s general wellness guidelines, in which the FDA states that does not regulate wellness products. So that is very much been part of our ongoing collaborative communications, they are aware of that when we shared it with them. In terms of the FDA timeline, again, we are really excited about the opportunity to get a clearance. Owlet is the technology leader in the nursery with the largest dataset of infant health and sleep and the best technology. And we have done extensive testing on the safety and accuracy of our products. Over one million families have used Owlet. It is the number one brand. We have seen real impact and we are not starting from scratch in that. We have been working with FDA for a few years on clearance and just received our ISO 1345 recommendation. So, I can’t speak to the specific timelines, because that is up to FDA. We feel really confident in the safety and accuracy of our technology and we have a fantastic team that is making great progress.

Got you and as a follow-up to that, have you gotten any sense that the FDA Warning Letter has had an impact at all on consumer’s perception of the product?

Yes. We have had obviously a lot of insight into that. We launched our Smart Sock over six years ago and in that time we have released four versions of the product, we have monitored over a million babies. And overall parents mostly just have questions about what this means for them, and whether or not they can continue to use the product. And we continue to get positive NPS scores and feedback. We believe retailers are excited about the long-term relationship with Owlet and we are doing our best to navigate tough situation and work with parents and retailers even more.

Got it. And I guess that kind of blended into my next question. With the launch of the Dream Sock, assuming that that was forward are you going to be able to get that to all the same channel partners that you currently worked with are you at risk perhaps of losing any channel partners to this?

I think our sales team has done a fantastic job of communicating with our channel partners. And we know that freeing talk will resonate with parents and solving a real need and it is something that we have been working on and delivering for a long time. So we feel really confident that this is a product that our partners are going to be excited about.

Got you. And then just before I turn it over, could you just talk about operating expenses. How you are thinking about that here, especially in light of I guess, the Smart Sock, temporarily, I guess, being suspended overall, but potentially, replaced by the Dream Sock or always been a different product. Just generally, I mean, how are you thinking about the overall pace and spending here on the operating standpoint?

Kate do you want to take that one?

Yes, sure. So, we received a warning letter at the beginning of Q4, obviously, a lot of our activity was already in motion for the holiday seasons. So we are really focused on the top priorities to drive the business forward, which would be around Dream Sock and Duo, as well as our increased efforts around the FDA. And then we are very focused also on reducing any discretionary spend. That is outside of those key areas.

Okay. Thank you.

Thank you. Our next question comes from Jim Suva of Citigroup. Jim please go ahead, your line is open.

Thank you. And I think I’m correct but it sounds like the Dream Sock is completely outside of the FDA scope and whether you got if you can just kind of confirm that those type of things you are looking at is in the realm of what they’re looking at?

That is right. Yes, the Dream Sock was designed specifically to address FDA concerns and our value proposition around sleep. So it is not a medical device that doesn’t have medical intent subscribe.

And then to talk about your manufacturing pipeline or the companies that are putting this all together for you, did you have to slow down your order production orders for this Smart Sock until you get this resolved, are you kind of keeping it as is - and the reason why I asked is the global supply chain, whether you are buying a smartphone or a TV or even clothing seems to have longer lead times, so I’m just wondering about your production flow of what you have done to that?

Yes, we have kept the production from moving and we are in close, really good relationship with our supplier, which is top here and we are very well aware of that and so, of course, we are making sure that we have enough inventory to be able to support Dream Sock as it rolls out.

Okay. And my last question is on operating expenses, maybe any thoughts about, I know there is some shareholder litigation, there is the FDA stuff any step up or planning you should plan on for operating expenses, because there is just a lot of unique things that are kind of happening right now that weren’t really planned in the pipeline?

Yes, obviously we will have some additional expenses there. But we have had the FDA process in place and we have had budget around that. We have a great team running it. So a lot of that has been dealt in charge strategy and anything else that is covered around it will be timing in nature. So we are looking at operating expense just trying to pick out any variable that we can, but I wouldn’t say that we are looking for significant increases that we would need to be talking about today. Those all take time and we are just looking at - we are resolving things as quickly as possible.

Great and I want to express my appreciation for all being so open about things in a difficult and uncertain time. So thank you so much.

Thanks Jim.

Thanks Jim.

Thank you. We have a follow up question from John Babcock of Bank of America. John please go ahead, your line is open.

Just one very quick follow-up. Do you have any sense on the timing of when the Dream Sock might come to market? [indiscernible] provide more color on that.

Yes. We are going to announce it on the next few weeks. And the plan is to get it out as soon as possible. So you will hear more communication within the next few weeks on Dream Sock.

Okay. Thank you.

Thank you. [Operator Instructions] At this time we currently have no further questions. So I will hand the called back over to Kurt for any closing remarks.

Yes, I just want to thank everybody for joining today and thank Jim and John and Charles for the questions. We are obviously here to support parents and I just want to reiterate that our mission vision have not changed. We see a really big opportunity as we move into next year and we roll out - continue to accelerate our international expansion, we rollout Dream Sock and Dream Duo in the U.S. Care Assist, our new subscription service and then continue to work towards getting FDA clearance. I think we will have a strong foundation with the full stock ecosystem to serve parents and help them better care for their little ones, which is our goal. So thank you all for joining.

Thank you, ladies and gentlemen, this concludes today’s call. Thank you all for joining. You may now disconnect your lines.