Good afternoon. Thank you for attending the Owlet Earnings Conference Call. My name is Matt, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Mike Cavanaugh, Investor Relations. Mike, please go ahead.

Thanks, Matt. Good afternoon, and thank you all for joining us today. Earlier today, Owlet, Inc. released financial results for the quarter ended December 31, 2022. The release is currently available on the company's website at investors.owletcare.com. Kurt Workman, Owlet's Co-Founder, President 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 related 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 with the U.S. Securities and Exchange Commission, including its quarterly report filed November 14, 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's 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 the non-GAAP financial measures to the most comparable GAAP measures in the company's earnings release, which is also available on the company's quarterly results page of its website. I will now turn the call over to Kurt Workman.

Thanks, Mike. Good afternoon to everyone joining us today. During our call today, you're going to hear a lot of conviction about Owlet's fundamentals and our vision for the future. I recognize that our confidence in our business conflicts with our reported financial results in 2022 due to the efforts required to rebuild our business. I'd like to take a minute upfront to address this. Throughout 2022, we made tremendous progress positioning Owlet for sustainable, profitable growth in 2023 and years into the future. We rebuilt our brand health, rebased our operating expenses, focused on rebuilding channel health and made milestone progress towards regulatory approval for both our medical device and de novo product applications. A few weeks ago, with Owlet's underlying business properly positioned, we raised $30 million of additional capital from both insiders and new investors, ensuring that we have the balance sheet to execute in 2023 from a position of strength. The investors who provided us with this new capital base their confidence on the fundamental improvements and strategy I'm going to discuss with you today. Our plan for 2023 is clear, positioning Owlet on the pathway to cash flow positive, profitable and long-term sustainable growth through category-defining products. There are a few underlying trends in our business that give me confidence that Owlet is on track to deliver this. Our brand health has returned to all-time highs, levels not seen since 2021. NPS is at all-time highs and marketing spend at CPA has declined 80% since the start of 2022. Our channel sell-through growth quarter-over-quarter reaching nearly $20 million in gross revenue of sell-through in Q4. Inventory and channel is normalizing, and we expect sell-through to match sell-in by the end of Q2 with improvement in Q1. Our expenses are rightsized and this will demonstrate our…

Thank you, and good afternoon, everyone. Turning to our Q4 and fiscal 2022 results. Gross billings for the fourth quarter were $15.4 million, down from $23.4 million in Q3 sequentially. Q4 product promotions and discounts were $2 million, primarily associated with seasonal and promotional activity for owlet.com and Q1 retail promotional discounts. This compares to product promotions and discounts of $3.2 million sequentially in Q3. Returns and allowance reserves for Q4 2022 were $1.5 million, 10.7% of gross billings. This compares to reserves sequentially in Q3 of $2.7 million, 11.5% of gross billings. Q4 revenues were $12 million, including the impact of adjustments such as promotions, discounts, returns and other allowances. Cost of goods sold in Q4 was $8.6 million and gross profit was $3.3 million. Q4 gross margin was 27.5% compared to 26.6% gross margin sequentially. Costs and other items impacting our gross margin unfavorably in Q4 were from inventory adjustments and obsolete inventory, PPV and promotions. Year-to-date, 2022, our gross margin was approximately 33.7% within our targeted range. As Kurt detailed, the largest nonrecurring cost impacts we experienced in 2022 were related to the return to vendor program, elevated promotional discounts and product costs related to our FDA warning letter and launching our Dream products. One of our highest operational priorities in 2023 is gross margin improvement, and we are actively working to put the volatility of the FDA warning letter impact behind us. In addition to the nonrecurring aspects of the cost this past year, we are highly focused on the operational efficiency levers within our control to improve margins with the goal of returning to 40% to 50% gross margins in the future. Q4 operating expenses were $24.1 million compared to $26.4 million sequentially. Excluding stock-based compensation, Q4 operating expenses were $19.6 million. Within our Q4…

Absolutely. [Operator Instructions] The first question is from the line of Charles Rhyee with TD Cowen. Your line is now open.

Hey, guys. Thanks for taking the question. Kate, I just want to talk through this the sell-through and sell-in issue. Obviously, the guidance range you gave for 4Q was – it fairly wide. It was like roughly 12 to 17. And if we think between the bond to top end there, that's like call it the $5 million. And you attribute a lot of it to the first half, the sell-in was huge and then it accounts for that 21.5, and let's say, the 18 in the second quarter. What was the sell-through that in the first half of the year? Like can you give us a sense like the magnitude - I mean, were we selling through maybe $5 million, $6 million in the first quarter? Because it seems like a lot to rightsize in the back half of this year and into the first quarter. If you can just kind of give us a sense of that.

Yes. I don't - Kurt, do you want to make any comment on that. I think from a color perspective, if you recall, our initial launch into the market was at the very end, the sell-in was at the very end of Q1, as we talked about loading into retailers and the distribution into Q1. And so really sell-through did not take place until Q2. Kurt, I don't know if you want to make another comment beyond that.

Yes. I would just say it was substantial, right? So we - after the warning letter, we took all the products back to repackage, reprogram those units to position for the Dream Sock launch. And we did that, but it was sort of throughout the first quarter, right? So we didn't get into all of our retailers by the end, but there was significant load-in to get back to previous levels of Smart Sock inventory in retail. But our sell-through did not start off as strongly as our previous Smart Sock sell-through was moving in Q3 of 2021. And so that created an inventory imbalance. We did everything we could in Q1 and Q2 to push sell-through as fast as we could and continue to sell into retailers in Q2. And the sell-through just took a little longer to materialize. I think the good news is that by Q4 and now moving into this year, sell-through levels are getting back to those previous levels that we had before.

Okay. So does that mean, right? So if you're saying in the first quarter, you expect it to be sequentially down to support the sell-through. Does that - will our inventory levels be back to then 10 to 14 weeks? And then if that's the case, should we expect then a significant step-up in revenue in the second quarter or in the rest of the year? I mean, is that - or is it still more kind of a slope up?

I think what you'll see is a step function Q1 to Q2. And part of that is that we're reducing inventory levels this quarter and moving forward by 15% to 20%. We're also growing sell-through. And as we move into Q2 with Mother's Day and Father's Day, we expect that to grow with Prime Day - heading into Prime Day in July, and so there's inventory needs for Prime day as well. So there is quite a few catalysts in Q2 based on reducing inventory levels, growing sell-through and the promotional events that support it. So we do expect a step-up - a nice step up from Q1 to Q2.

Okay. And then my last question would be, in this $40 million OpEx, excluding stock-based comp, what is your assumption a, for stock-based compensation, I guess? But secondly, what would you expect for the exit rate? Like - I mean because you talked about breaking even. So it's kind of like, would we expect fourth quarter to be actually positive so we're basically front-loading the OpEx loss? And is that all coming from gross margin then versus...

Yes. So the OpEx is higher in the front half and then lower in the back half, yes. That is true.

And the change is that largely gross margin improvement then?

No, we have decreased again sequentially in operating expense from Q4 to Q1 and then again in Q2. So we have additional tapering. We do have some expense - a little bit of expense related to clearances in Q1 and then some additional optimization that we're doing around expenses. So we've had this four quarter trend of taking on expenses, and we still have identified some additional rationalization that we're doing. So that is still around operating expense, but we are also expecting gross margin improvement. So both of the levers we're using to get there.

And stock-based compensation assumption, should we think about 2022 as the right amount? Or would you expect that to be more or less?

It's about the right amount.

Okay. I'll jump back in the queue. Thanks.

Thank you for your question. The next question is from the line of Allen Lutz with Bank of America. Your line is now open.

Hi, good afternoon and thanks for taking the questions. Kurt, you mentioned the cost per acquisition down 80% since the beginning of 2022, that's clearly a really good form of operating leverage here. I guess what is that due to? And then as you think about sort of the run rate of sales and marketing spend in 4Q, just trying to understand if there's more juice to squeeze on that line or if most of the leverage is going to come from G&A?

Yes. Great question. I would think about that in kind of two ways. First, getting the Dream Sock portfolio launched we spent aggressively to do that. So we had to reposition all of our products. We had to get our rankings online, which is a key indicator of sales and sell-through backup. We had to start moving just a lot of momentum to get back out there in the marketplace. And then there's a lot of confusion around does Owlet sell products or not, what's in the product. And so we did a lot of education. So I think the first half spend was heavy. But in the second half, we did find a lot of efficiencies and optimizations that areas of spend that we've spent for years and as we tested and optimized and turned things off, we realized they weren't contributing and they weren't efficient. And I would say that the other piece of driving that efficiency is the product satisfaction improvements. We launched our CAMP 2. We launched Predictive Sleep. The second half of the year, we launched a new app submission update almost every week to improve that product experience. 53% of our purchases come from word of mouth. And so really using that word of mouth and finding other organic ways to get people to consider the product, we're talking organic on TikTok and social to the tune of tens of millions of views and interactions that we didn't have to pay for. So I think the team got really creative, which is the kind of the second piece to this. As we move forward, there will be a decrease Q4 to Q1 with marketing spend and where we're at today is more efficient than we were in Q4. And I think that will start to stabilize through 2023. I don't know that Q1 to Q2, you'll see a lot more efficiency decrease, but you will Q4 to Q1 from a sales and marketing perspective in terms of variable marketing expense.

Got it. And then one for Kate. On the gross margins, as we think about them over the course of 2023 and versus 2022, you mentioned that nonrecurring costs impacted margins by almost 1,000 basis points, 800 to 900. I guess as we think about those nonrecurring costs or just the impact over the course of 2023, should we think about where you ended 2022 as sort of the starting point and then a step function over the course of the year higher. Just trying to get a sense because that's a pretty big range from where you ended 2022 to getting back to the 40%, 45% plus margins before. Just trying to understand the timing and then the size of the margin increase over the course of the year?

Yes. What I would say is that our goal will be to be back in the range. Some of that that came out was really just a lot of that rework cost that happened. A lot of the - just the back-and-forth nature of the entire liability that we took in working with the retailers. There's probably a little bit of step function at the very beginning of the year, but we should be able to have that type of range most of the year with that type of cost completely behind us. There is some PPV associated or that cost that's associated depending on when the inventory specific is sold through. So it's not a complete snapback. But what I would say is that the real cost related to the overall warning letter should be overall out. And then you just kind of see the opportunity for most of the year.

Great. And then kind of a two pointed question. So Kurt, you mentioned the NPS is at all-time highs here. And if we sort of look at the model from a revenue perspective over the past couple of years, it's been clearly very challenging to kind of understand what type of normal seasonality this business would have in a normal year. But you talked about Mother's Day, Father's Day kind of in Prime Day driving a lot of demand. I'm just curious, as we think about sort of some of the onetime dynamics that are still playing out, how would you think about the seasonality of this business in a more normalized year? And would it be reasonable to assume that 2Q, 3Q should be kind of viewed as a more normalized year? Thanks.

Yes, that's a really good question because if you go back for the past 2 years, there's definitely quite a bit of nuance to the story with the warning letter and then getting Dream Sock back in the market. So I appreciate the question. I think in a normal year, usually, what you see is Q1 is the lightest quarter. It's not as seasonal as like your normal consumer electronics companies where it's just - it's 70% back half weighted. We're a little bit more even than that, but Q1 is generally down 10% to 15% from Q4. Q2 picked up really nicely because you have the Mother's Day, Father's Day and then you do a load-in for Prime Day. Q3, Baby Safety Month in September, and then you load in, in Q3 for your holiday promotions for Black Friday, Cyber Monday, Fall Prime Day, any promotions you do in December. Usually, that loading happens in Q3. And then you see a little bit of a kind of a tail off in Q4 for us in terms of sell-in, if you're tracking revenue. I think what you'll see - you'll definitely see a step function in Q1 to Q2. I think it's - we're still going to be getting healthy. So it's not going to be totally normal in Q3 or sorry, in Q2, I think it starts to normalize in Q3. So Kate, anything you'd add to that?

No. That's great.

Very helpful. Thank you very much.

Thank you for your question. That is all the questions that we have registered in the queue.

Thank you, Matt. We'd also like to take this time to answer a few questions that we've been getting from investors during recent conversations that are probably on everybody's mind. So I'd like to hand a couple over to Kurt and Kate right now. So the first one, this is for Kate, and you did address this a little bit, but maybe for everybody's - refreshing everybody's memory, what is outlet exposure to Silicon Valley Bank? And do you have access to all of your cash? And what happens to the latest LSA?

Yes. Sure. So as I mentioned in the prepared remarks, we were impacted along with everybody else, given this week's past events. We have been customers of Silicon Valley Bank for a long time. So we do have access to our deposits and we are confirming that our loan agreement and credit facility do remain in place, and we are in the process of amending our loan agreement and line of credit with them as previously disclosed.

Okay. Great. And then a couple for Kurt. Kurt, regarding the FDA submissions, you previously mentioned on earlier calls, a 90-day FDA window that starts after submission and pauses as questions come in with the average decision coming around the 6-month mark since we're coming up on 5 - we're coming up now in 5 months since submission. Can you share any personal thoughts on how you feel the process is going? And potentially some of the color around some of the questions that the FDA is asking during the process. And then finally, regarding the de novo submission, can you share what the FDA time line typically looks like? And would that be similar to the 510(k) submission?

Yes. So just kind of as a quick refresher, we have the two submissions with the FDA. The first is our prescription device called BabySat, which is a 510(k) that will address Baby's who are sick and need a prescribed medical monitor. That submission is subject to the typical 510(k) rules, which is a 90-day clock that stops when FDA asks questions. The company then has 180 days to gather information and provide a response. So we are currently working through our response to questions from the FDA. I'm not going to comment on the specific details of that submission. We are really confident in our products. In December, we filed a second submission to the FDA for a software-as-a-medical device, as an over-the-counter product that offers the heart rate and oxygen notifications in conjunction with the existing Dream Sock, fleet monitoring capabilities. The de novo application includes both the display of heart rate and oxygen currently in the Dream Sock and the additional notification features as software-as-a-medical device. So de novo applications with FDA, FDA has 150 days to review and then the company has 180 days to respond. So I would just comment, I'm really proud of our team for getting both submissions in during 2022 while launching Dream Sock, CAM 2 and our new Predictive Sleep features and passing the two audits, the MDSAP audit and ISO 1345. So it's a very busy year, and I'm really proud of everything they've accomplished. I'm also very confident in our products and their ability to meet FDA standards.

Okay. Great. And then one final question on international regulatory clearances. How many international regulatory clearance submission is Owlet currently working on? And when can we expect to see each of those submitted?

Yes, we've made substantial progress towards our international applications, there is two. There's the U.K. application and the CE applications, which are similar in nature, but one will allow us to gain clearance in the U.K. and the other will allow us to gain EU medical device certification. Both submissions will be filed with the notified body in the second quarter of this year. And we also continue to maintain our MDSAP and ISO 1345 certifications for that international compliance. And so our vision is to have medical device status globally, which we believe will better empower parents in every region to deliver the best care possible for their baby.

Great. Thanks. And operator, I think we may have another question in the queue.

Yes. We have a follow-up from Charles Rhyee. Your line is now open.

Thanks. I was going to ask about the submission. So you guys answered it. So appreciate it. Thanks, guys.

Thanks, Charles.

Thank you for your question. There are no additional questions waiting at this time. So I'll turn it back to Kurt for any closing remarks.

Yes. I just want to take a minute to thank everybody who has been so supportive of the business through the past year and getting back online with Dream Sock, getting our FDA submissions and really grateful for the team that has dug in to accomplish a lot of work in a very short period of time to get Owlet in a position to be focusing on getting to profitability this year and getting FDA clearances, which we believe are going to provide a lot of future growth for the business and also will help improve the safety and health of a lot of babies and help a lot of families. So thank you so much for your time today, and we'll continue to work hard.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.