Good afternoon, ladies and gentlemen. Thank you for joining today's Owlet Q3 Earnings Call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Mike Cavanaugh, Investor Relations. Please proceed.

Good afternoon, and thank you all for joining us today. Earlier today, Owlet Incorporated released financial results for the quarter ended September 30, 2023. The release is currently available on the company's website at www.investor.owletcare.com. Kurt Workman, Owlet's Co-Founder and Chief Executive Officer; and Kate Scolnick, Chief Financial Officer, will host this afternoon's call. As a reminder, some of the statements that management will make on this call are considered forward-looking statements including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements, and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's SEC filings for further guidance on this matter. With that, I will now turn the call over to Kurt Workman, Owlet's Co-Founder and Chief Executive Officer. Kurt?

Thanks, Mike. And good afternoon, everyone. Thank you for joining us today for Owlet's Q3 2023 Earnings Call. I'd like to start the call with a reminder of our main 2023 strategic objectives. First, obtaining FDA clearances for both BabySat and our consumer Dream Sock monitors; and driving towards EBITDA breakeven. Owlet is spearheading new standards for consumer and medical solutions, allowing caregivers to provide better care at home for their babies through access to advanced digital health technologies. In Q2, we were thrilled to announce that we received FDA clearance for our BabySat monitoring device. As a reminder, BabySat is a home monitor for use with babies under a doctor's care and will be available by prescription. Early feedback from pediatricians has been overwhelmingly positive, and we are targeting market introduction by the end of this year. Following on that positive momentum, last week, we announced clearance for the Dream Sock as the first and only over-the-counter pulse oximetry solution for infants. Dream Sock will monitor and display Baby's Live Health Readings, including pulse rate and oxygen saturation level and will provide health notifications which will alert caregivers with lights and alarm sounds if their infants' readings fall outside of preset ranges. These new medical-grade features will be available to all existing and new Dream Sock users and will be launching soon. Achieving de novo marketing authorization from FDA means the Owlet Dream Sock was clinically tested in both home and hospital environments and proven to be as accurate as medical grade baby monitoring technology and compliant with all relevant performance and safety standards by independent laboratories. This new technology will equip caregivers with the right information at the right time and will provide them with the confidence and clarity on their baby's wellbeing. Securing over-the-counter clearance for the…

Thank you, and good afternoon, everyone. Kurt addressed a number of our financial highlights and his overview. So I'll repeat a few items with some color and provide some additional financial commentary. Gross billings for the third quarter of 2023 were $11 million and did not include any selling revenue for Amazon distribution as those purchasers and shipments were recognized in October. Product promotions and discounts were $1.3 million, and returns and allowance reserves for Q3 2023 were $700,000, 6% of gross billings. Q3 revenues were $9.2 million. Total revenues were driven primarily by sales of Dream Sock and Dream Duo. Q3 sell-through was up 7.4% sequentially, demonstrating a third consecutive quarter of sell-through growth in 2023. This year, we offered less promotional discounting with Prime Day in July to maintain overall channel sell-through health versus last year when we had recently launched Dream Sock and had loaded in significant inventory to support channel restocking. As Kurt discussed, the main difference in Q3, both sequentially and last year on a gross billings and revenue basis, was a shift in timing of Amazon selling revenue from Q3 to Q4 this year. As we have discussed previously, we've been managing selling revenue with retailers over the course of the year as they target lower inventory levels across our balance sheet, primarily reflecting macroeconomic conditions. We also lost a category-leading retailer with the buy-buy Baby bankruptcy and, as discussed today, had a timing shift in our Amazon selling revenue from September and Q3 to October in Q4. Our total revenue has been impacted by some macro and business transition headwinds year-to-date. Sell-through has improved 7% year-to-date over last year across retail channels. At the same time, our cost per acquisition is down 75%. This is an important aspect of our channel held focus…

We will now begin the Q&A session. [Operator Instructions] The first question comes from the line of Charles Rhyee with TD Cowen. Please proceed.

Yes. Thanks for taking the question guys and congrats on all the progress so far. Maybe first, just wanted to quickly ask, on the Amazon agreement, the products that shipped, is that the new Dream Sock then with -- we packaged with the FDA approval on it? Or was it the original Dream Sock? .

Yes. Great question, Charles. So the underlying product is the same between the cleared products and the product that's available today. The same hardware, has the same app. The FDA-cleared features will begin rolling out towards the end of this year. So what we ship them was the current product that's compatible with the FDA-cleared features. The main reason for the shift to Amazon 1P is we felt like that was a better business arrangement for Owlet, provided better gross margins, the ability to grow the business and connect more directly with our customers through Amazon. So it's really kind of a business shift that led to transitioning from third-party sellers on Amazon to selling to Amazon directly.

No, yes, I appreciate that. I was just curious, like -- but when customers go to Amazon to look for Dream Sock, what the purchasing -- what will they see when they go to Amazon? Will they see that this has been FDA approved, and so that's the differentiator when they're like looking? Or what kind of messaging will they receive that they will get additional functionality when they buy the sock? .

Yes, it's a great question. So we've already started to message around the FDA clearance and make it clear to all of our current existing customers that they'll have access to all of those features, and that their Dream Sock will be an FDA-cleared Dream Sock, and future customers. So we're working on rolling out into all of our retail channels that same messaging, so that somebody knows, as we're approaching the holiday season, that the Dream Sock they're buying is compatible with and will get access to all of these FDA-cleared features before the end of the year. Does that answer the question?

Yes, it does. That's helpful. And then I think, Kurt, you mentioned that, and Kate, you maybe can answer this as well, right? You said you shipped 90% sell-in of the volume that you did in gross billings from last -- back half of the year. And if I look back, I think gross billings for Q3 and Q4 last year was around $39 million. So am I right in thinking that you sold in $35 million as of October, is that the right way to think of it? .

Kate, you want to take that one?

Yes. Just for clarification, that's just regarding the Amazon to give an understanding of where we are in terms of the pace of the Amazon business.

Not total gross billings is the Amazon portion.

Right. Exactly. So just to indicate where we are in the Amazon pace of business, yes.

Okay. So then maybe outside of -- so if we look at the $9.9 million that it sort of left the Amazon piece, is it right to think that, had we had the Amazon portion, we would have seen more normal kind of revenues that kind of -- you kind of discussed before, and instead we'll get the rest of that in the fourth quarter? So we should expect a much steeper step up given that we're going to -- we're capturing the Q3 sell-in for Amazon in Q4?

I think that's accurate.

Okay. So then I guess just to follow up to that. So when you said there was a 7% increase year-over-year in sell-in, that's sort of over the course of the full year, inclusive of the shift in the timing, is that -- is the right way to think of it?

That's sell-through. The 7% was in sell-through. So we've seen sell-through, yes.

Oh, sell-through.

Yes. To talk about the -- because that's really been the main focus, right? As we've seen some of the undulation in the sell and demand, there's been, on a year-over-year basis, it's really not indicative of what we're seeing for the demand from parents of the product. And that's -- and as you know, we've really been focused on sell-through and partnering with the retailers. We also think heading into the back half of the year, heading into the beginning of 2024 with the clearances of both products, it really sets us up for next year very nicely in terms of this rate of sell-through that we focused on, while also we've decreased the amount of cost per acquisition for customers maybe than other industries or other customers are seeing, what people are doing to utilize getting to -- getting the word out of their products. So just the fact that we're spending less, but yet increasing sell-through about our product means that we're seeing also the NPS on our products getting back to where we were with our prior products. We think that we're heading in with real channel health and product health into 2024.

Great. And maybe last question for me. With BabySat, Kurt, you talked about we should expect an announcement at some point for a distribution channel. The way I understand it, getting into getting coverage, getting reimbursement codes and all that sort of stuff, that takes time typically and working with all the payers. Is this distribution partner channel meant to kind of accelerate that and relying on the partner to kind of get those approvals and stuff for you? Or maybe kind of explain that a little bit more, because I would think that when you think about devices coming into the market and getting coverage, that tends to take time. Just curious on what the strategy is here to kind of accelerate that, such that physicians can start prescribing the product.

Yes, that's a great question. One of the -- there are several complexities or challenges with introducing BabySat into the market, including shipping and fulfilling a medical device to and through providers, how you handle prescription verification and insurance verification, how do you help customers get the right prescription for the product. Those are all kind of significant challenges. And Owlet has interviewed lots of different partners in the space. We feel like we have one that can help significantly reduce that complexity and will not only help us kind of manage the back-end process of all of those pieces and make it really seamless for the consumer, but also will help us increase our distribution faster with providers and hospitals as a take-home monitor. So we're really excited about it. The opportunity we're sitting on in the near term with BabySat is that there are existing insurance codes for home monitoring, and so it's not the creation of a new code. They're already sending babies home with these big bulky wired monitors that are intrusive in the parents' lives. Owlet's, it's less expensive, it connects right into your smartphone, it's wireless. There are a lot of benefits. And so we -- the BabySat will be eligible for existing reimbursement codes and this partner is helping us manage that with all of the different insurance carriers and companies across the United States out of the gate. So we're excited about that. There's -- will be more to come, but it's not creating a new code. It's really taking advantage of the market that's in place right now, to start.

Got it. And sorry, one last for Kate. You kind of mentioned. Are we still on track then for sort of EBITDA breakeven early -- end of this year, early next year?

That's our focus absolutely on an operational basis. And in terms of the operating expense profile we're at a steady state runway, we're still looking for places where we can optimize both in terms of how we're running things on the operations side, whether it's on the margin or cost of goods, but also within the business. We've been status quo in terms of employee costs. We've been very measured in terms of marketing, as we've talked regularly about, getting over the hurdles in terms of our clearances is important as we've been putting kind of additional focus there based on our regulatory, there's been costs related to that. So that's our -- the next piece for us to manage to. But -- and we want to continue going through 2024 there. So that's going to be the major focus in 2024, is growing and growing profitably beyond as we start talking to what our business model looks like in the next phase at our next earnings call.

We will now turn the call over to Mike Cavanaugh to ask questions that came in via e-mail. Mike?

Thank you, operator. Kurt and Kate, first question that we received is, now that Owlet has a medical and consumer product, how does that play into your go-to-market strategy with the retailers that are expanding into health care, such as Best Buy, Amazon, which has been mentioned, and Babylist with the purchase of a DME?

Yes. Thanks, Mike. So the gap between consumer and medical technologies and channels continues to shrink. And I think timing could not be better for Owlet with big box, your e-commerce sites and specialty baby all moving into the DME opportunity. It's kind of the perfect overlap of existing channels with our new medical focus. So Babylist recently acquired a DME to expand its breast pump offering, and Best Buy is significantly expanding its capabilities into health care. We're having active conversations with each one of these players to roll out BabySat and Dream Sock next year in addition to exploring new channel opportunities that BabySat opens up.

Great. Next question. Are you expecting to see a revenue lift from your FDA clearances this year in 2023? Or are they 2024 events? And what you need to spend differently to support the launch of those products?

I can take that question.

Kate, do you want to take that one?

Yes, sure. We were planning on making both the BabySat product and the FDA clearance features available before the end of the year. I think at this point, where we are, we'll see minor or modest revenue improvements this year, but really, the majority of the benefits are yet to come in 2024 and beyond. And in terms of supporting those opportunities, those will really be -- the support will come primarily in 2024. But as we'll see with the support of Dream Sock, it will really be within -- it's a software opportunity and so that will be readily available before the end of the year.

Great. Thanks, Kate. The next question is, are you experiencing any impact from your competitor launching a consumer monitoring product at select retailers?

Yes. So Owlet is the clear leader in this category. We've invested millions of dollars into establishing this category. And Owlet's de novo FDA clearance sets a new standard for our category, that other pulse oximeters and health monitors are going to have to adhere to. This is a clear benefit to Owlet in terms of our market leadership, and availability moving forward.

Great. The next question is, given your recent FDA clearances and future entry into remote patient monitoring, what is the current long-term vision for Owlet? And has that changed at all?

I think we've shared this before, but we really believe that just like every baby has access to a breast pump, reimbursed by insurance, or goes home from the hospital to car seat, we believe every baby will have access to a health monitor at home. And Owlet created this category, we've now established it with the recent FDA clearance. Our vision is to drive that tipping point both in the U.S. and globally, and we'll see that as a significant opportunity over the coming years. We also know that every year in the U.S., we spend tens of billions of dollars on primary care for children in this age group, just in the first few years of life. And I think that's a tremendous opportunity to move the center of triage from the clinic into the home, and Owlet's well positioned with our data to become the platform. And with our data set, we believe we can create the services and the platform that speaks both to parents in the home and the health care provider. So there's so much we can do right now with our current regulatory approvals, our distribution that's expanding, our data and our community, and that's our focus right now to drive growth.

Okay. Great. And then the next question, I think this is probably for Kurt, but do you think that -- do you envision that Dream Sock, the over-the-counter monitor, would eventually have a telehealth component? Or would that kind of feature be limited to BabySat?

So I think both products will have interesting telehealth opportunities. They'll be a little bit distinct. With BabySat, it would be focused on monitoring babies who have known health conditions. With Dream Sock, the opportunity is to focus on home triage for healthy babies. There's 92 million primary care visits in the first few years of life, and partnerships with telehealth could help parents and physicians better understand baby's health at home, without having to expose them to more sickness in the clinic.

Okay. Great. And one last question. How has the product road map changed over the past few years compared to what was shared previously with the [ Band and Crib ] for example?

Yes. So kind of like I just mentioned, we believe that there's a significant opportunity to become the health platform in pediatrics, similar to other well-known patient monitoring companies in their markets. Our focus right now is to dramatically increase adoption of home monitoring, both for well baby and at-risk babies with Dream Sock and BabySat and both in the U.S. and in Europe, we believe we can significantly grow market share overtime and position Owlet for LTV expansion with our data and services. And so we want to see healthy growth with improving gross margins that allows us to grow from our strength. And for us, that means increasing adoption of our sock and our CAM launching value-add features with our data that consumers and providers are willing to pay for, and then lengthening our customer relationship for extended LTV.

Great. Thanks, Kurt. And that's all the questions we received. So operator, back to you.

That is all the time we have for questions. Handing the call over to Kurt for closing remarks.

Yes. Just as we wrap things up, I want to express my gratitude and thanks to each and every one of you who joined us today. Your presence on this journey means a lot. Owlet's obviously overcome a lot as a business. And the recent news of FDA clearance is an exciting milestone, probably the most exciting milestone along this journey. And when it comes to the world of pediatric care, the future looks incredibly promising. Owlet is driving that progress, and we're making meaningful strides that bring us closer to our vision of better care for our little one. So thanks once again for your time and your belief in Owlet.

That concludes today's conference call. Thank you. You may now disconnect your lines.