Owlet, Inc.

Hello everyone and welcome to the Owlet Q3 2021 earnings call. My name is Nadia and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. I will now hand over to your host, Mike Kavanagh from ICR Westwick Investor Relations to begin. So Mike, please go ahead.

Good afternoon and thank you for joining us today. Earlier today, Owlet, Inc. released financial results for the quarter-ended September 30, 2021. The release is currently available on the company's website at investors.owletcare.com. Kurt Workman, Owlet's co-founder and chief executive officer, and Kate Skolnick, 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 prospectus dated 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. Outlet 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 note that Outlet 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'll 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, delivering $31.5 million in revenue. This represents 48.8% year-over-year growth. and 26.3% sequential growth in the second quarter of this year. International revenue accounted for 10.6% of this, and it's exciting to see the contributions from outside of the U.S. continue to grow and account for even more of the overall pie. We officially launched in 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, the 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've accomplished at Owlet through the first three quarters of the year. We achieved everything we set out to do at the start of the year. Our domestic penetration and awareness continue to grow organically, and that growth has accelerated with increased investment. Moreover, I'm happy to report that adoption and growth rates internationally have outpaced our expectations, and our progress toward key platform expansion opportunities are on the doorstep. I'd 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 of 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 newest product, the SmartSoc 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, the global Net Promoter Score, or NPS, for the SmartSoc was 75, which is best in class and which we believe 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's clear from the results we've achieved that giving parents access to the tools and technology they need to better care for their baby 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 innovations. I'd like to take a moment to address the recent communication Allett has had with the Food and Drug Administration regarding our SmartSoc product in the U.S. For those who are newer to the Allett story, we launched the SmartSoc in 2015 as 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 Socks could have broader impact 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've been in discussions with the FDA regarding our efforts to obtain clearance for a prescription use only version of the Smart Sock for sick babies under the care of a 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 warning letter from the FDA. In the letter, the agency stated it believes the SmartSoc 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've cooperated in good faith with the FDA's request to cease distribution of the SmartSoc in the U.S., while we work to obtain marketing authorizations for the Smart Stock with these functionalities and claims. It's 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've been in ongoing collaborative discussions with the FDA to discuss the path forward for our medical device application for the version of the SmartSoc we've historically been selling for use in healthy babies with notifications for heart rate and oxygen based on preset values. We have a team of some of 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 13485 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'll 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're not starting from scratch. Allett 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're making now more than ever. I'm really excited to share more about our newest product, the Allett DreamSock, which we plan to announce in the coming weeks. The average parent loses 44 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're designing the new Allett DreamSock to be a revolutionary baby sleep monitor that 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 to help little ones up to 18 months old and their parents sleep better. Combining the power of Owlet's award-winning technology and sleep program, the Owlet Dream Sock is meant to empower parents to build better sleep habits from day one. We plan to launch this new product as a duo as well with the Owlet Cam, similar to the Smart Sock Duo we had previously. With the upcoming addition of the Dream Socks to our suite of products, we are doubling down on our focus on infant sleep with our Care Assist services, which we expect will include coaching, courses, and other service integrations. We're building this out to initially focus on wellness offerings, specifically sleep-related services in 2022. If we obtain marketing authorization for the notification features of the Smart Talk that FDA believes rendered in a medical device, we plan to expand into more telehealth-focused 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 were $31.5 million, a year-over-year increase of 48.8% and a sequential increase of 26.3% from the second quarter of 2021. Q3 revenue growth was driven primarily by our flagship SmartSoc and Monitor Duo. are SmartSoc and Canberra 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 and 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 retailer sell-in activity we've 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 to 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 quarter. The inquiries 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 in 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. The EBITDA margin for Q3 2021 was negative 24.2% compared to negative 4.1% in the prior year. The 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 outlet has executed very well against our business and financial growth goals as we sat at the beginning of the year. Some select 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've 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're working through for our smart stock products have created near-term headwinds for our product sales growth trajectory in the U.S. As we prepare to announce our new DreamStock and Duo 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 in EMEA through the end of 2021. In terms of operating expenses, we are managing variable spend while planning to support our new DreamSoc and DreamDuo 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 for 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.

Of course. If you would like to ask a question, please press star, followed by one on your telephone keypad. If you choose to withdraw your question, please press star, followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. and our third question today comes from Charles Rhee of Cohen & Co. Charles, please go ahead. Your line is open.

Hi, guys. This is Gwen Sheehan for Charles. Congratulations on the quarter. Just a first quick question. With the new Dream Sock, I mean, is sleep training something that you, you know, had wanted to incorporate into the smart select before? And is that something that, you know, parents have really, you know, asked 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're kind of thinking about the fourth quarter and the fact that we got the warning letter around 20 days into the fourth quarter, how should we be thinking about the revenue recognized in those first 20 days? Was there some positive impact of a pull forward as well? Thanks.

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

Yeah, and regarding the additional demand that we saw in Q3 and what was happening at the beginning of Q4, What I'd 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 have expected until we needed to cease shipping.

Okay. That's helpful. And then one last question is just around your ability to sell internationally in the UK. You know, does the FDA decision change anything internationally at all? Have you guys kind of spoken to European regulators since the FDA decision?

Yeah, the FDA advisory letter is only specific to the U.S., and our international business continues as usual with the smart stock available. We're really proud of the progress we've made towards our international expansion. And, you know, this year alone we've 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're 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.

Good afternoon, Vesha, evening. I guess just starting now, can you talk about the extent to which the FDA is aware of the DreamSoft coming out and ultimately any thoughts on timing on when you might get FDA approval for the SmartSoft?

Yeah, we've been in communication with the FDA about the proposed ring stock, and we've outlined how we believe it fits within the agency's own general wellness guidelines, in which the FDA states it does not regulate wellness products, so that has very much been part of our ongoing collaborative communications. They're aware of that, and we've shared it with them. In terms of the FDA timeline, you know, again, we're really excited about the opportunity to get Clearance. Owlet is the technology leader in the nursery. We have the largest data set of infant health and sleep and the best technology. And we've done extensive testing on the safety and accuracy of our products. Over 1 million families have used Owlet. It's the number one brand. We've seen real impact. And we're not starting from scratch in that. We've been working with FDA for a few years on Clearance and just received our ISO 1345 recommendation. So while I can't speak to the specifics timeline because that's up to FDA, we feel really confident in the safety and accuracy of our technology, and we have a fantastic team that's making great progress.

Gotcha. And as a follow-up to that, have you gotten any sense that the FDA warning letter has had an impact at all on consumers' perception of the product?

Yeah, we've had a lot of, obviously a lot of insight into that. You know, we launched our Smart Sock over six years ago, and in that time we've released four versions of the product. We've 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, you know, use the product, and we continue to get positive NPS scores and feedback. We believe retailers are excited about the long-term relationship with Ballot, and we're doing our best to navigate a tough situation and work with parents and retailers even more.

And then I guess I kind of blend into my next question. With the launch of the Dream Sock, assuming that moves forward, are you going to be able to get that to all the same channel partners that you currently worked with? Or 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 DreamSoc will resonate with parents. It's solving a real need, and it's something that we've 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.

Gotcha. And then just a last question before I turn it over. Could you just talk about operating expenses, how you're thinking about that here, especially, you know, in light of, I guess, you know, the SmartSoc temporarily, well, I guess, you know, being suspended overall, but, you know, potentially, you know, replaced by the DreamSoc or at least being a different product. Just generally, I mean, how are you thinking about the overall pace and spending, you know, here on the operating expenses?

Sure, I can take that. Yeah, sure. So on the... We received the warning letter at the beginning of Q4. Obviously, a lot of our activity was already in motion for the holiday season. So we're really focused on the top priorities to drive the business forward, which would be around DreamSpot and Duo, as well as our increased efforts around the FDA. And then we're very focused also on reducing any discretionary spend that's outside of those key areas.

Okay. Thank you.

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

Thank you. And I think I'm correct, but it sounds like the dream stock is completely outside of the FDA scope and letter you got. If you can just kind of confirm that, you know, those type of things you're looking at isn't in the realm of what they're looking at.

That's right. Yeah, the DreamSoc was designed specifically to address FDA's concerns and our value proposition around sleep, so it's not a medical device. It doesn't have medical intent. That's correct.

Okay. And then can you talk about your manufacturing pipeline, you know, of 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, or are you kind of keeping it as is? And the reason why I ask is the global supply chain, whether you're 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've done to that.

We've kept the production flow moving, and we're in close, really good relationship with our supplier, which is top tier, and we're very well aware of that. Of course, we're making sure that we have enough inventory to be able to support DreamSoc as it rolls out.

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

Yeah, I would say, I mean, obviously we'll have some additional expenses there, but, you know, we've had the FDA process in place. And we've had budget around that. We have a great team running it. So a lot of that has been built into our strategy. And anything else that's covered around it will be timing in nature. So we're looking at operating expense, just trying to take out any variable that we can. But I wouldn't say that we're looking for significant increases that we would need to be talking about today. you know those all take time and you know we're just looking at 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.

Thank you we have a follow-up question from John Badcock of Bank of America. John please go ahead your line is open.

Thank you, Evan Schroeder. Please do hear from me again. Just one very quick follow-up. Do you have any sense on the timing of when the DreamShock might come to market? It sounded like next few weeks, so I was wondering if you might be able to provide more call with that.

Yeah, we're going to announce it in the next few weeks, and the plan is to get it out as soon as possible. So you'll hear more communication within the next few weeks on DreamShock.

Okay, thank you.

Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypads now. That's star followed by one on your telephone keypads. At this time, we currently have no further questions, so I'll hand the call back over to Kurt for any closing remarks.

Yeah, I just want to thank everybody for joining today and thank Jim and John and Charles for the questions. You know, we're obviously here to support parents, and I just want to reiterate that our mission and vision have not changed. We see a really big opportunity as we move into next year and we roll out, you know, continue to accelerate our international expansion. We roll out DreamSoc and DreamDuo in the U.S., CareAssist, our new subscription service, and... and then continue to work towards getting FDA clearance. I think we'll have a strong foundation that's a full stack 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.