Owlet, Inc.

Good afternoon. Thank you for attending the hourly earnings conference call. My name is Matt and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call for an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. 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 Incorporated 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 Skolnick, chief financial officer, will host this afternoon's calls. 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 US 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.outletcare.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 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 Curt 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 up front 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 based 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, 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 improvements in Q1. Our expenses are right-sized, and this will demonstrate our rebased operating expenses in Q1 and Q2 with the plan to spend no more than $40 million in 2023 adjusted operating expenses, excluding stock-based compensation. We are aggressively focused on achieving profitability and improving working capital. We're targeting to be EBITDA breakeven in the back half of the year and to see working capital continue to improve each quarter. Owlet weathered a lot of change in 2022. Today Owlet is now in a position to focus on execution, and we understand the best way to build trust with the market is to deliver results each quarter. As we progress through the year, we expect to deliver results that demonstrate what we see internally. An organization that is on track to be profitable and growing with numerous avenues for future growth, including organic marketplace opportunities, regulatory clearances, and new products for our connected nursery portfolio. Turning to our 2022 business results. After relaunching our flagship stock monitoring product in the US in January and transitioning from our CAM1 to CAM2 in July, we achieved full year product portfolio revenues of 69.2 million within our targeted range. While retaining strong satisfaction, it's notable that since January 2022, we've reduced the cost of our media acquisition spend, CPA, by 80%. Owlet is now the number one selling monitor on Amazon year-to-date in 2023. After effectively marketing and advertising our dream portfolio relaunch in early 2022, we believe consumer satisfaction of our products and trust and belief in the Owlet brand is strong. The MPS of our product continues to improve throughout the course of the year, with successful introduction of DreamSoc and our CAM2 product transition. NPS across our portfolio is now at or above 2021 levels. Our Q4 reported revenue does not represent the current sell-through of our business. That is because the first half of 2022, sell-in was materially greater than sell-through as we re-entered the market and initially stocked all retail and distribution channels with our Dream products. As we rebuilt brand health through 2022, sell-through continued to improve, growing nearly 47% from the first half to the second half of 2022, and giving us confidence that our brand and products resonate with consumers. However, inventory and channel is substantially greater than our targeted 10 to 14 weeks, which resulted in materially less sell-in in Q4. As a result, our reported revenue does not represent the current sell-through across our channels. We expect a similar effect in Q1 2023 as inventory and channel normalizes. Looking to Q2, we expect sell-in to begin to align with sell-through. In partnership with our retailers, we are highly focused on sell-through and recognize managing inventory in the channel is essential to maintaining strong brand health, better margins, and delivering consistent results. 2022 gross margins were 34% and within our targeted range for the year. There were multiple factors that adversely affected gross margins in 2022, which we believe will not be present in 2023. Headwinds for margins last year were primarily related to the return to vendor program we offered to all domestic retailers as a result of the FDA warning letter, the substantial write-off of prior generation inventory deemed obsolete, additional promotions to support the launch of our dream portfolio, elevated PPV costs incurred due to supply chain shortages in 2021, and inventory adjustments and reconciliations cleanup. In retrospect, this was an unprecedented and costly operational challenge for a company of our size to execute, and we did our best under very difficult circumstances. Moving forward, one of our biggest operating priorities is working towards getting back to 40% to 50% gross margin in future periods through tighter management of promotional spend and supply chain costs. It's important to note that the contract cost of manufacturing a product has not increased, which gives us confidence in our ability to return to these prior gross margin levels in the future. For 2022, total operating expenses were $95.1 million, excluding stock-based compensation, sequentially declining each quarter through the year. In the first half of 2022, our focus was getting our dream product portfolio into the market. and we spent heavily in marketing and promotions to build back and reposition effectively in the marketplace. We were able to successfully position our dream portfolio back into the number one position in key retailers by mid-year and have also been able to improve customer experience and satisfaction with our products to previous levels while putting together two FDA submissions and two European submissions for medical device clearance. Over the last two quarters, we've taken multiple steps to significantly reduce our day-to-day operational spending. The effects of these expense run rate improvements, including headcount reductions, variable spend controls, and finishing programs related to regulatory clearances, were somewhat masked in Q3 and Q4 due to cleanup adjustments, such as bad debt reserves and other items incurred in prior periods. And as such, the improvements we've made are not yet fully reflected in the financial statements. We exited the fourth quarter with operating expenses excluding stock-based compensation of $19.6 million. When factoring out bad debt reserves and one-time expenses, such as costs from our financing activities, severance, regulatory clearances, and out-of-period expenses, the underlying spend to operate the company was $15.2 million, marking a significant improvement to prior periods. As we shared in our last call, due to the changing macroeconomic conditions in the market, we adjusted our operating plan to drive the business to break even adjusted EBITDA in 2023. We've streamlined our organizational structure from 227 employees last year to under 100 employees today. We are targeting run rate operational expenses under $13 million in Q1, excluding stock-based compensation and adjustments and financing transaction costs. We will continue to find opportunities to reduce costs in the first half of 2023 to maintain operating expenses under $40 million in 2023, excluding stock-based compensation and Q1 financing transaction costs. For the past 12 months, Allett has shown operational resilience with the vision and commitment to be the long-term leader impacting pediatric health. In February, as I previously mentioned, we raised $30 million in capital to support our balance sheet, and we are working to restructure our lending commitments for access to working capital. Our 2023 planning will be to limit cash burn under $15 million as we strive for profitability and cash flow positives in the back half of the year. As we set the foundation for profitability and gain FTA clearances, we believe Owlet has a very healthy high growth opportunity. The most critical accomplishments towards Owlet's digital healthcare future is the work we've done to pursue regulatory clearances for our products in 2022. As stated in prior calls, we believe in making the highest quality care available to every baby by democratizing access to technology and information that has previously been limited to clinical settings. Our team has completed significant work which enabled us to file FDA submissions for our monitoring platforms, which, if cleared, will unlock further long-term opportunity and growth for Owlet. Over the past year, we've greatly increased our communication with the FDA, maintaining frequent conversations and meetings, and developing two clear, distinct paths forward for our submissions. In October of 2022, we filed a 510 pre-market notification to the FDA for a new prescription monitoring device for infants. The device, which we internally call BabySat, uses pulse oximetry technology and is intended to be prescribed by physicians to assist with the in-home monitoring of babies under a physician's care. The device provides alerts to parents when their baby's heart rate or oxygen saturation level, or SpO2, does not fall within prescribed ranges. BabySat represents significant advantages to the large wired hospital monitoring technologies on the market today with its wireless wearable form factor and cloud-connected data integration designed for home use. 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 heart rate and oxygen notifications in conjunction with the existing DreamSoc sleep monitoring capabilities. The de novo application includes both the display of heart rate and oxygen currently in the DreamSoc and additional notification features as software as a medical device. We are currently in the review process with the FDA and are working to respond promptly to any questions or clarifications that come up We've also made substantial progress towards our UK and CE medical applications and continue to maintain our MD SAP and ISO 1345 certifications, passing several audits in 2022. I look forward to sharing more updates on these submissions when we have news to share. We believe the FDA authorizations will position Owlet to better help parents navigate the gap between hospital and the home and increase our ability to use our large and growing data set as a critical tool for pediatric care. We are determined to execute as best we can through this near-term macroeconomic uncertainty and remain focused on the milestones that will best position us for the strongest long-term potential for a healthy, profitable business. Thank you for your continued support of Owlet. Kate, over to you.