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Operator
Ladies and gentlemen, please remain holding. Your conference call will begin shortly. Again, please remain holding. Your conference call will begin shortly. Thank you. Hello, everyone. Thank you for attending today's Outlet Fourth Quarter 2023 Earnings Call. My name is Sierra, and I will be your moderator for today. All lines will be muted during the prepared remarks from our management team, with an opportunity for questions and answers at the end. If you'd like to ask a question, press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Mike Cavanaugh, Investor Relations.
Mike Cavanaugh
Thank you, Operator, and good afternoon, everyone, and thank you for joining us today for Outlet Baby Care's fourth quarter 2023 earnings call. We appreciate your time and interest in our company. Earlier today, Outlet released financial results for the quarter and full year ended December 31, 2023. The release is currently available on the company's website at www.investors.outletcare.com. Our speakers for today's call are Kurt Workman, Owlet's co-founder and chief executive officer, and Kate Skolnick, our chief financial officer. Kurt will begin with an overview of our performance and key developments, followed by Kate, who will provide a detailed review of our financial results. Following their remarks, we will open the call for your questions. Before we get started, we'd like to remind participants that today's discussion will contain forward-looking statements based on current expectations. These statements are only predictions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, but are not limited to, those described in our most recent filings with the SEC and in the risk factors section of our annual report in Form 10-K for the fiscal year ended December 31, 2023. Please note that the company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. With that, I would now like to turn the call over to our CEO, Kurt Workman.
Kurt Workman
Good afternoon, everyone, and thank you for joining Owlet's earnings call. 2023 was a transformative year for Owlet. We set out with three key goals. secure FDA clearances, achieve adjusted EBITDA near breakeven exiting 2023, and revitalize our channel health. I'm incredibly pleased to announce that we achieved all three. These accomplishments are a testament to our team's dedication, the strength of our product portfolio, and the large community of parents, health professionals, and partners that believe deeply in the importance and mission of Owlet. Most importantly though, these achievements position Owlet for substantial growth in 2024. Now let me talk about each. Our recent FDA clearance was a pivotal moment for the business. And by launching BabySat and DreamSoc with medical grade features, we redefined consumer health monitoring and redesigned the market for Owlet. Let me explain why this is so significant. First, it removes purchasing obstacles FDA clearance addressed the key customer concerns around regulatory status and the efficacy of our products and firmly. Specifically for DreamSoc, we added features such as live vital sign displays and health alarms, giving medical-grade comfort to parents wishing to monitor and protect their children. And my excited report that parents responded in kind in Q4, as evidenced by the doubling of our sell-through during the recent holiday period, and our DreamSoc sell-through has continued to maintain double-digit growth over prior periods. Second, it solidifies our market leadership. Owlet is now the first and only FDA-cleared baby monitor in its category, setting us apart from competitors to our basic consumer products and further distinguishing our category from traditional sound and video monitors, also allowing us to draw direct comparisons to trusted hospital-grade technology. Third, it opened the market for medical expansion. These clearances paved the way for our BabySap product to enter healthcare distribution, allowing us to improve the standard of care of monitoring for higher-risk babies. It also allows pediatricians to prescribe Owlet instead of the traditional, intrusive, and clunky hospital monitoring solutions that increase risk with wires going into the crib. These new channels increase our distribution, strengthen our consumer and medical brand, and improve margins. Alongside our FDA success, we've dramatically improved financial efficiency. Through a combination of strategic actions since the launch of DreamSoc in 2022, we reduced operating expenses by nearly 60%, including consolidating vendors and eliminating unnecessary costs. Over the same timeframe, we significantly reduced marketing expenses by over 70%, and we've been able to effectively maintain those marketing spend levels while still driving a 20% increase in sell-through in 2023. This was done by focusing on targeted channels on social media, specific partnerships, product satisfaction initiatives, and leveraging our credibility behind our FDA clearances. Our marketing team drove over 100 million unique video views and increased our social media following to 1.3 million pairs. The sell-through growth in 2023 and significant year-over-year improvement post-FDA clearance demonstrates that we can grow without significantly increasing marketing spend. We also improved gross margins to 47% in Q4, a 1,900 basis point improvement year-over-year, and would have delivered over 50% and adjusted EBITDA positive if not for the one-time impact of our former Amazon partner going out of business. The improvement in margins during the year were due to warehouse changes, improving our channel mix, PPV reduction, and the onboarding of Amazon 1P. These were significant operational achievements for our small operations team. These combined efforts of expense reduction, marketing efficiency, and margin improvement brought Owlet to adjusted EBITDA near breakeven and the most efficient operating position in our history. At the start of 2023, we focused intensely on channel health. Key channels like Amazon, Target, and Walmart saw significant reductions in weeks on hand while sell-through improved, getting to a healthier channel position. An additional 800 Walmart doors fueled over 100% growth in sell-through year over year. We added distribution of our Duo 2 product to DreamSoc in all Best Buy stores and onboard at Amazon 1P. The combined sales effort helped fuel the sell-through needed to improve our channel health at retail. We also addressed imbalanced international inventory with strong sell-through in the second half, reducing weeks on hand to manageable levels. Overall, our weeks on hand are now healthy. Owlet navigated this even while overcoming the buy-by-baby bankruptcy, where liquidation temporarily impacted other channels. Overall, across 2023, we improved weeks on hand with our retailers by over 45% from the beginning of 2023, setting us up for strong revenue growth in 2024. As we enter 2024, Owlet has the best product portfolio in the industry, strong sales momentum, healthy level of channel inventory, scalable operations, and FDA clearance. We're now focused on rapidly expanding medical distribution, elevating our retail presence, all while maintaining our operational and financial efficiency and discipline. In addition, we're eyeing two important milestones ahead of us to further unlock growth and market access. First, European expansion. CE medical clearance, a focus for early 2024, will propel continued European momentum and open new markets. Second, software and services. Providers are now able to use our data to better enable care at home. And Owlet will be developing software and services behind this new theme that will empower parents with new insights and better close the loop between healthcare and the home. These new services will be introduced in 2024 and begin to shape our revenue and margin story in 2025. I'm incredibly proud of our team's perseverance and the amazing work done in 2023. Our mission to empower parents fuels our dedication during challenging times. This was evident in our donation to our foundation partners of over $1.4 million worth of DreamSocks to families in need. In addition, fundraising for SIDS Research, which raised over $150,000, and support for grieving parents where Owlette and our partners donated and planted trees, over 500 trees in memory of these parents' precious little ones. We are dedicated to serving the families and communities who need Owlette the most, and I'm grateful and proud of the team that took time to give back while also pulling Owlet through very difficult times. I'm incredibly excited about the growth and opportunity we've unlocked for 2024 and beyond. I've been on this journey with Owlet and our community of over 2 million parents for over 10 years now, and I can tell you Owlet has never been in a better market position. Our time is now. Thank you. Kate, over to you for the financial highlights.
Owlet
Thank you, Kurt, and thanks for everyone joining us today. In Q4 2023, Owlette demonstrated strong financial performance. I'll spend the next few minutes walking through key financial metrics and providing some additional detail. Gross billings for the fourth quarter were $32.9 million. Product promotions and discounts were $5.9 million, and returns and allowances reserves were 5.7 million. Within this, 3.1 million was related to the transition of our business on the Amazon platform. Excluding the Amazon platform, returns and allowances were approximately 8% of gross billing within our average range. Q4 revenue, which excludes returns and sales discounts, was 21 million. Gross billings for the full year 2023 were 73.2 million. Revenue, which excludes returns and sales discounts, was $54 million. Entering into 2023, our sell-in to distributors had outpaced sell-through to consumers, and during the course of the year, our partners were able to work through their excess inventory, bringing sell-in and sell-through into healthy balance by year-end. Q4 sell-through units were up 32% sequentially, demonstrating a fourth consecutive quarter of sell-through growth in 2023. We ended 2023 with overall sales rate increasing 27% year-over-year at the top four retailers. Our gross margin for the fourth quarter was over 47%, a significant increase from 27.8% in the same period last year. Gross margin for the full year 2023 was 41.8%, a significant improvement over margins of 33.7% from 2022. Our strategies to expand gross margins have been multifaceted. We've been focused on improving our sales product mix and optimizing our promotional strategy. We've also been working diligently to reduce our cost of goods sold where possible, including negotiating better terms with our suppliers and improving our shipping and warehouse processes. Operating expenses in the fourth quarter were $13 million, including stock-based compensation of $2.3 million, representing a 46% decrease of $11.1 million year-over-year. Excluding stock-based compensation, Q4 operating expenses were $10.7 million. Within these expenses, we accounted for a net $1.3 million in bad debt expense regarding our former Amazon distribution partners. For the full year, operating expenses were $51.2 million, including stock-based compensation of $9.9 million, representing a 53% decrease of $56.7 million year-over-year. Excluding stock-based compensation, 2023 operating expenses were $41.3 million. The year-over-year decrease in operating expenses was primarily due to employee-related costs and marketing spend. The measurable progress towards operating profitability in 2023 is an important foundational shift for ALIS business. Fourth quarter net loss was 6.9 million for the quarter, a 65% decrease from 19.5 million in Q4 2022. For the full year, net loss was 32.9 million, a decrease of 46.4 million year-over-year. Adjusted EBITDA loss for the fourth quarter was approximately 0.7 million, down 95% from 15.2 million year-over-year. For the full year, adjusted EBITDA loss was 16.3 million, compared to 68.3 million in 2022. In terms of our balance sheet and cash flow, we ended the year with 16.6 million in cash and cash equivalents. Coupled with our recent 9 million financing announced in February, we're beginning the year with good financial flexibility to invest in our 2024 growth initiatives and the necessary working capital resources to meet growing customer demand for FDA cleared products. We remain focused on executing our strategic initiatives to further strengthen our commercial and financial performance in 2024. With revenue growth, sustained gross margins, and controlled expense management, we believe we can continue to drive shareholder value. 2024 is off to a strong start. Looking ahead, we will again refrain from providing specific quarterly guidance. We are focused on executing on the core business activities in 2024 that will maximize supporting dream product commercialization and driving continual balance of sell-in and sell-through retail inventory. From a linearity perspective, we anticipate a seasonal sell-in step down in Q1 from Q4, and particularly with the strong Amazon one-piece sales with past Q4, followed by sequentially strong sell-in Q2 for Mother's Day holiday promotions and Prime Day. Second half sell-in for the November-December holiday promotions usually take place in Q3. Making strides in ramping babysat commercialization with new DME partnerships. Babysat revenue will begin ramping as we develop our important long-term DME partnerships in 2024 and align for revenue model impact in 2025. Driving gross margins within our target range of 45 to 50 percent through unit volume, product mix, and ongoing operational efficiency, and driving our operational planning towards break-even and sustainable profitability. We are targeting operating expenses, excluding stock-based compensation, between 10 to 20 million per quarter. With that, I will turn the call over to the Q&A portion. Operator, please open up the call to questions.
Operator
Absolutely. We will now begin the Q&A session. If you'd like to ask a question, please press star followed by one on your telephone keypad. To remove your question, press star followed by two. Again, to ask a question, press star one. And if you are using a speakerphone, please pick up your handset before asking your question. Our first question today comes from Charles Ray with PD Cowan. Please proceed.
Charles Ray
Thanks, and congratulations, guys, end of year strong here. Um, you know, Kate or Kirk, maybe, uh, just touch on Amazon a little bit here. Uh, obviously the, uh, direct selling to Amazon, you know, what's, what's the importance of that? And, you know, why, why do you, why, why should we view this as a real, uh, significant step forward for the company?
Kurt Workman
Yeah. Thanks Charles for the question. Um, I think one of the big things to note is that Amazon is our largest channel. Something close to 30% of our revenue is driven through Amazon. So this is a really important channel for us. And traditionally, we've been working with third-party sellers on Amazon that help manage the logistics and compliance with Amazon's fulfillment process. And then they also help with some of the marketing on Amazon for us. As we progressed through 2023, we realized that the outlet sell-through was growing. We're getting into a healthier position. We were worried about some of the partners' financial strength. And at the same time, Amazon approached us. They usually work with kind of the top 70 brands in every category, kind of the top brands in every category. And Owlet was one of the brands that they weren't working with that's top in the baby category. And so we were really excited about the opportunity. What it provides is better financial stability, better margins. The unit economics through Amazon are better. Then going through third-party distribution, we get additional placements as part of our agreement for advertising and marketing to give us better elevation. And so all of that combined puts a much better margin profile for the business, specifically within that channel as we move into 2024. And then, you know, combining that with the FDA clearances, this channel is one we expect to see a lot of growth in.
Charles Ray
Yeah, and maybe just sticking with the clearance, obviously you're the only FDA-cleared product that's available in stores. Maybe talk a little bit about the competitive landscape. I know Mossimil has a product out there. Maybe just give us an update on what you're seeing in the rest of the markets.
Kurt Workman
Yeah, I would say that the number one concern our customers had heading into Q4 was around the confusion with the FDA. And so being able to announce that Owlet is the first and only FDA cleared monitor for over-the-counter use, that's still the case today. There's no other monitor that has FDA approval to sell over-the-counter and through retail channels to empower parents directly with all of this health information. So Owlet's in that position. Um, and, and what we saw as a result of that is that it opened up the bottom of the funnel. The top of the funnel has been pretty healthy. The awareness around all it's been really good. And there's just been this question mark around is outlet FDA approved. Should I buy this for my baby? And we were able to answer that very clearly for consumers in Q4 and they responded. That's why our sell through doubled, uh, during that holiday period, year over year with that specific, uh, messaging and, and the press around that. We're really excited about that opportunity. I think this year. Owlet's been put into a new category. We are the only FDA cleared monitor on shelves. Our retail partners are really excited about that. They're giving Owlet more shelf space. They're differentiating Owlet from the competition. We're able to do that through our marketing and labeling, which is really, really exciting. So what we're seeing is Owlet was the number one monitor in the category, and we expect that distance to continue to increase in 2024.
Charles Ray
That's great. Maybe switching over to Babysat a little bit quickly. This one, I think you had talked about partnering with a direct medical equipment distributor. Maybe give us an update there where you're at with that. I think you had already selected one or you've partnered with one. Maybe give us a little bit more details there.
Kurt Workman
Yeah, of course. We announced a partnership with Adapt Health at the beginning of January. ADAPT is a nationwide distributor of medical devices. They have relationships with every national insurance, you know, payer in the United States. They're in a big portion of the hospitals throughout the country. And so they're the perfect partner for Owlet to go to market with as we begin to sell Babysat. They're integrating with all the insurance companies. They've integrated with our website so that the checkout experience through our website is seamless for our customers. They do all of the prescription verification, all of the insurance verification. They've got a sales group of hundreds of sales reps that are taking Owlet now to hospitals. It's obviously a channel that takes a little bit of time to build. Things move a little bit more slowly, but we're really excited about that partnership. You'll hear more partnerships announced probably every quarter this year as we're building out that medical distribution. But we're really excited about this first step into medical distribution.
Charles Ray
Great. And sorry, maybe two more questions for me. The first one on international, you kind of moved into Europe early on before some of the things that kind of got delayed here. Maybe give us an update on where you are for the CE mark and When you get to CE, Mark, is that for an over-the-counter product or is that for a prescription product? Just curious on the distinction there.
Kurt Workman
Good question. It's for an over-the-counter product. Europe's a little bit different in terms of their – we have prescription and over-the-counter here for pulse oximetry there. You can get medical distribution and have an over-the-counter product, but it is specifically for over-the-counter use. We'll be able to sell it through all of our retail channels that we've set up there. And we think it's going to have a huge impact on not only the expanded distribution that we've been working on, but also the same thing, the opening up the bottom part of the funnel. We've worked hard for a few years to build awareness, and we believe this is going to drive additional conversion and more partnership opportunities. So we're very close to it. We've been able to leverage a lot of the a lot of the work and a lot of the studies that we did for FDA clearances, and we feel like we're in the kind of final steps to getting clearance.
Charles Ray
Great, and maybe my last question. Kate, you know, if we kind of look at the quarter here and we kind of back out sort of the one-time items that you kind of noted with, particularly with the shift to Amazon, it would look like gross margins were north of 50%, and adjusted EBITDA would have been positive for the quarter. I know you're not really giving forward guidance per se, but maybe you could help us think through sort of how margins, how you're thinking about margin progression and sort of, you know, move to profitability here.
Owlet
Yeah. You know, as I said, you know, we're looking at the that we have through the year, what we're trying to get to, you know, for our long-term model is really margins between 45 and 50%. Some of the undulation just kind of comes with the pace through the years. We talked about the Q1 being a step down from Q4, just given volume. And then as it ramps up in Q2, Q3 with the different, you know, holidays and the promotions and prime days. So I think that what we're seeing is the more, um, gravitation that we have towards our stock product. That is obviously the hero product as it relates to margin. So mix moving towards there as a benefit, um, looking further out, as I mentioned, as babies sat ramps out further into 2025, um, that will be margin benefit to the model as well. In terms of adjusted EBITDA, we're not changing our profile as it relates to expense. So excluding stock-based compensation, operating expense being between 10 to 12 million per quarter, we're looking at leverage in the model that way. You know, depending on where the revenue kind of lands each quarter, we'll see that improving too. Our goal is to be in a sustainably profitable company, and I think the benefits of 2023 that we made in taking as much expense as we did out, we don't want to lose that momentum that we have. So it's the opportunities that we have to put our working capital towards the FDA-cleared products this year, having revenue growth that will get us to that over the sustainable line, if you will, in 2024 and beyond. to make this really a company that is focused on being that independent growth company with a profitability lens. So still some work to do in 2024, but I think what you'll see is that that improvement continues as we go through the year.
Charles Ray
That's great. I'm sorry, maybe one more here. You talked about opening at the bottom of the funnel and you saw that kind of double in the fourth quarter. Can you give us a sense on what that trend looks like on the sell-through here in the first quarter so far? Are we still seeing the same kind of momentum?
Kurt Workman
Yeah, I would say not. It hasn't been a double kind of in the first quarter of 2024, but we've seen definitely double-digit growth year over year for DreamSoc, which is part of the sales mix that's really starting to outperform DreamSoc. and DUOs close to that. So we have seen sustained sell-through lift that's really promising as we go into 2024 that we can build on, and it's significant.
Charles Ray
Great. I appreciate all the questions. Thank you.
Kurt Workman
Thanks, Charles.
Operator
Thank you for your question. There are no further questions in queue, so I will now pass the conference back over to Mike Cavanaugh for further questions that came in via email.
Mike Cavanaugh
Thanks very much, Operator. Yeah, we have received some questions from investors and particularly some of our retail investors that we wanted to share during the Q&A session today. So the first one, congratulations team on 13 trillion heartbeats. Are there efforts to identify potential correlations between heartbeats and various medical conditions or sleep quality? What can you tell us about the product roadmap and some of the other products like Band and Crib. Considering both FDA clearances and your extensive data set compared to competitors, that should be an advantage for you.
Kurt Workman
Yeah, I'll take this one. Yeah, Owlet has one of the largest data sets of infant health at home and a fantastic data science team. We've known for a long time that the potential of our data and our technology And the value we can drive from those insights is immense. We've really been limited for years, you know, just being a consumer device and limitations around being in the consumer device space. So now with FDA clearance, we can really start to unleash our data and technology for parents and providers. That's a big part of this year. I talked a little bit about software and services. So our focus in 2024 is really two things. It's to drive adoption of our medical devices, and we're seeing the momentum in that area. and launching software and services to leverage Alice data. So we really do believe that there's significant revenue and margin growth. And as we progress here by focusing on those two specific areas with about 140 million babies born globally, we're just scratching the surface of Alice long term potential. So stay tuned for more. This is a really exciting area that we'll be sharing more and more about.
Mike Cavanaugh
OK, thanks, Kurt. The next question As an investor, I appreciate the strong support from Eclipse, as well as the active participation of the board in the recent offering. That clearly demonstrates confidence in Owlet going forward. With the public float at only about 20% of total shares, do you have any thoughts on the best way to build shareholder value? And then in the current macro environment, how does Owlet push forward and stick out from the others?
Owlet
Um, yeah, I can take that question. Um, you know, as a micro cab company, I think along with others, we've been impacted by these conditions of the capital markets, especially since they've continued to be drawn out over what seems like a long period of time. We've had the financial support of our largest investors and our banking and trade partners. So we've been able to continue to also execute against our mission and vision. Lauren Small, I think you know this support has been really helpful in our ability to deliver against our business and operational plans in 2023 that we've just spent time discussing today. Lauren Small, And these accomplishments, you know set us up for even more success in 2024 so we believe that you know the execution of last year, and also the execution of plans that we talked about for 2024 is what puts us in the best position to continue to. build shareholder value right now.
Mike Cavanaugh
Okay, thanks, Kate. Next question. Does Owlet plan to launch in India or other Asian countries? And if so, what is the potential timeline for that?
Kurt Workman
Yeah, I mentioned that we're very close on the CE med clearance. I'm really proud of the team's work there. That's the near-term focus. But there are 140 million babies born across the world every single year. And parenting really has universal needs. It doesn't matter where your baby's born. Parents care about their child's safety and their health and them being able to get a good night's sleep. And so our technology has a really big opportunity to have an impact across the globe. We're really excited about this. In 2024, our specific focus is on expansion of Owlet's medical device in Europe. There's a lot of room for growth there, and then we'll open up other geographies in coming years.
Mike Cavanaugh
Great. Thanks, Kirk. Next question. Given the demographic of Owlet's target market, how important is social media and influencer marketing?
Kurt Workman
and can we expect celebrity type marketing for the outlet stock in the future so we work really hard to meet parents really where they're at with messages that resonate with them in channels that you know they spend their time and one shining example for us recently is the tick tock tick tock strategy that we've put in place put a large emphasis on getting outlet stories out into the communities and those stories include really fun and creative content about parenting, very serious and emotional content around the parent or the child's story, their health journey, or Owlet detecting that the baby had low oxygen and parents being able to intervene in time. Those stories have a big impact. We've even had a lot of user-generated stories and partner stories. Somebody wrote a song about Owlet or about their child and they included Owlet in it. We do a lot of work on social. We had over 100 million video views and engagements last year. And we want to be a very authentic connection with parents. And it's obvious that parents telling real stories and real life examples and the word of mouth behind our product is always meaningful to Owlette. It's been a big part of growing our brand and our awareness and being able to do that also while cutting marketing expenses. There's a lot of opportunities with that, and there are a lot of celebrities who use Owlet organically and share about Owlet because they absolutely love the product. And so we feel like that's the approach that resonates the best with parents.
Mike Cavanaugh
All right, great. And we have one final question that we received. I noticed there was a PR firm that is a public relations firm hired toward the end of the year. Can you speak to that and the strategy behind it?
Kurt Workman
Yeah, I would just simply say that Allett really, again, we're in a first and only position. We are the first and only approved FDA monitor for over-the-counter distribution, and we're taking advantage of that in the market today by driving awareness and cleaning up any confusion in the market that's existed. We've had hundreds of articles written about Allett in just the last few months, millions of parents engaging with that message, thanks to our social and our PR team that's doing a fantastic job. And that's a big reason why we're seeing this organic lift and sell through. People now know that Owlet is in that position and we're the best available option. So this is a massive year for us.
Mike Cavanaugh
All right. I think that's it for our supplemental questions. Operator?
Operator
Thank you. I'll now pass the conference over to Kirk Workman for closing remarks.
Kurt Workman
Thank you. Yeah, as we look ahead, we're excited about the opportunities that are ahead of us. We're focused on expanding our product footprint, driving revenue growth, improving operating leverage, and achieving further profitability. Our strategies and initiatives are designed to capitalize on our recent product introductions and regulatory successes and to continue to deliver value to our shareholders. In conclusion, I want to express my sincere gratitude to our shareholders, to our clients and our dedicated employees for their unwavering support and loyalty. And your belief in our mission and commitment to our vision has been instrumental in our achievements this past year. Thank you. As we look forward to 2024, we are energized by our progress and the momentum that we felt, and we're committed to our mission of helping children live long, happy, and healthy lives. We're excited to continue our journey with all of you. Thank you once again for your continued support. and for joining us on this call today.
Operator
That will conclude today's conference call. Thank you all for your participation. You may now disconnect your line.
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