iPower Inc. (IPW) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for participating in today's conference call to discuss iPower's financial results for its fiscal first quarter 2023 ended September 30, 2022. Joining us today are iPower's Chairman and CEO, Mr. Lawrence Tan; and the company's CFO, Mr. Kevin Vassily. Mr. Vassily, please go ahead.

Thank you, operator, and good afternoon, everyone. By now, everyone should have access to our fiscal first quarter earnings press release, which was issued earlier today at approximately 4:05 p.m. Eastern Time. The release is available in the Investor Relations section of our website at meetipower.com. This call will also be available for webcast replay on our website. Following our prepared remarks, we'll open the call for your questions. Before I introduce Lawrence, I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any forward-looking statements which are being made only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements. With that, I'd like to now turn the call over to iPower's Chairman and CEO, Lawrence Tan. Lawrence?

Thank you, Kevin, and good afternoon, everyone. Our fiscal Q1 was a strong quarter despite lingering challenges from a supply chain environment. Although our gross margin dipped below 40% due to higher freight costs associated with order inventory, we generated approximately 50% year-over-year revenue growth as we expanded both our hydroponics and non-hydroponics businesses. Throughout the quarter, we were able to maintain concentration on our in-house product mix, which accounted for over 90% revenue compared to around 80% in fiscal Q1 2022. We also continue to focus on diversifying our product mix with non-hydroponics household products, such as shopping supplies, home fans and chairs, accounting for over 65% of the sales during the quarter. Looking to the future of our product catalog, we will be investing more in R&D to create even higher-value and higher-margin products. We believe this will allow us to better manage quality control and ensure that our customers are consistently receiving catalog-leading products. We expect to begin rolling out these new products in 2023. Heading into calendar 2023, we will continue to leverage our extensive supply network and supply chain expertise to tap any and all consumer home and garden categories that can create value for our consumer base and business. Earlier in the year, we made the strategic decision to stockpile inventory in anticipation of both residual supply chain headwinds and our planned increase in non-hydroponics product sales. This ensured that we have consistent availability of fast-moving products for our customers and channel partners. However, it did offset gross margin as many of those products came in at higher freight rates than what we are seeing today. We continue to have an elevated inventory position, and we expect to work with higher cost inventory down over the next couple of quarters, which will improve both our cash flow and gross margin. As mentioned on our last quarterly update, we have been in the process of revamping our image to better showcase the core iPower business alongside our increasingly diverse product portfolio outside of traditional hydroponics vertical. We are launching our new website this weekend and expect our entire rebranding process to be completed soon, which will include a new logo, color scheme and other marketing-related items. This new branding is an important step in unifying iPower's various non-hydro-related products and services via creating a more seamless experience for our customers as we continue to scale and grow both domestically and abroad. Looking ahead, we expect the volatility and pricing in the supply chain to continue improving as we are already seeing meaningful decreases in overseas shipping costs as well as lower leading time to cross the Pacific. As a result, we expect to require less inventory going forward and plan to reduce the balance over the next few quarters. Between selling through higher cost inventory, purchasing less products and eliminating short-term warehousing need at elevated rates, we are well positioned to improve margin and cash flow. All of that said, we will continue to be vigilant in our business and capital allocation as the macro environment evolves in fiscal 2023, and we look forward to delivering another year of strong growth and profitability. I'll now turn the call over to our CFO, Kevin Vassily, to take you through our financial results in more detail. Kevin?

Thanks, Lawrence. As Lawrence mentioned, our fiscal Q1 was another period of strong top line growth for the company. Total revenue was up 50% to $26 million compared to $17.4 million in the year-ago period driven by increased demand for our non-hydroponic product portfolio, which includes items like commercial fans, shelving equipment, chairs, carts, et cetera. Gross profit in the first fiscal quarter increased 37% to $10 million compared to $7.3 million in the year-ago quarter. As a percentage of revenue, gross margin was 38.4% compared to 42.1% in the year-ago quarter. The decrease in gross margin is driven by a great portion of our sales coming from inventory that incurred higher freight costs earlier in the year. Total operating expense for fiscal Q1 was $11.5 million compared to $6.0 million for the same period in fiscal 2022. As a percentage of revenue, operating expenses were 44.1% compared with 34.7% in the year-ago quarter. The increase in operating expense was primarily driven by elevated warehouse costs. These costs were for temporary warehouse space. This is a result of having that higher inventory compared to the prior year period. As Lawrence mentioned, we expect to improve operating margins in the next coming quarters as we eliminate short-term warehousing for those elevated inventory levels. Net loss in the first fiscal quarter was $4.3 million or $0.14 per share compared to net income of $0.9 million or a $0.03 per share gain for the same period in 2022. The decrease in our bottom line was primarily driven by a $3.1 million goodwill impairment charge that was related to a decline in our market capitalization as well as the aforementioned elevated warehouse and freight costs. Moving to the balance sheet. Cash and cash equivalents were $4.8 million as of September 30, 2022, compared to $1.8 million at the same time at the end of our June quarter. Increase is primarily due to purchasing less inventory as we previously added to that product stock to ensure availability earlier in the year. As of September 30, total long-term debt stood at $16.1 million compared to $14.1 million at the end of June 30, 2021. Increase was driven in part by timing as we utilized our revolver to better manage working capital. And then looking ahead to the rest of fiscal 2023, we plan to continue to drive solid top line growth in the business while maintaining our approach to capital allocation and returning the business to profitability. Although the macro environment continues to present challenges, Lawrence may touch on this a little bit in the Q&A period. He's actually in China right now, we've begun to see improvements in our supply chain costs. We think that these will continue into the next calendar year. So this concludes our prepared remarks. And we'll open it now for questions. Operator?

[Operator Instructions] Our first question comes from Scott Fortune with ROTH Capital Partners.

I want to dig in to inventory. But first, can you quantify kind of the $26 million top line result here as far as the business segments and the growth of each of those segments? Non-cannabis seems to be growing quicker, obviously and then kind of your thoughts for longer-term mix from those segments, and then also the segment gross margins for each business, around each of the business for the quarter and going forward from that standpoint.

Sure, Scott. So I'll take a few of those. So first, the breakout between our hydro product line and our non-hydro product line, let's call it roughly 50% each. The non-hydro was lower last year, so that's obviously growing a little faster than the 50% clip that we reported on the aggregate basis. Lawrence, maybe you would comment on kind of margins for the different segments.

Yes. Sure. The non-hydro and hydro business in terms of the in-house product gross margin, they are relatively the same. But we have always been seeing the non-hydro parts have been growing faster than the hydro side, which now contributes to, for the last quarter, over half of our total revenue. But in terms of gross margin for the in-house parts, which contributes to most of our sales, which is about 90% for the September quarter, then they're relatively the same.

As a quick follow-up on that, Lawrence, you said you have a lot of R&D for new product growth going forward. It kind of gets back to the question about the mix. How should we look at that? With new products coming onboard, the mix kind of moving forward away from the cannabis side and more non-cannabis going forward here.

We'll actually be doing both. The R&D will be put in both the hydroponics and non-hydroponics business as a way to make our products smarter and better value for our consumer. We're not limited by either hydroponics or non-hydroponics business, it's basically the way we put more R&D into the existing product line or some new product [ related ] line so that we can provide a better product to the market.

And Scott, one other kind of advantage for more kind of in-house R&D is that a lot of the products that we bring to market are done or co-engineered with a partner, either a third-party or directly with some of our suppliers. So by bringing some of the R&D in-house, we obviously own a bit more of the IP associated with that. And I'm not going to try to quantify it too precisely, but there's a little bit of a margin bump we get because we're not paying kind of the co-engineering service fees. So in an attempt to keep trying to push those gross margins upward, we think this is an important thing to do over the next couple of years.

Got it. And then my follow-on question, obviously, the inventory levels, it sounds like this should clear over a couple of quarters. Just kind of step us through as you look at SG&A and the costs there going forward and the key to get back to profitability from this level. And I take it that your partner, Amazon, did not boost holding more inventory in 1Q, so you didn't see that boost. Just kind of step us through how inventory and the bridge getting back to profitability plays out on the SG&A side for you.

So the biggest incremental costs associated with holding this inventory is all of the temporary warehouse space that we needed to procure to store that inventory. And as such, as you might imagine, short-term lease, for a short-term kind of service fee, is significantly more expensive than the long-term warehouse lease. Our challenge was, over the summer, somewhat still worried about the supply chain, the still fairly elevated shipping times and not wanting to miss kind of the demand window that still felt like it was going to be there. And I think the top line results we saw this quarter kind of supported that view. But as we've seen shipping costs or times come down, we believe our ability to run the business on a lower level of inventory, meaning higher returns, will return. So that's one. And with that, the money we're spending to hold inventory in these short-term facilities will start to disappear. I don't have an exact timetable because it's obviously a function of sell-through. But it's related. As that inventory comes down, we won't need to be holding it in what's very, very high-cost storage. So I think that's the way to kind of think about getting us back to a more normalized operating expense environment.

[Operator Instructions] Our next question comes from Michael Baker with D.A. Davidson.

So a couple of follow-ups and other questions. So first, just to be clear, so you're still paying the temporary warehouse space. That hasn't clearly gone away. You expect it to go away in the coming quarters, but we don't know exactly when. Is that right?

That's correct.

Do we think fiscal 2023?

Do we think that we won't be paying it?

Yes, at some point this year.

Through our fiscal year, yes. I mean, assuming...

Will there be a quarter this year where you will be back to profitability? I guess that's the question.

Well, I don't want to give specific guidance, but we expect that we will not have to be paying that elevated warehouse space costs at some point during this fiscal year, so yes.

Got it. Okay. And then the R&D, is there an incremental cost to that? Is that like another sort of SG&A line item that's going to pop up?

Well, I think the way that's going to roll out is any incremental spending initially is going to be pretty small, so it may fall under kind of the G&A line. But the way to think about it, though, is initially a bit of a one-for-one kind of trade out of gross margin and into an R&D line. And then as that scales over time, we'll have a little bit of leverage on that gross margin line because we won't be, again, embedding co-engineering costs in the cost of goods sold. But the early R&D spend, and if we decide to break it out if it's big enough, will essentially be kind of a one-to-one kind of pull out of kind of what we're spending on cost of goods sold. Hopefully, that makes sense.

Yes. I think it does. Okay. And now more, I guess, bigger picture, strategic type question. Is your customer base, which is, I guess, primarily Amazon, but you do have other customers, is your customer base different for the non-hydroponic versus hydroponic products? And as part of that answer, can you update us on your customer base? Have you diversified away from Amazon at all? I know that's something you have been working on, both in terms of customers but also geographically as well. Can you update us on your international business?

Lawrence, do you want to take that?

Yes. Sure. In terms of like the sales channels for United States, the hydroponics and non-hydroponics, they do not differ very much. We utilize the same channels for both business lines. Now in terms of geographical area for the end consumers, who buy and uses our product, I don't have the data in front of me that shows differences between these 2 segments. I don't have that data in front of me right now. In terms of international business, I think right now, the European mostly have the hydroponics sales. We are working on bringing non-hydroponics sales into European. Now in terms of Canada, I think it's mostly that as well. So like in that regard, the non-hydroponics business expansion to the rest of the world other than in the United States is still a little behind in the hydroponics business.

Okay. And domestically, any diversification in the customer base? In other words, I know you've been sort of talking to some bigger-box retailers and trying to diversify away from Amazon, any update there?

Yes, we are making slow but solid progress there. But it's a work in progress.

Yes. And Mike, given that you work with a lot of those biggest-box retailers that we are developing relationships, the window is particularly to sell -- bricks-and-mortar don't open kind of every week. And so we are going through the process of getting to be a qualified vendor. And the process of being invited in should happen hopefully over the next couple of quarters, and we'll keep you guys posted. But these are companies that you, I'm sure, are familiar with. So I think you understand kind of the windows that we get to provide product, and we're optimistic given the progress we've made so far.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Kevin Vassily for any further remarks.

So I just want to thank everyone for dialing in today. We will be talking again to you as we complete our fiscal Q2 and hold the conference call probably sometime in early to mid-February. Thanks, everyone, again, and we'll talk to you again soon.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.