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 second quarter 2023 ending December 31, 2022. Joining us today are iPower's Chairman and CEO, Mr. Lawrence Tan; and the company's CFO, Mr. Kevin Vassily. Mr. Vassily, you may begin.

Thank you, operator, and good afternoon, everyone. By now, everyone should have access to our fiscal second 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 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. We generated a double-digit revenue growth during our fiscal second quarter, as we strategically leaned into sales and marketing to offload excess inventory built up over recent quarters. The top line growth was led by our in-house products, which demonstrates the consistent strong demand for iPower's extensive and evolving product portfolio. Throughout the quarter, we continued to grow and diversify our product portfolio with non-hydroponics offerings. A few of our most notable products were within the shelving, office and pet categories, which continue to receive strong customer feedback. Although hydroponics is becoming a smaller portion of our business today, it remains an important category, and we will continue to invest appropriately as the market evolves. The growth and diversification of our product catalog has stemmed from our investments in R&D. Moving forward, we will continue to invest in the development of new innovative products to create high-value offerings for both our customers and channel partners. channel partners. This consistent growth of our portfolio will ensure our customers receive industry-leading products that they can trust, and we expect to continue rolling out new products throughout calendar 2023. Earlier in 2022, we made the strategic decision to stockpile inventory in anticipation of both residual supply chain headwinds and increased demand for our in-house products. This ensured that we had consistent availability of our fast-moving products for both our customers and channel partners. As a result, we accumulated a heavy inventory position and had to pick up additional short-term warehousing space, which impacted our margins. As we closed out the calendar year, we began to experience a shift in the supply chain environment as freight and shipping costs began to stabilize, returning to pre-COVID levels. With an improved supply chain, we no longer need to carry this higher level of inventory and prudently leaned into sales and marketing to offload excess inventory. This decision enabled us to improve our working capital and eliminate the actual warehousing space and the higher costs associated with it. We expect these actions, coupled with our continued revenue growth to drive improvements to our bottom line in the quarters ahead. In calendar 2022, we began the process of revamping our image to better showcase the core iPower business alongside our increasingly diverse product portfolio outside the transitional hydroponics. I'm happy to report that we officially completed the strategic initiative last month, which included a new company logo, website, color-scheme and other marketing-related items. Together, these new design elements will help instill a new brand identity to position and guide our company's image moving forward. In addition, it will unify our various non-hydro-related products and services to create a more seamless experience for our customers as we scale both domestically and internationally. As we look to the back half of our fiscal 2023, we expect to continue benefiting from the improved supply chain environment and elimination of elevated short-term warehousing expenses. With freight and shipping costs back to pre-COVID levels, we plan to more efficiently allocate capital towards inventory purchases while mindfully managing our operating expenses. Between these tailwinds and the continued strong demand for iPower products, we are well positioned to deliver another period of strong growth and profitability in 2023. I will now turn the call over to our CFO, Kevin Vassily, to take you through our financial results in more detail. Kevin?

Thanks, Lawrence. Fiscal Q2 was another period of solid growth for iPower. Total revenue was up 12% to $19.3 million compared to $17.1 million in the year ago period, driven by strong demand for our in-house product portfolio, including shelving, office and pet products as well as hydroponics. Gross profit in the fiscal second quarter increased 5% to $8 million compared with $7.6 million in the year ago quarter. As a percentage of revenue, gross margin was 41.4% compared to 44.1% in the year ago quarter, with the decrease in gross margin primarily driven by increased freight charges as well as channel and product category mix. Total operating expense for fiscal Q2 was $12.1 million compared to $6.1 million for the same period in fiscal 2022. As Lawrence mentioned, the increase in operating expense was primarily driven by higher selling fulfillment and marketing costs related to the sale of the inventory buildup that we saw. We still have some excess inventories to offload in fiscal Q3. However, we expect operating costs to normalize thereafter, along with improved working capital, which we no longer have to carry, higher loads of inventory and the incremental warehouse expenses. Net loss attributable to iPower in the fiscal second quarter was $3.3 million or $0.11 per share compared to net income of $0.8 million or $0.03 per share for the same period in fiscal 2022. The decrease in our bottom line was primarily driven by the aforementioned higher selling fulfillment and marketing costs. Looking at our cash flow, we generated more than $7.7 million of cash from operations during the quarter compared to a $7 million cash burn in the year ago period, reflecting the improvements we've made to our working capital. Moving to the balance sheet. Cash and cash equivalents were $4 million at December 31, 2022, compared to $1.8 million on June 30, 2022. As of December 31, 2022, total debt stood at $12.2 million compared to $16 million as of June 30, 2022. The decrease was driven by our decision to pay down a significant portion of debt given the freed-up working capital related to inventory. As a result, our net debt position was reduced 42% to $8.2 million compared to $14.2 million at June 30, 2022. As Lawrence mentioned earlier, with the normalization of the supply chain, we've seen freight and shipping costs return to pre-COVID levels as well as shipping times. When coupled with lower inventory levels and the elimination of our excess warehousing costs, we expect to significantly reduce operating expenses as we exit our fiscal year. Looking ahead, we continue to plan on improving our working capital position, focused on driving growth and improving profitability as we provide our customers with a diverse range of high-quality home and garden products. With that, we conclude our prepared remarks, and we'll now open it up for questions. Operator?

[Operator Instructions] Our first question comes from the line of Scott Fortune of ROTH.

Real quick, a focus on top line a little bit here. Can you provide a little more color on the top line growth? I know it was up year-over-year 12%, but down on a quarterly basis. And can you help us understand the seasonality or the slowdown in hydro and non-hydro segments? Kind of what's driving the growth? Or where is the growth quarter-over-quarter coming from? And then just a follow-up on that. Are you seeing consumer weakness a little bit here across the board? And can you provide additional color from your commercial hydro business side and ongoing weakness, in particular, turn on the hydro side anywhere [ this time of year ] here as far as the potential inflection for the hydro side, focused to turn positively [ from that standpoint ]? Sorry, can you share about a little bit more on the top line growth and you've seen the growth and the weakness per se?

Right. So let me -- I'll start, then Lawrence, you can jump in at any point.

Sure.

I think we've talked a little bit in the past about the typical seasonality in the business in the years leading up to calendar year 2021. The December quarter and then the beginning of the March quarter represented low season for us, and that was the seasonal pattern. I think what we saw last year seemed to defy seasonality a bit. So I think from the standpoint of how our revenues has historically tracked quarter-to-quarter versus quarter-over-quarter, the December quarter is a bit hit in that little [indiscernible] for us. So in that context, I don't think what we saw in December was that surprising. You will say, though, that our channel partners have slowed their ordering a little bit. And I think they, like a lot of people who were kind of in the broader home and good -- or home and garden categories, are finding ways to kind of work through inventory. And so there was some slowing for some of our wholesale ordering. But I think from a kind of seasonal pattern standpoint, I don't think what we saw was kind of out of the ordinary. From the standpoint of kind of consumer weakness, Lawrence, maybe you can kind of chime in here. I don't think we've seen anything meaningfully weak. I think the general tenor is one of supply chains finding way to deal with higher levels of inventory, but there still seems to be reasonable consumer demand out there. Lawrence, I don't know if you have anything else to add there?

Yes. The consumers, they did not stop buying, even though there is a slowdown of the economy. I think our products are mostly known as like valued products, and these are more kind of like utility hardline products where people need it and they do need it. So it's actually somewhat beneficial to -- these kind of mid-tier products as they provide the best value to the dollar for consumers. So I don't see a slowdown there. As for hydroponics, we maintained our position. I need to look at the data, but I think we get more market share now on the hydroponics side online. So that part is growing but slowly. The -- most of this growth are contributed by other products. So -- yes.

And then I think, Scott, you asked about commercial. Well, I think it's hard for us to see from our online orders whether or not a purchaser is really commercial or not. Our offline commercial business is a very small part of our business right now. And I don't think the demand environment there has changed in any meaningful way. It's still limping along. I mean, it's not having a really meaningful impact.

Yes, that's correct. That's correct.

No, I appreciate the color there. And then just you mentioned a follow-up on the progress. I know slow progress, adding potentially a big box partner here. You're looking to potentially do it by the end of the fiscal year here. Can you provide any updates or color around timing of that opportunity, kind of in the near term for big box partners moving forward?

We got into some of the channels. We started -- there are progress there, and we start to make sales on some of the online platform. But that's just the first step to get the product into stores, but we made some progress there. So things are moving. It just takes some time.

Thanks, Scott..

[Operator Instructions] Our next question comes from the line of Michael Baker of D.A. Davidson.

Okay. Yes, I just wanted to ask about what should we expect in the next few quarters. First of all, Lawrence, I think you said 2023 will be profitable. So you weren't profitable this quarter, but did I understand that right? Do you plan on being profitable on the net income line for the -- for fiscal 2023? And then maybe to help us get there. Gross margin is down close to 300 basis points. How much of that was from supply chain, which seems like it's getting better, and how much was from mix? And then on the SG&A, up $6 million, how much of that was just incremental marketing that's going to go away? So in other words, help us understand what the margin might look like in the next couple of quarters. How much of what happened this quarter was because of things that aren't going to occur, or at least partially behind us for the next 2 quarters?

Right. Let me take a few of those and Lawrence, again, I'll have you kind of jump in.

Sure.

First, I don't think that we said full year fiscal 2023 would be profitable.

For sales and profits in 2023 is what I heard. Sales growth and profits in 2023, but maybe I heard it wrong.

Yes. Well, I think maybe the better way to kind of characterize that is that we expect that we can return to profitability in fiscal 2023. So the trajectory will get us there. We hope by the end of the full year.

So run rate of profitability by the end of 2023, but not profitable for the year?

Correct. Correct. So I mean, without giving specific guidance, I think the math would make the full year extraordinarily hard.

That's what I thought. That's why I asked.

Yes. Yes. I'm glad you did. So from a gross margin perspective, it was a combination. I think we've talked about this in the past. Given that we have a catalog of in excess of 20,000 SKUs, our in-house products, we've got 6,000 SKUs. There's a distribution of gross margins in that product. They're not uniform across every product. And so what products sell at any given quarter influences that. A big piece of the incremental 300 basis point decline, however, was the shipping costs. So the inventory that we purchased over the summer in anticipation not only of a pretty important product ramp with Amazon, but because of what felt like really dislocated and, in some ways, panicked supply chains and container availability is still flowing through the income statement in this December quarter. That stuff is starting to work through. And in fact, one of the kind of strategic initiatives we took was to push as much of that out the door as possible in this quarter, so that inventory that we hold now carries the much, much lower freight cost. And we're talking constant costs that are 4 to 5x lower than they were in the March to June time frame of last year. So that is going to ease for us, which should improve gross margins. On the sales and marketing side...

Right. [indiscernible] that?

Go ahead.

Let me just say, Kevin, that was all clear from the remarks. I guess what I'm asking is, can you help us with a quantification of that? Of the 270 basis points, or whatever it was, you said a significant portion. So is it half was mix and half was the supply chain stuff that will get better? Is it more than half? Is it most? And any -- [ I'm not asking ] about the forward projection. I'm just asking you in the second quarter, how much was from everything you described about the supply chain? And then we can make our judgment as to what that will look like going forward.

Yes, yes, yes. I think -- I would say that at least 75% of it came from the shipping and container cost, and the other 25% was mix. Yes.

Okay. And then same question, on the SG&A, of that $6 million increase, how much was from what sounded like incremental marketing to push the product, which presumably is mostly behind you now?

Yes. I would say almost all of that increase was that -- there's some impact on sales and marketing from channel. But our channel mix, being different programs with our primary channel partner, plus you [ weigh ] quarter-to-quarter anyways, and it's where we get demand is pretty hard to forecast. But the big chunk of that, at least 80% of that incremental, came from intentional sales marketing promotion that we did to push that higher cost inventory out the door.

Understood. And am I correct in saying that a lot of that, now that the inventory is coming down, is behind you?

Lawrence, maybe you have a better sense of how much more we need to do on that front? But we've done a significant amount of it.

By December, we reduced -- we accomplished 50% of our goal. So we're on the way there.

So you're 50% through? So still have some to go.

Yes, we still have...

You shouldn't assume that all that incremental $6 million will go away because you still have some that you're working through?

The promotions costs won't be as much for the remaining half of the inventory that we want to get out of the door, but it will not all go away. But most part of the $6 million will not be there. We do not -- we no longer plan to play as aggressive as what we did when we are facing a higher total inventory pressure. But now, even though we only -- we did like halfway through -- get through the inventory, but our pressure is a lot lower now. So we won't run as aggressive campaigns as what we did before.

Very clear. I appreciate the color.

Thank you. That does conclude the Q&A portion. I'd like to turn the call back over to Kevin Vassily for any closing remarks.

Okay. Thank you, operator. I want to thank everyone for joining us today, and we look forward to speaking with you again a little bit later this spring. Thanks so much.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.