iPower Inc. (IPW) Earnings Call Transcript & Summary

Emerging Growth and Special Situation at Water Tower Research. Today I'm joined by Kevin Vassily, CFO of iPower. iPower is an e-commerce company using data analytics to design, source and market products primarily on online channels in the U.S. and internationally. iPower has a wide range of products, including hypoponics, home goods such as fans and chairing system, wellness products and pet products. IPower has achieved robust growth, thanks to its ability to design, procure and market various products responding to unmet customer needs and to do effectively in various e-commerce savings. I should mention that iPower safe harbor statements can be found on their website in their latest corporate presentation. Kevin, welcome, and thank you for joining us.

Thierry, Hi. Thanks for having us.

Great. Kevin, today, we'd like to discuss your business on TikTok Shop. But before we do that, I know you participated in the beta version of the TikTok Shop. Can you tell us are you got selected for that? How you -- how TikTok got to know you and how you connected?

Yes, sure. So we approach TikTok in a couple of ways. The first most obvious way was we just approached them through their public channel, and they made that available to suppliers. We also worked on developing some relationships with some key people inside of TikTok. We got introductions to them through connections that we've had just through the supply chain and the relationships we targeted were managers in key verticals that align with our product portfolio. We think we were able to get on-boarded fairly quickly because we -- we feel this way, but we think we have the right infrastructure to be successful on a platform like this. We've got a really large software development and production team, a really sophisticated ERP system for a company of our size, and it's optimized for e-commerce and we operate our own fulfillment center. So the consumer wants to place an order for a product featured in a short video on TikTok, the experience on the back end will be pretty seamless to them. TikTok absolutely wants a good consumer experience, particularly as they come out of the gate live here. And I think we have what it takes to do that. And then finally, I think we've got pretty good alignment from a product perspective. I think I would add that it's pretty easy for TikTok to see how well our products sell on places like Amazon. So they were, I think, right out of the gate pretty interested in having us come aboard.

Along with the beta stage on TikTok Shop?

I think one thing I should kind of be clear on, they never really officially called it a beta, but maybe the best way to think of it as soft launch, where they were inviting people onto the platform that they felt had a decent shot at being successful out of the gate. So it took about 6 months from the time we were introduced until it was live, which happened like the third week of September. And we are on that -- up on the platform for that entire period. So let's call it about 6 months. Not a lot on that changed. We didn't have to do much in the way of adjusting our approach. But I think what TikTok was trying to do was use that period to kind of fine-tune the algorithm on what content was working best, how much product content to weave through kind of a traditional fee for users, et cetera and kind of once that 6 months period ended, we got some heads up that the more public launch would be sometime in September. But they seemingly accomplished a lot in the 6 months that we were on the platform because they feel pretty confident going live in September.

Right. So do you create TikToks yourself? Or do you get in touch with influencers and ask them to create TikToks? Is it organic? Or do you reach out to influencers, how does that work?

So it can be -- it can be both of the things that you've highlighted. Our primary way of getting visibility is to develop relationships with the influencers and we do that proactively. TikTok has a decent amount of data on these influencers, including traffic, what they like to post about, categories that tend to be associated with them. And we can see that data. TikTok also gives us recommendations based on their evaluation of our product portfolio and who to reach out to. And then we can proactively choose and connect with those influencers. Buyers can also be influenced organically. And so as an example, someone goes to an influencer's page, sees one of our products, decides to buy it. They like it, decide that they want to make a short video. TikTok is giving them tools to also create and kind of monetize their videos. That's going to be a little bit of a slower ramp. An individual person's reach is going to be a bit more limited than a well-known influencer. But that's an example of how you could create some organic content from an actual buyer of the product.

And I read that TikTok as an affiliate plan, so you don't need to negotiate with every single individual influencers. This is like parameters as to how do you -- what commissions they might get or how the relationship works, right?

Right, right. That's correct. So they do have a pretty structured approach that outlines kind of terms and conditions on how a seller would interact with a particular influencer and the deliverables associated with that, including the incentives that we get on this platform right now. The one thing that we have some control over though is the commission. We get to choose that and -- obviously get the choose that we work with. Typically, those commissions are somewhere between 10% and 20%. We're not -- at least out of the gate, we're not seeing a ton of "negotiation" on that. On average, 15% commission or take that an influencer will get has been pretty standard for us right now. But everything else is put in place. So once we've made that connection to an influencer, all we've got to do is agree on a commission rate and you can go from there.

Could you do any direct advertising on TikTok Shop or it's strictly through influencers?

Yes. So we're not doing advertising in a way that someone might traditionally think of the term. But we would consider that the commission that we pay to an influencer is an embedded form of advertising because they're featuring our products and bringing in audience to them. We also sell through -- some of our products are on shop on the platform. And that's going to be, I think, over time, a little bit more useful and cost-effective as our brands start to get more and more traction and build their reputation on the platform. At that point, we won't have to be paying a particular commission to any given influencer. Well, we're certainly not going to push them away. It will kind of be just another avenue through which our products get hit in front of potential customers.

So you can have your brands directly on the site. Somebody puts fans or put the brand name, they will find your products.

That's correct.

Okay. No, it's interesting what you said earlier that TikTok felt your products would be very appropriate on the TikTok Shop. And I thought influencers and all that could be more fashion, maybe apparel, makeup, maybe some novelties, maybe games. But how do your products fit in that cultural environment, if you will, on that platform.

Right, right. So you're absolutely correct. Fashion and beauty are, so far from the data we can see are, the 2 largest categories on TikTok right now. But I think one observation I would make is that we think the platform is pretty well-suited to a more general lifestyle product portfolio. And I think in our current product portfolio, we're fairly well-aligned to do that. So I would include in that description, our pet products, our home and kitchen products, as well as some of our like outdoor home accessories such as portable grills, portable fire pits, et cetera. And so I think it's happy to kind of brag a little bit about what we've been able to accomplish so far with small qualifier that these categories are still small for them relative to fashion and beauty and the platform is still really in its nascent stages. We ranked #1 in the kitchen category right now and #4 in the pet category. And I think based on some of the, at least, initial data we're seeing and some of the conversations we're having with TikTok, pet, in particular, is going to have a fairly long runway. If there's anything that we've discovered in the pandemic period and kind of post is that people have really started investing a lot more money and spending a lot more money on their pets. And I think we're in a pretty good position there. So at least from where we are right now, we're pretty happy. It doesn't mean we can just sit out and hope that only those 2 categories will continue to carry us. We're always looking for more. Not clear that fashion or beauty or cosmetics or supplements or the like are places we're headed, but we're obviously investigating that because we see the success that companies in that area are having.

If I post a picture of myself or a picture of my dog, the dog always gets a lot more likes than I do on those things.

Yes. Funny how that works.

Yes. I have to ask about trending because I heard like trending is a big thing. Is it -- do you have an example of one of your products that trended? And what is it exactly? Is it something that stimulates sales for a few hours or a day or 2? Or is it something that is kind of like a long-term implication for one of your products?

Yes. I think it's -- it might be a little early to say at this point what a trending product will mean for the success or longer-term kind of sustainable kind of sales ramp on the platform. I think we still need more time to understand it. But yes, trending means somebody of note did a demo of a product and the traffic was large and it resulted in kind of above trend sales volume. For us, I think we've got a rule of thumb kind of on other channels that a successful product will have a pretty consistent ramp for about 2 months before it reaches a more steady pace. I think the way that might transition in terms of thinking about it on interactive shopping or social commerce platform is that, that represents the transition from the consistent endorsement you might get from influencers, transitioning to more organic traffic. And that can happen in a couple of ways: one, the buyers of those particular products end up posting their own short videos. And that has a pretty nice virtuous kind of cycle associated with good reviews and someone buys it, they post their own video, maybe the equivalent of a good review on an Amazon sale. The other thing that could happen is as our brand gets and those products get building in good reputation, they can start transitioning and looking for other products that we sell, and those are on our own branded page on TikTok. So we're going to be watching that over the next 6 months to see if we can take the model that we think has worked really well on other channels over here. But I think the pieces are in place for that same type of ramp to happen and a trending product on any given day, certainly can help start that process.

Great. I also wanted to ask about live shopping. Can you -- is it something that happens on TikTok Shop in the U.S.? I know it's kind of a big thing in for TikTok in Asia.

Yes. So I mean I think the way to think about social commerce, there's 2 major forms. One is short video, and that's really what we're spending most of our time with now and the other is live shopping, right. In the U.S., almost all of the kind of sales are happening in the short video format. But you're right. It's very popular in Asia already, live shopping. We do have an analog for this here in the U.S. Yes, the live TV shopping networks like QVC and home shopping network. So that concept is fairly well understood. I think it's pretty successful. I think I saw that those 2 networks combined are doing somewhere between $15 billion and $20 billion in gross merchandise value per year. And so I think it's likely to be over time, the bigger portion of social commerce for the platform and we're actively developing our in-house live shopping team right now and we hope to have some products featured there by the end of the year. Part of that is going to be how quickly TikTok decides to roll that out in more scale, but we'll be ready with a live shopping component to the products that we are currently offering on the platform.

If we step back on a typical online marketplace like Amazon, if we think of the buying process for a consumer, I need a product, I'm thinking, let's say, fan, I go online, I put fan in the little box. The site gives me a range of options. I look at them, I look at price, I look at the features if it's what I'm looking for. And then I look if it's got reviews or it's Amazon best or whatever. What would be the same -- is there a similar kind of typical process on TikTok? Or is it much more spontaneous somebody surfs and gets interested or do actually people are like, "oh, I need this", I go to TikTok and see what I can find.

Let me try to answer that in a couple of ways. I think first, again, I'll start by saying it's probably a little early to really know what the kind of buying process will look like over time. But I think it's a little different than kind of the Amazon process that you described. At least right now, and it doesn't mean it can't evolve. But I think the central kind of driver behind how this happens is, I think, TikTok's feed algorithm. So it obviously sees all the user interaction on the platform. And based on that, I can see any particular user's set of interests, right? They like pets, they like cooking videos. And so they could start to send product-related content and traffic to those users that aligns with those interests. So let's use that cooking example, a user who follows a lot of cooking accounts and watches either home or well-known celebrities doing kind of short videos on a particular recipe, et cetera, will be shown short videos that feature kitchen prep tools. From there, I think it's probably a function of their interests. Does that particular short video show a product that aligns with someone's needs at any given time. Is the content compelling? Is the influencer creating content that somebody is going to sit through and then there's a button on that short video that takes you to a place to buy that product if you're interested in it. And if the price is right, then you'll hit the button and do it. So right now, it feels more spontaneous. There is a search function in TikTok. So if you have had some success with finding a product that you like, either from a particular brand or just a category, you can certainly enter that search term into the search box on the app and it will feed you a number of different things, some of which could be an actual short video where there's a place to buy a particular product. I think that's going to get more robust over time. I think it's still early in terms of its effectiveness. So right now, most of it feels like it's the spontaneous -- quasi spontaneous purchase that happens when someone you know or follow is featuring your product that you need at any given time.

Great. Now if we switch to your relationship with TikTok or the fulfillment aspect of the whole process, how does it work? Is it do you just fulfill for TikTok? Is there a feature that's similar to Amazon where it says sold and shipped by TikTok or how does -- do you have a third-party arrangement? How does that work?

Right. So right now, it's a purely third-party arrangement. The transaction happens between the purchasing customer and us directly. We're using our -- one of our wholly owned subsidiaries as kind of the sales entity or engine, so to speak, on the site, but the order will come to us. It will run through our ERP system and our inventory management system. We have a fulfillment center, so it will get kind of picked and packed and boxed and loaded on a truck from FedEx or UPS or another third-party delivery company and ship to that consumer.

Okay. That's helpful. I don't know how much you can share, but I mean you clearly right now have 1 -- online marketplace that you're #1 place where you had the bulk of your revenues. Where do you see the TikTok Shop in 2024, 2025? Is it going to be one of your top 3 or one of your top 5 or no comments? Or what are your thoughts.

Well, I need to kind of state it's probably -- we don't give guidance around either kind of particular financials or product categories for us. I mean, I think the way that we can frame it, though, for the purpose of this discussion is to talk about can this platform be successful? And if so, can it be successful for us. So I think at least right now, there's -- I think there's little doubt that it can be successful in the U.S. It's already doing around $20 billion in gross merchandise value globally, and we're arguably the largest market in the world for the kind of products that they'll be featuring. And so I think that it's just a matter of when, not if this is going to be a meaningful e-commerce entity in the U.S. The numbers that we've seen or at least they've been kind of intimated to us is that right now, they're doing about $10 billion of sales a day on the platform. So it's ramping pretty nicely. And I think you could also point to -- and that's just on -- largely on short video sales. We also know that the live shopping concept if you use the kind of legacy home shopping networks is one that works here. And I think that it has -- there's no reason why TikTok can't be a meaningful player on that front. And so I think the other thing that's interesting about TikTok in terms of them being successful is that the platform was designed for short video from the get-go, which I think it probably gives us a little bit of an advantage of some of the kind of non-video native social media platforms that have been trying to do some commerce. I mean there's no guarantee that this will be successful. But I think they have the right elements for it to work. And then as it pertains to us, we definitely think it has the potential to be as large as our other business segments. We have high hopes for our services business, and I'll talk a little bit on how we think this might tie in there. But currently, our product business is our biggest business by far. And so we do look at it from a couple of perspectives. We think as we grow our product portfolio, we're going to be adding another variable to consider to the multivariable equation that we use to determine what our catalog looks like. And that variable is simply is the product TikTok optimized. Is it something that makes sense for social commerce. Part of the reason that, that variable and potentially that variable is going to take greater weighting at least in the near term, is that the incentive structure that TikTok has put in place for us and other sellers on the marketplace is pretty attractive. And so it's to our benefit to be spending time adding to the portfolio with products that make sense on TikTok. The margins will be at least in the short to medium term, better. There's another angle here as well, and I think it plays into some of the evolving kind of business strategy that we have, which is we think there's a services angle for us on this channel as well. We think we can apply our service partnership model, which is also in its nascent stages to this platform and be a full TikTok services provider for brands and companies who want access to this channel. We've got fulfillment infrastructure. We were one of the first sellers on this platform. I think it puts us in a unique position to help accelerate other brands on this emerging channel. Part of the strategy behind the services channel or the services business for us in the first place was really interesting companies and brands that were struggling to make progress or breakthrough in an e-commerce setting and particularly on Amazon. Amazon is -- and their sales platform has been it's 20-ish plus years at this point. And so companies that are struggling a bit to make progress there. Again, this might be extrapolating too much. But if they're struggling there, trying to break through on an almost completely new type of sales experience, social commerce is probably even more difficult. And I think it's an opportunity for us to make a difference for a number of companies who see this as a real viable channel, but don't really know where to start. They can take advantage of our early learning and our relationships and help accelerate kind of their success. So I think it's short. Yes, we're really excited about what this can mean for us.

Great. Maybe as we wrap up a quick update on the business services. So you have 2 clients announced. Any update to that? Or update us on the third quarter call or...

Yes. Nothing that we can announce right now. So I think the message is stay tuned. We're -- continue to be kind of looking for partners in negotiating with people that we think make sense. Lawrence is off to the Canton Fair actually later today, taking place in either in Hong Kong or Shenzhen, but he'll be there for the next 4 weeks or so, meeting with some manufacturers, some brands, some promising companies that we think. Now it could be part of the services business, but now potentially part of what we're offering with regard to TikTok. So we hope to have something more announced by the time of the earnings call, which should be the second week of November -- or will be the second week of November. But stay tuned, we don't have anything to announce just yet.

Great. Kevin, we're going to wrap it up. I want to thank you for your time. I also want to thank the audience, both the live audience and the recorded audience. We'll have a transcript of the conversation in the next 3 business days or so that will be on our website at watertowerresearch.com and it's open to all investors. I read the company forward disclosure at the beginning of our conversation. I need to quickly remind you all now that the views expressed in this chat may not necessarily reflect the views of Water Tower Research and are provided for informational purposes only. This fireside chat may not be distributed, reproduced without direct content -- consent of Water Tower Research and should not be considered research or recommendation. Water Tower Research provides research-driven communication and investor engagement. It is not a license broker, broker dealer, market maker, investment bank, underwriter or investment adviser. Additional disclaimers can be found at Water Tower Research. I want to thank you one last time, Kevin, and thank you all for your time. Have a good day, and goodbye.

Thanks, Thierry.

Thank you, Kevin.