iPower Inc. (IPW) Earnings Call Transcript & Summary

[starts abruptly] Research. Today I'm joined by Kevin Vassily, CFO of iPower. iPower is an e-commerce company, it's in Data Analytics to design source end markets products primarily on online channels in the U.S. and internationally. iPower sells a wide range of products, including hydroponics, home goods such as fans, [ shaving ] systems, wellness products and pet care 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 it effectively in various e-commerce settings. As you mentioned that iPower safe harbor statements can be found on their website in the latest corporate presentation. Kevin, welcome, and thank you for joining us.

Hi, Thierry. Thanks for having us.

Great. Kevin, let's start with an update on your activity on the TikTok shop. Can you give us a sense of what iPower products are doing well on this channel? Or is it the whole catalog? Or is it specific products?

Right, right. Yes. So there's 2 categories that stand out for us. And I think it's a function of the kind of audience that TikTok Shop attracts and the kind of products that make sense on a kind of short video or kind of quick live video social commerce platform. First is our kitchen-related products. These are kind of kitchen tools, utensils that you can use in a house, small apartment, et cetera. The other is pet products. Kitchen tools fall under our Simple Deluxe brand, which is one of the several brands that we have that falls under the kind of iPower kind of corporate entity. And again, I think the reason that those 2 categories do well is that, like I said, they're well suited for kind of an on-demand/impulse purchase works well in a short video and live shopping genre. And I think one of the things that you can do on -- on a kind of TikTok short video is demonstrated product. And the products that have done well for us so far are kind of in that category. We're looking at some others as well. You might know that the types of products that have done the best on TikTok generally, not just us, tend to be in apparel and in cosmetics. It's not an area that we're in right now. And I certainly don't see us getting into apparel. But some of the -- some of the either cosmetics or nutraceuticals might make some sense. And so that is an area we're doing a little work on. But we're largely seeing most of our volume in those 2 categories I mentioned earlier.

Okay. Cosmetics could be an interesting area. Can you -- your marketing strategy on the TikTok Shop, how does it compare to what you're doing on online channels? And is it -- are you doing a lot of things? Or is it mostly user generated? How does the marketing work for you on the TikTok Shop?

Right. So I think it's pretty straightforward how we market there. We utilize influencers and personalities, who are prominent on the platform and have them act as a spokesperson or a promoter of our products. We also have our own content creation team in a storefront that features that content and some of the products that we have, that is different than our, I guess, I'm kind of reluctant to call legacy channels because they're still in the grand scheme of things, fairly new. But our more traditional e-commerce methods marketing, which includes stuff like paid search, which is both via search engines and also native search on the channel platforms that we use, SEO and it's promotional activity. We're not really doing any of that on the TikTok platform. It's really using kind of the influencer community to act as an ambassador for our product, so to speak.

And the influencers you have contract your relationships with them? Or do people create stuff spontaneously and post it?

So the first question, yes. I don't know, if I would call them contracts as much as there are kind of agreements or memos of understanding on how affiliate would get compensated. We're featuring our product. But yes, I'd say that about 75% of what we're doing comes from influencers that we've aligned with. And then the other 25% or so comes from our in-house content team. So there probably is -- some, and we're doing a fair amount of work on trying to understand that. There is some kind of organic traffic that comes in our -- from people who see our product buy it and then do their own, which obviously helps. But the majority of what we're doing to drive kind of interest comes from -- comes from influencers. One thing I would say is we do have a fair amount of experience in content creation. If you look at some of the listings or any of the listings that we have, for instance, on our largest channel, which is Amazon, we do quite a few videos associated with those product listings that either demonstrate, how to use a product, or just to create a kind of compelling piece of content that gets someone's attention. So for us to have a kind of in-house content team working on TikTok listing, wasn't a difficult undertaking for us. That said, the influencers have a far greater reach and greater impact for us right now. So we're leaning into that to the extent that it makes sense. And the way we find these influencers is through the affiliate program platform that TikTok has put in place. We can seek out ambassadors, who we think make sense for the products that we have. And we've actually had people reach out to us, they've seen content that -- our products were featured in and have reached out and said, "Hey, we might be able to do something similar. And here's who we think we're targeting and here's how we think this might work." And so it's been a really robust process for us to find the right people to talk about iPower and our various brands.

So is it mostly a matter of developing relationships? Or do you -- you often talk about data analytics in your process. How is data analytics on the Tiktok shop? Is it playing an important role? Or is it focused much more on identifying influencer and working with them?

Well, I mean, I think there's 2 things that we're doing. One is just -- I mean because we're so early in our tenure on the platform. So yes, a lot of work is just -- right now, developing those relationships and making sure we've got the right people who are -- can help create awareness and ultimately transactions for the products that we're featuring there. But you're right, with regard to analytics, we're always looking at finding additional pockets of information and insight that we can based on what we see and what the kind of the -- kind of behavior you're seeing. So one example, I think it's worth noting is that TikTok is a direct-to-consumer channel for us. Unlike Amazon, where the bulk of what we do is sold wholesale to them, and they're essentially the retailer for our products. With TikTok, we fulfilled the transaction directly to the consumer. And so to do that effectively, especially early on, we need to be pretty smart about the inventory that we carry. So we are doing a couple of things and measuring a couple of things right now to see if there's patterns we can detect and data that we think could be useful on a go-forward basis. For instance, we like to see what the kind of [indiscernible] distribution of demand is, post the product video posting, how much product moves in that first 12 hours from the time that a video is posted. And then kind of looking at the tail of demand that happens 2, 3, 4, 5 days after that video, those videos will get additional views, but it tends to see the bulk of -- the bulk of its activity pretty near there, although the shape of the distribution and the length of the tail, is a little different depending on the product. And so that's some of the data that we're trying to -- kind of pull from our activity. Another one would be how much organic content do we get for our products based on a certain ambassador or influencer's video. How many view -- which is I think a measure of reach of that influencer, so we can essentially rank order them kind of over time and see if there are other people that we should be working with or we should spend more time with a certain influencer. So this is the kind of stuff that we think makes sense on this platform. Think of it right now as we're experimenting a lot with who and how and what to provide and exploring more. And I think as we get more time on this platform over the next several years, we'll have a nice kind of repository of data that we can use to more effectively target products for the platform, do product development, specific product that we think might make sense on the platform, we don't currently carry or even product modification based on what we're seeing and what we're hearing and the feedback that we get from people when they're using our product. So it's similar to the playbook that we run for our current -- for our current set of products in our catalog. But given the nature of the platform, we're working with different kind of data outputs and we think they could be useful.

Do you have any sense or can you -- I mean, obviously, I'm not looking for guidance for TikTok, but do you have a sense of how much that channel can grow and how big of a role it can play in your business?

Well, I mean, it's definitely early. We -- I think our first year, we're hoping for somewhere between 2% to 5% of our total revenues coming from TikTok. And I think we're -- I don't want to say we're being cautious as much as -- we want to make sure that because it's a direct-to-consumer fulfillment channel and fulfillment platform that we make smart decisions about the amount of product inventory to carry. We don't want to be short on product, when we have something that we think takes off. But at the same time, we don't want to load up on inventory to a point where we're going to have to do things that we would rather not do like promote similar to what we had to do when we were burning off the inventory from last year. And so I think early if we can get in that 2% to 5% of revenue for -- its first year in existence, then that to us is a success. Over time, it's going to be dependent on a couple of things, who we might be working with on a partnership basis. And then what other products that we feel we can bring to market that are well suited for the platform. But with all of that kind of caveat, so admittedly, that's what that was. We would love to see this be well over 20% of our total revenue in the foreseeable future. We think it's a big enough platform. They're spending enough money and putting enough resources behind it that we should be able to do that. And frankly, we feel like we have the infrastructure to do that. We've got a fulfillment capability and our ERP system and our kind of warehouse management and inventory management system we built from scratch. And at this point, it can support sales volumes probably 5x what we have right now. So we've got a lot of room to grow there. It's just a matter of aligning the catalog, our partnership, entities with the demand profile of the customers that we see on TikTok.

What's the impact of that the super suite business, you have 2 partners. And clearly, there are people out there or companies that have the product that they don't -- they need help on the marketing side and so on. Is your experience on TikTok. Can you leverage that at the super suite front? Are you getting initial -- are you having initial conversation? Or are you getting any traction there? How do you see that?

Yes. Yes, yes. So we actually recently inked the deal with a regional supplier in the food and beverage sector. And they wanted to use with us, as a channel partner on TikTok, they didn't have any experience, social commerce. They really didn't know where to start. We got introduced to them by -- got introduced them by, I believe, it was somebody that we know at TikTok, they have reached out kind of cold to the platform. And because we've done pretty good work on there so far, we got referred to this partner, and they're going to -- we're going to use our relations with TikTok and become the -- for now the exclusive kind of marketer for their products on Tiktok. And this will be similar to some of the other super suite partnerships that we bring. It's just that it's in a different product category, better suited, given that it's food and beverage for a social commerce play. And we also have -- we've had some discussions. And I think we've talked about this. I don't know if I've talked on this format with you about it, but I know we've had this conversation. There are several kind of larger national brands in that food and beverage space, who were introduced to us. That's going to take a little bit longer to secure in terms of any type of agreement. It's a much heavier lift. There are multiple kind of national entities involved with getting something done. But I think the best way to say it is, companies are realizing that this is a channel that they need to be cognizant of and ultimately active on to augment the other channels that they sell products through. And we're optimistic that we'll get a couple more of these in this sector over the next several quarters that could be additive to where we are, right?

So the food and beverage partner on TikTok Shop. Are they also -- are you also going to have them on other online channels? Or is it strictly on the TikTok Shop?

Right now, it's strictly at a TikTok Shop. But -- and then I think this is another kind of piece of our super suite strategy that we've talked about, which is our intention is to offer a suite of services, hence the name that covers kind of various points on a kind of value chain for a particular product, starting in early as product ideation and being as late as providing a sales channel. And so there are multiple sales channels that we work with. And then there are multiple spots along the way that we can add value. And so ideally, this initial TikTok arrangement with this particular supplier could lead to us helping them with penetrating Amazon part there, could help them with some of their kind of product warehousing and distribution strategy, could be with helping them develop potentially a product that is especially suited for TikTok, I don't want to call it, TikTok branded product, but it might be a product extension of what they're doing that is ideally kind of targeted to a certain demographic that you see on TikTok more than other channels. So there's a whole host of things we think we can do, but we're starting with this one.

Okay. Great. I wanted to switch to talk a little bit about gross margins. If we look at the last 2 or 3 quarters, you've held up pretty nice in the low-40s. You've mentioned on the calls that the product mix during a specific quarter can have an impact. So that might be more of a cyclical or of a occasional impact. But I'm kind of wondering on the secular side, what do you see to try to bring those gross margins up. I mean the first thing that jumps is obviously a leaner inventory. We think with the linear inventory, you have less pressure on a -- plus you have less of the extra costs that have affected gross margins, when you had excess inventory. But then also you probably have less pricing pressure to move that inventory. So I would think a leaner inventory should be an upside. I'm wondering if there's any other things we should think of maybe transportation costs or manufacturing, development if you're looking at other places to manufacture the products and so on. I'm kind of wondering, again, on the secular side, what can help you on the gross margin side?

Right, right. So we believe that the trajectory of gross margin over the next several years should still have a positive slope. So we expect that there is further room for improvement. And we like where our gross margins are. It's great to be in the 40-plus range, especially given the way that our channel partnerships work, the better the gross margin, the easier it is for us to generate over time, good healthy EBITDA margins. And so one of the things we're doing is working with our manufacturing partners. We started that initiative during this third fiscal -- sorry, the first fiscal quarter of this year, so the September quarter of calendar 2023. And so some of that is going to start working through the gross margin line over the next several quarters. And we're trying to focus on some of the higher running products that we have. And some of it is small redesigns. Some of it is just because of the volumes we do with these manufacturers getting better kind of unit costs from them. Some of it is also helping them identify sources of materials to help keep their cost down. So it's kind of a more of a partnership approach as opposed to your traditional kind of purchasing manager yelling at a supplier or manufacturer to lower cost. One, you referenced kind of other regions. So we are -- we are actively looking at finding some manufacturing partners in other parts of Asia largely in Southeast Asia. So, I think places like Thailand, Vietnam, Malaysia, where we can do a couple of things. One, take down kind of the unit cost of production for certain products. The other piece of this will be -- if we're successful at doing that, taking some of the tariff pressure that we see on products that are coming out of China for us. So we do expect that if we're able to put in place some of that, that will be an uplift for margins. Another area that we're focused on is pricing strategy. So we have the ability to make some small changes selling prices that we think can positively impact margins. And it's largely a function of how we priced products in the past. We were never the premium price. We were certainly never the low-cost producer. So we're in that kind of what we think is the sweet spot kind of a value to price, where a couple of percent increase in price won't really change the demand profile for our products, but will flow through to kind of our bottom line. So there are certain areas where we feel like we've got more room than others, and we're working on that. I think -- then there's also some scale that we should get as we grow over time. There's efficiencies on shipping. There's efficiencies on QA that we're doing that with a slightly larger volume we'll accrue in a better kind of margin to us. So we've got a number of things in place. I think maybe the last thing I should mention is our super suite services offerings. So we're pretty early in the life cycle. And I think, it's fair for me to say that our margins aren't optimized yet for super suite. And so as those streams of revenue grow over time, we think that there's margin upside there as well. So put all that together, we feel like there's bottom up positive pressure on margins that we should be able to see. It's up to us to execute. There's obviously disruptions that can get in the way. But we feel like we know where the levers are hold, continue to push gross margins up from where they are right now.

Maybe a quick last question. Your inventories have gone from $30 million, when they were probably a bit too high to $50 million or so the last quarter what's the right metrics there? Do you have a -- is there a risk of having too lean of inventory? Or are you just where you'd like to be? Or how should we think about what to expect in terms of looking at that line item?

Yes. I think -- I mean you hit on something interesting, which is running lean is kind of what we've historically done. And that buildup was a function of just the demand environment and the kind of supply chain environment at the time, we're ahead of some really important product launches for us, we were having trouble getting low-cost and low ship time product from across the Pacific. So we have made a lot of progress in bringing inventories down. I think last quarter, we were around $15 million. We think we -- at least at the current kind of business run rate, having inventory somewhere between $14 million and $20 million makes sense. With our preference being kind of at the leaner end of that, the risk of running too lean is that especially as we ramp TikTok, if we don't have product, those sales are kind of gone, right? We're not selling in bulk to TikTok and then they're distributing it. So we do have to be smart about that. And if we're running too lean, spending money to expedite product with manufacturers and then finding a way to get to overseas quicker, can be costly. But right now, I think somewhere between that $14 million and $20 million is the right amount, and I don't expect it to be -- it certainly shouldn't be well anywhere much above that $20 million range. And at that $14 million range, we're probably at the -- pretty close to the low end as to where we should be. So we're comfortable right now.

Kevin, I think we are getting to the end of our time to ask. So I would like to thank you for the time. I want to also thank our audience, both our live and recorded audience. We will have a transcript of the conversation at watertowerresearch.com, which is open to all investors. I read the company's forward disclosure at the beginning of the session. I need now to quickly remind you all that the views expressed in this fireside chat may not necessarily reflect the views of Water Tower Research and operate for informational purposes only. This fire-chat may not be distributed or reproduced without observation consent of Water Tower Research and should not be considered researching our 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 watertowerresearch.com. All right. I've done my duty there. Kevin, thanks again. Thank you all, and have a great rest of the day.

Yes. Thank you, Thierry.

Thanks.