iPower Inc. (IPW) Earnings Call Transcript & Summary

Good day, everyone. Welcome to today's fireside chat with iPower and your host, Terry Wuilloud, a senior research analyst 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. iPower sells a wide range of products. We're going to talk extensively about the range of product that iPower sells, iPower has achieved robust growth, thanks to its ability to design, procure and market various products responding to unmet customer needs and to do so effectively in various e-commerce platform. I should mention the iPower safe harbor statement are disclosed on the on their website. Kevin, welcome, and thank you for joining us.

Thanks, Terry. Thanks for having us.

Great. So the range of products and services that iPower offers has expanded over the last few years. I'm wondering if you can kind of recap where we are today with the main product categories maybe in order of magnitude for your business?

Sure, sure. I think it maybe makes sense to even start from kind of our origin. The company, when it was founded in 2011 had focused its kind of efforts around the consumer hydroponic space that got fairly popular in the kind of late 2000s and kind of right up into our IPO and kind of prior to our IPO, consumer hydroponics was roughly 70% of our revenue. Do you fast forward today, the product mix looks quite a bit different. And in fact, hydroponics is not kind of the top category anymore. So I think we don't necessarily break it up into distinct categories, but I can give you a sense of the product types that make up the bulk of the revenue. And yes, I'll do my best to do in order of magnitude after the first 3 or 4, it becomes a lot more fragmented, but this should give some people a better idea of what we do. So our biggest category right now is in the fan space. So commercial and consumer fans. So that could be anything that you would find in a warehouse environment, a greenhouse environment to something that a consumer would put in their living room or in a bedroom or a garage. Hydroponics would be the next largest category that's still roughly 25% of our revenue. Shelving and kind of derivatives of shelving is our next largest product that's in the neighborhood of, depending on a quarter, 15% to 20% of revenue. And then from there, it starts to tail off a bit in terms of contribution, but we will kind of group some of these other categories into maybe a catch-all category, the one we'll call home furnishings. And so that could be anything from furniture and that could be outdoor furniture or indoor furniture, kind of outdoor recreation equipment, stuff like portable grills and stoves. We have a pet line that has been around 10% of our revenues for some time. It's probably one of our more margin-friendly products. There's a lot of demand for taking care of pets in this country. And then kind of a newer category that's starting to get some momentum is in the kitchen space. And so I'm kind of remiss the call, I'd be remiss to call them appliances, their tools is maybe the best way to say it or kitchen devices, things like a portable icemaker or a kind of countertop or desktop fridge or a salad spinner, stuff that you would use in and around your kitchen or to be involved with food or preservation, et cetera. So those are the major categories for us right now.

So if we look, for example, at the kitchen category that you just mentioned, how has that developed? Did you -- did -- was it developed internally, organically? Or is it the result of an acquisition or how is that growing?

No, that's -- yes, the kitchen. And in fact, all of the product categories that I mentioned were developed organically. We came not so much with an idea, but the idea was -- or the genesis of that idea came from the work we do in looking at the data that we collect in our kind of channels and markets about product categories that we think might make sense given our development engine. And in particular, we'll talk about this, I'm sure a little bit later. But the kitchen product lines are really well suited for our emerging business on TikTok Shop. And so when we got approached by TikTok early last year, so early 2023, about being one of their kind of pilot vendors on this -- which was essentially a silent beta. They never really called it a beta, but to be one of their early providers of product on their new e-commerce foray here in the U.S. We want to define products that made sense. Social commerce really does lean quite a bit towards apparel and cosmetics. And those were not necessarily things we were looking to get into. But given the suppliers we've worked with in the past and given kind of our design talents in and around part of physical goods, we thought that the kitchen category might make some sense for TikTok. So that was the genesis of it. And then from there, we decided to go down the route we did with the certain SKUs that we have based on what we saw in the marketplace was relatively fragmented with not a ton of differentiation between products. That's good for us because that means if we design a product with features and benefits that make sense, then we can go and capture even a small amount of share in that category and still have it be meaningful to us. Is it the kind of product that has some level of kind of impulse buy. So it's not at a price point that makes you have to "balance your budget" before pulling the trigger on that product. It was something like a desktop fridge, as an example, it's not going to cost you much more than $30, $40. I think a lot of people who are on those sites can put fairly easy kind of make that decision and buy on impulse. And then it was a function of us then kind of designing those features and benefits and finding a partner who would be able to make it for a price that would allow us to clear a pretty decent margin on it. If we can't do that, then there's a reason to bring the product to market. So those kitchen items were really part of the engine that I think you and I have talked about on several occasions prior, it just -- the timing was good and the fit was good for us, particularly as we got approached by TikTok.

So you have a team that just focuses on that. You have designers, then you have data analysts and how does it -- I mean, kitchen items seems like such a big category, but who can pull the trigger there in terms of thinking of the idea of doing the -- I'm kind of wondering how much is [ automates ] analysis in the process of developing [indiscernible].

Yes. That's a good question. I would say leans very heavily towards analysis. The design part, we have a lot of co-engineering partners in Asia that we work with, a lot of them are kind of embedded in the suppliers that we work with. And so when we have an idea, the idea will be based in data that says, okay, it's this size of a market, at least from our perspective, we don't see a ton of differentiation. What we've seen though is in the structured data, a certain number of kind of features and attributes that are either missing or that people don't like how do we design something that eliminates the things that people are unhappy with, but adds to the things that people are asking for. And once we do that, we can go to the design and co-engineering groups that we've worked with in the past and say, "All right, can we build this and can we build this at this price?" And from there, the answer is either yes or no. If we can't build it at the price that we think we can then move product and volume, we'll stop there. But yes, a lot of this work is rooted in the kind of analytical piece. We're looking for categories where we just want to take a portion of the share by doing right by consumers. And that's all in the data. The rest of it -- not that the design is not important. I don't want to undersell that. But a good design is not necessarily going to sell itself. I mean it doesn't have the features and attributes that we think people want nor does it make sense from a cost standpoint. So yes, I said 80-20 analysis, 20 design that's probably the right kind of ratio.

How many new products you start marketing on a monthly basis?

It's a good question. I don't know if I have -- I don't really have at my fingertips. I think any given year -- I mean we've had a couple of years where we've added 600-plus SKUs. We're not at that pace right now, partly because of the focus that we're putting on the services business. and finding partners to work with versus developing new products. But I think in a normal year kind of on a go-forward basis, if we can have anywhere from 50 to 100 new SKUs while at the same time, rationalizing some of the more mature legacy SKUs, then I think our -- we'll feel good about our activity level. And some of those SKUs also are kind of bundles, I should be clear. Sometimes, we'll have a bundle as an example of, say, a fan and an extension cord as an example, or a fan and a fan that comes with some level of connectivity. And so there's an appliance you can plug the fan in that allows you to then control it from another room or from your office if you're on the to way home. So there's -- there are other kind of ways for us to get kind of skew growth -- but yes, I think we're doing 100 a year. I think we're still being active.

Are there any consumable sectors that you feel you could penetrate food or cosmetic or anything related.

Yes. That's an interesting question, too. And kind of timely. We've actually been approached -- and I think we've talked about this before. We've been approached by companies in the -- what's called nutraceutical category. And so it's an area that we'd have some interest. It's pretty well suited for a social commerce platform. I think the challenge is -- I think there's a little bit more of a regulatory environment. And that's not really in our wheelhouse in terms of product development. So if we were going to go down that path, it would either be through partnership or through an acquisition. But that's an interesting area for us. As you know, I think I've talked to you about this before, and I don't know if we've done it on this forum, but we have a partnership with a coffee brand. We haven't announced the brand yet.

For the TikTok Shop, right?

On TikTok Shop, yes. There are regional provider of beans and they were introduced to us by a fairly large consumer food and beverage company who have gotten wind of who we are and what we do. And we are -- that's our first -- that's our first services partnership in the food and beverage space. And so that's another area that we would look to kind of grow. It's more likely that we would enter into partnerships versus development in-house where we don't have that type of competency. That said, we certainly have the competency for merchandising, warehousing and then providing kind of real access to channels. So I think our offering there will be appealing but definitely not a category that we're going to put R&D dollars behind to try and make a pitch. I think we'd be better off just finding in partners like we did.

Yes. So this product design and new product development, is that something that you are offering to your service partners too? Or is it something for them, it's mostly just access to the online markets.

Yes. So we're making kind of our -- if you think about it as points on a value chain, anywhere where we feel like we have a real competency, we'll try to monetize that with partnerships. The easiest way in initially though, is sales channel because we have a really good relationship with Amazon on a wholesale basis, which is not an easy partnership to kind of create from scratch. You need to have scale, you need to meet minimum requirements in terms of delivery, inventory levels, et cetera. And so you don't just show up and say, "Hey, I want to be a wholesaler to Amazon." They invite you based on what they see. So we do think that over time, we'll be able to offer more of the points on the value chain that we think we do well, including as early as product design and/or redesign. It's more likely to be, I think, product modification with the services partners. They're in a business already, and they're not likely to be companies that are going to broaden what they do. So as an example, our biggest anchor services partners in the electronic space. I wouldn't imagine they want to give them the pet space, as an example. So if we do work that early on in the value chain, it's likely to be product modification, taking something that they have. And doing -- even if it's not a major redesign, just enough of a redesign that allows them to achieve something, taking some cost out because we can introduce them to another manufacturing partner adding an attribute or eliminating something that is bothering people. There's a lot we can do there. And we expect that over time, as our relationships continue to grow with these services partners that they'll want us to be working on stuff like that.

And again, the engine to drive those types of product modification or extension or insights is really review analysis.

Yes. Yes absolutely. It's all the data that we collect, and we can...

Comes mostly from that, from reading analysis.

Yes, we can bring them in to kind of our world and say, "Hey, look, here's a competitive product that seems to be doing well, and here's why we think that is. And here's the data that supports that." And with -- with that in hand, making those recommendations come with a certain amount of substance, right? It's not us winging it.

Yes. So it's review analysis -- it's review analysis and review of competing products that seem to be doing well.

Yes. Correct.

Okay. Is the process very similar on the TikTok Shop? Or I mean it's a different forum. It's different drivers. Is it also just review analysis, the number of lights or...

It's definitely a little different, right? There aren't really product reviews, so to speak. But you do get with -- imagine a, let's call it, an influencer who's selling a product on there, there's quite a bit of data to be collected from the comments that come in when that person is demonstrating the product and showing the product and comments like, "Oh, God, I wish it had this" or "oh, this looks interesting. I like this." It's not quite the same because they aren't reviews. But you do start to add kind of additional color on the kinds of things people are responding to. So while we're attempting to kind of use the same template, we're going to have to use a slightly different template based on what we can glean from that. But there's also lots of data that can be collected on at what price point did the items being sold hit the highest volume, and we'll kind of bank that. I think we're probably going to need another couple of years for it to be the kind of rich treasure trove of data that we have in our other channels. But I still think there's stuff there that can be mined that we're going to take advantage of.

I'm curious about the pricing analysis. How often if you have a product in a store, it can be -- it's still kind of tedious to change the price on an ongoing basis. But obviously, if products are online, you can -- I mean do you change prices? Are things more expensive in the morning and in the evening? Or how often -- how quickly do you make those adjustments?

So I mean I would say that where the pricing changes happen in a lot of cases, are out of our hands because we sell wholesale Amazon to the -- it's up to them to set the price. Now they're not -- because we're selling wholesale to them and they're taking on inventory, they're not going for 90% margin by marking the thing up 4x because they won't be able to move it. They've got to hold analytics aspect to what they do as well. But what I would say is those decisions are out of our hands, what's -- what we can control is what we sell to Amazon and the margins that we can make on that. On TikTok, it's a little different. We are the direct-to-consumer vendor there. So we do have some -- we do have some flexibility on the prices that well set. I think maybe the best way to say it, though, is we haven't been super dynamic with pricing decisions on that channel so far. It's still pretty narrow for us. One. Two, I think we're still in the learning phase, right? We may make a small change, but you wouldn't see anything dramatic, and we're not -- at this point, there's not enough data to say, we should price it high in the morning when people are happiest or price it higher in the late afternoon whatever one's tired and they're not paying attention. We're trying to find kind of -- we're trying to find those kind of sweet spots and figure out where we go going forward based on what we learned, I think we still have quite a bit of learning to do given how nascent that platform is.

We talked about TikTok. I'm wondering, obviously, there's some questions about the business in the U.S. and so on. Are you, at iPower, what do you -- are you thinking of the scenarios there that are more like the most likely. I mean, obviously, for example, if there was a fourth divestiture, the TikTok Shop would continue [ and the ] incentive to making it a success. I'm just wondering if you have -- what your thoughts are on the whole situation?

Yes. I mean, I don't know. I don't have any magic crystal ball on what Congress or the political forces that are at play will do. I think as long as it's a platform that I think consumers really like, one; and two, it's a platform that's being supported by TikTok from the standpoint of making it attractive to consumers to engage in commerce there, then we're going to be part of it. If it goes away, then we'll have to find another avenue. There are a lot of different -- there are a lot of different kind of channels that exist out there. I think we at one point had talked about Temu as one, they've approached us. We know there are other e-commerce platforms across the world. Amazon is not the only one. There's a very large one in China that comes to mind that we obviously are trying to engage. So we feel like we understand in how to operate in the environments where we have some control over that. We can't control what politician decides is good or bad for consumers on any given day. So...

No, I mean I just wanted to bring it up because obviously, it's in the news, it seems to me that, I mean, I just don't see it going away. I could see the ownership changing. But I don't think the business opportunity goes away. Just a couple of more questions. We're getting to our allotment. We talked about kitchen items being a new category. Do you see another -- is there another big new category that's insight for you? Or right now, you're working on building up what the categories you're already in?

Yes. I think it's likely to be the categories that we're in and kind of extending those. I could see us investing a bit more in the pet category. We just -- we need to find the right products for that. It's just such a big market with really healthy margins and what feels like noncyclical demand I just -- people spend money on their pets. And so...

Right now, I'm just aware of the pets, what are the -- do you have any other products in that category?

Yes, there's toys. There's cats, there's like scratching polls, there's -- in theory, we could get into the kind of food category that probably will come with -- through a partnership, but there's -- yes, there's just a whole lot that you can do, harnesses, leashes, sweaters, dog apparel is shockingly a -- maybe not shockingly, it's a big market and people will spend more money on a sweater for their dog than they might spend on themselves. Just got to walk down the street, you'll understand that.

Yes. Yes. And then maybe a last question, if we look -- step back and look at the overall economy, you had supply chain challenges a few years ago. Are there any -- is inflation an issue for you, consumer confidence? Or are those things not keeping you up at night?

Well, I mean, I think there's plenty of to keep me up and keep us up at night. I don't know that how inflation is affecting kind of us. It hasn't affected us much on the input cost for us. So that's good. I mean it did at one point during the supply chain kind of challenges when the inflation in freight and shipping costs were really, really burdening our cost of goods sold. That's really come off. Those prices skyrocketed and then fell back to kind of prior levels. So quite a bit of deflation in prices there. On the consumer side, I think the way that we think about it is we tend to have products that aren't big ticket items in a given person family's budget. And so if there's inflation for sure, and people are thinking about their budget that may have an impact on what they have available to spend on the kind of products that we provide in the market. But to be honest, we haven't seen a ton of impact at least from the data that we can see. Most of the fluctuations that we've had in demand, and I think we talked about this a little bit with regard to our last quarter, the December quarter were a function of managing inventory levels at our largest channel partner. I think every December quarter has been kind of a down quarter for us in the last 5 years. And that's a lot of -- at least from our perspective, it's a lot of managing of inventory and managing the balance sheet at a year-end. I don't think that's necessarily abnormal. And we typically see a nice rebound in demand, probably more so than you would see in terms of overall retail sales just because of that dynamic. And so, yes, there's not a lot of data that we see that makes us concerned about the health of the consumer right now. And so...

Well, I offered you a great excuse there, and I'm kind of happy to see you're not choosing to use it, so.

That's right. Well, like -- we can't control inflation if it takes over either. So we work on the things that we can control, which is bringing well-priced products with good margins to customers and consumers who see what we offer and I think the value prop is high because the price is attractive and the value is good. So as long as we keep doing that, and we're optimistic that we can continue to execute.

Well, great. And I mean looking at the last 3 years, you -- iPower is really delivered in that sense, steady growth over that time frame in an environment where a lot of similar companies have struggled. So that's great, Kevin. I think we're at the end of our allotted time. So I'd like to thank you. I'd like to thank our audience. We're going to have a transcript of our conversation. It will be posted on our website at watertowerresearch.com. I read the company's forward disclosure at the beginning of the conversation. I have to remind you now that the views expressing this fireside 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 or reproduced without the written consent of Water Tower Research and should not be considered research nor a recommendation. Water Tower provides research-driven communication and investor engagement. It's not a license broker, broker dealer, market maker, investment bank, underwriter or investment adviser. Additional disclaimers can be found at watertowerresearch.com. Kevin, thank you again for your time. Thank you, everyone, and have a good rest of your day.

Great. Thanks, Thierry.

Thank you.

Bye-bye.

Bye.