iPower Inc. (IPW) Earnings Call Transcript & Summary

Welcome to today's fireside chat with iPower. I'm your host, Thierry Wuilloud, and I cover emerging growth and special situations 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 sells a wide range of products, including home goods such as fans, shelving systems and also home gardening products, 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. iPower's safe harbor statements can be found on their website in the latest corporate presentation. Kevin, welcome, and thank you for joining us.

Yes. Thanks, Thierry. It's a pleasure to be here.

Great. Kevin, I wanted to discuss your various sales channels today, your various distribution channels. And maybe we start with your most important partner, Amazon. Can you give us an update on the relation and in particular, any kind of key developments with Amazon over the last, say, 12 to 18 months?

Sure. So our relationship, and this is actually our longest and kind of deepest relationship we have in distribution, but the relationship is quite strong. As you know, someone who's not familiar with the story, it's probably worth spending a little bit of time with this. Our relationship is a two-pronged relationship. We sell both on Amazon's Vendor Central platform, which is their first-party platform, and our relationship with them is a wholesale relationship there. And we also sell on their third-party marketplace, which is where a lot of independent sellers engage Amazon. As you know, our -- the majority of our business is on the Vendor Central platform. So roughly, I would call 85% to 90% of the business that we do via Amazon is done on a wholesale basis. And so to be a part of that, you -- there are -- well, I shouldn't say you, but there are expectations as a vendor that you need to meet to be on that platform. It's also an invite-only platform, and we were lucky enough to be invited to be on Vendor Central when we were probably about 4 years old as a company. So it took us about 4 years to kind of take the lead from being just a seller on their third-party marketplace to being a wholesale provider. And our -- I think I would characterize a relationship with them as being quite strong and kind of solidifying and improving kind of over time. It requires a fair amount of sophistication to be an effective supplier on a wholesale basis to Amazon. You've got to be able to integrate your ERP and inventory systems with theirs. There are certain minimum order quantities that they expect us to be able to meet when they feel like they have demand. You need to be able to ship out of your own inventory if they -- for whatever reason, or out of stock, for products that they purchased from you. So the kind of example that I would give is, Thierry, say, you wanted to order a fan from us and there was a particular fan that they no longer had inventory of and we're waiting for kind of supply from us. If we had it in inventory at one of our warehouses, they would route the order to us. We pick it, pack it and box it in an Amazon box and ship it out to a consumer. You wouldn't know the difference. The label looks like it came from Amazon, the box looks like it came from Amazon, but it shipped from our warehouse instead of theirs. And that is a feature that allows them to help, one, manage their own inventory, but two, make sure that they can meet customer requirements and expectations, particularly with regard to customers who are Prime members. Having that level of fulfillment sophistication, integration with IT systems, et cetera, allows you to continue to be part of that Vendor Central platform. So I would say that we think that one of the reasons we've been successful and have had a reasonably good kind of growth profile over the last 4 to 5 years is that Amazon is increasingly narrowing who they want to work with on their Vendor Central platform. And it has allowed us to take some incremental share as they have started to shed some of the vendors in the same categories that we participate in, who aren't quite meeting the requirements of being on the platform. So I think all in all, it's been a -- it's been a really healthy relationship. We feel like it's getting stronger kind of by the quarter and kind of we're happy with where they -- where we are with them. I think the other thing I would say, too, is that there's been some volatility over the last 2 or 3 years, I guess maybe I'm probably understating that, with regard to the supply chain, where inventory needed to be, et cetera. And we saw some -- even as recently as the December quarter of 2023, we saw some inventory rationalization that was going on, on the part of Amazon. And that actually saw quite a nice bounce back in the March quarter of 2024. And so I think they're still trying to get kind of back closer to equilibrium relative to kind of prior year and prior kind of pandemic growth patterns. And it feels like some of those inventory rationalizations are finally kind of clearing up. And so we think that they're back in a more healthy position, and that benefits us because it allows us to operate with a little less volatility as well. And generally, the sales environment is -- remains pretty healthy, at least from what we can -- are able to see through with regard to the work we do on that channel. Sales and sell-through seems pretty healthy. And so right now, I think we're pretty happy kind of with where we are with this particular channel.

Great. So Amazon is rationalizing maybe the number of suppliers or the number of partners they're dealing with. Are they themselves somehow competing with you on meaningful quantity of goods that you sell on the platform? Or that's been -- is that something that you're tracking or that you're observing?

So when you say competing with us, are you saying they bring their own private label products?

Yes.

Yes, not right now, no. We don't see really any of kind of what we do overlapping with products that they're trying to get into directly. That doesn't mean it can't happen, but I think there's -- the way we look at it is there's still quite a few categories that they haven't entered in that make a lot more sense for them to get into that will come before any of the things that we're working on kind of right now. So that's a little bit longer answer to say no. But it's a question we get kind of frequently, "Why isn't Amazon in the business that you guys are in?" It's -- they have a lot more -- there are a lot of other things that are probably in their crosshairs before us.

Okay. Obviously, your strong relation with Amazon is a key selling point for your SuperSuite business. At the same time, you recently announced a partnership with Amazon Logistics Services. Can you explain how that works? I mean is it for partners of yours in the SuperSuite business that would sell in different channels at Amazon? Or does that -- how does that gel within SuperSuite?

So it is just another service to enable some of the other kind of parts of what we do. So we don't provide kind of stand-alone logistics services through the Amazon kind of relationship we have. But if we have, for instance, a partner who is taking advantage of using kind of our relationship with Amazon Vendor Central platform, another thing that we can offer is the ability to ship some of their other products that they're selling that are not on the -- that we're not selling through Vendor Central via Amazon's shipping services. So they've set up this business to compete directly with UPS and FedEx given that they have this infrastructure. So they're looking for companies that are looking to bring their costs down. So that is kind of one element of it. We don't -- we try not to make this -- I shouldn't say, try -- we don't make this available just as, hey, you want to take advantage of lower-cost shipping. But if there is a relationship that we have with this potential vendor on SuperSuite, this is another way for them to get a benefit. They have to have a relationship with us in another place for them to be able to use this. But fulfillment is an essential kind of piece of the value chain of everything we do kind of through kind of warehousing and kind of other logistics. And so the other thing where this can work is Amazon is not the only channel that we have, and I'm sure we'll talk a little bit about some of our other channels. But if we have a partner that wants to sell through say, TikTok or Temu, where the fulfillment kind of relationship is a little different, we'll use Amazon Logistics and their shipping infrastructure to fulfill to those customers because we'll be doing kind of direct sales to them.

Okay. Makes sense. You mentioned the other channels, maybe let's start with the TikTok Shop. You started really strong there. I'm wondering if you maybe have slowed things down a little bit given some of the concerns about the platform in the U.S. Can you give us an update there on your strategy with the TikTok Shop?

Yes. So it hasn't really changed much since I think we last talked about this, but maybe it makes sense for me to talk a little bit about like how we engage with TikTok and what that fulfillment chain looks like. So unlike a kind of first-party relationship that we have with Amazon, for TikTok, we fulfill directly to a consumer. An order will get kind of routed through us via TikTok's platform, and the shipment would go directly to that consumer who placed the order through their TikTok Shop infrastructure. And so TikTok does not hold inventory. So they're much more akin to being like an Amazon third-party marketplace without the kind of auxiliary services that Amazon provides, like holding inventory or kind of doing some promotion on the site via couponing, et cetera. Here, we just get an order routed via TikTok and then we pay a commission to the producer or influencer is maybe a better way to say it, of the short video or the live stream. And then we pay some fees to TikTok. And so because we have that direct-to-consumer fulfillment model with this platform, having really cost-effective shipping and like the relationship we have with Amazon Logistics really helps kind of seal the value prop there because you're charging them a shipping price that is lower than if we were going to ship through FedEx or UPS. So that's a real advantage. And that's also attractive to a customer that is on the platform for the first time. From the standpoint of how we're engaging them with regard to kind of their position in the U.S. marketplace and in particular, vis-a-vis some of the regulatory constraints that may come upon them given their relationship with ByteDance, we are proceeding cautiously because we have to fulfill directly to consumers, we have to have the inventory that we carry to do that. And as you might imagine, the concern that we would have is if there is no resolution around TikTok's future in the U.S. and they're forced to kind of divest from the U.S. We don't want to be carrying a lot of inventory that then we've got to go and scramble and find another channel for. And so I think probably the best way to say that is we stay engaged. We still are -- have a nice healthy amount of sales on the platform. But we're trying not to expand until there's some clarity on kind of what might happen. I think we're optimistic that there'll be some resolution that will allow not only TikTok, but TikTok Shop to remain in the U.S. At that point, we can reassess what that risk is and invest appropriately. But I think it just makes sense for us to maintain kind of what we've done there and not expand too fast given some of that uncertainty. And I think the other thing we'd say is we haven't heard anything either in the market or from the people that we know or talk to. And it's not likely that a lot of them would have real good information anyways. But nothing is -- we're not seeing any signals that suggest there's any resolution in the near term. And so until we see that, I think it just makes sense for us to proceed cautiously, but to stay engaged and we haven't disengaged at all. We're still seeing healthy sales there. We just want to be careful.

Makes sense. You started with Temu earlier this year. Can you maybe give us an indication there of how that's progressing? Obviously, no comments about the June quarter, but maybe a bit of a general update. And then also, what's the model with Temu? You give us an idea of how you work with, obviously, Amazon and with TikTok. How is Temu? Does everything come from China? Or do you carry inventory in the U.S.?

Yes. Yes. So it is continuing to kind of grow pretty fast. I would say that it's coming off of a small base, though. So the growth rates, while we're pleased with them, very pleased, we're recognizing that when you're starting from a really low amount, the growth rates are going to be pretty strong. The way we work with them is a bit different than what we -- than the way that we work with TikTok. I think they're very much more like Amazon in a couple of ways. One, they will hold some inventory. And so some of the sales that we do with them look very much like the first-party sales we do with Amazon, obviously, on a much, much kind of lower scale as they get to know us a little bit better and understand kind of what products that we offer, sell. But because we have local warehouses, we're very attractive to them as well. Meaning we can work with them on a kind of third-party marketplace basis where we make what we have available to them via kind of our inventory system. And because there is significant demand for being able to get product in a 1- to 2- to 3-day basis, we are able to kind of ship out of our inventories. And that puts us in a kind of advantageous position vis-a-vis some of the other brands and products that they're selling, largely the ones that are coming directly from China that have to drop-ship from there. And so I mean, if you're familiar with Temu as it was getting started, they were kind of value brands, value products. And to get access to those, you placed an order and you largely had to wait somewhere between 20 and 30 days for that to kind of make it over from China. But the model is morphed in a way recently to allow for kind of what we do, which is to provide good value products that can get to its consumer in days, not weeks. And so I think part of the reason that we're growing so fast is that we've got products that people are looking for but can get them sooner than later. And the good news for us is that given our legacy and history of highly rated products, products that have 5-star reviews and other channels like Amazon, it is garnering kind of more attention than we might otherwise. And I think that's been beneficial to us. I think the other thing I'd say, though, is they're pretty immature given just the amount of time they've been on kind of U.S. soil. And so there will be changes and a lot of adjustments kind of going forward from them as they figure out where they're making money and where they're not. But so far, we're really happy with it. And I think I've mentioned this to you before. One of the things that we think is interesting is that I don't know that, that many people, at least particularly kind of who were following kind of the company from a kind of financial or kind of Wall Street perspective, know about the kind of fulfill from local inventory strategy that they have here and understand kind of consumer perceptions of Temu. The data that we have suggests consumers are quite happy with not only the quality of the experience on the platform, and that does seem to go against the conventional wisdom of what you hear, I don't want to say in the media, but just hear more broadly where it's the -- products are not considered good products, they take too long, it's hard to return, customer service is bad. What we've been able to pick up says the opposite. And the fact that we're able to do what we're doing right now with the kind of level of growth and success that we've seen tells us that our data is, I think, a bit more reflective of real perceptions than what you might hear otherwise. So we're really happy with where we are right now with Temu.

Right. So I think your relationship with Amazon was a big driver in starting the SuperSuite business. And I'm kind of curious, is there a type of potential partners that have a specific interest in what you've learned about working with TikTok or working with Temu? Is that -- are those 2 good relationships you have? Are they attracting a specific group of potential SuperSuite business?

So without getting into too much detail because some of the discussions are still underway and haven't been inked and some others have not been disclosed yet. But I -- but the way I can answer that more generally is, yes, partly because success we've had on those platforms are some newer categories for us. So I think I've mentioned this before in some of our other conversations. When we got started with TikTok -- and actually maybe just even some context about the kind of product categories that do well on TikTok. So think -- if you think about kind of the role of an influencer, there's, I guess, a couple categories that we're not in right now that would come to mind. So fashion is one. Cosmetics is another. Those are easy to kind of show, model, demonstrate. There's an audience given kind of the demographics of TikTok that are interested in that. And so those are pretty natural. Our discussions with TikTok led us to look at some other categories where they weren't, I would say, not well represented, but thought that there were similar characteristics. So one of them were -- one of the categories was kind of kitchen items. So things to prep food, things to cook food, things to use for entertaining kind of for dinners and centered around the kitchen. And in our first -- I think in the first 2 months after TikTok Shop went officially live, we were one of the leading providers of these kind of kitchen items. Actually, we're the #1, not even leading. We were #1 for the first 2 months in those categories. And so those were kind of test cases that allowed us to then engage in conversations with companies that would be interested who are in that general space as well. And so that is, I think, broaden the category group of the kind of companies that would work with us. I've talked before about the food and beverage space. We had somebody kind of proactively come to us who was a coffee provider in Southern California who had multiple other distribution channels, but we're trying to find a way and thought that the kind of influencer model that you see on TikTok would be effective for what they do. They're a small regional brand. And they had no real understanding of what social commerce was and how it would work other than they thought, "Well, somebody talking about my coffee would probably generate sales." We just -- we don't really know how to start there. And so that has started other conversations for us with companies that are in that kind of category based on the success we've had there. And so, yes, those are all -- these relationships have led to broadened conversations with potential customers on the -- for the SuperSuite platform. And we're optimistic that those discussions will ultimately turn into real partnerships for us.

And is there any specific type of potential partner that's interested in Temu? Or is there a pretty big overlap between Temu and the interest in -- people who are interested in Amazon are the same who would be interested in Temu?

So it's a little early to know that -- or to kind of make that assessment yet. I think the kind of partner that would make sense for us, maybe less about their interest in working with us, but the kind of partner that would make sense for us relative to Temu via a SuperSuite partner would be companies that already have product kind of warehouse here in the U.S. so that very quickly we could route and pull from that inventory, or in the case of having a deeper relationship with them, have them warehouse their products with us such that we could kind of fulfill from our locations in Southern California. And so that has been kind of the model that we've pursued with our SuperSuite partners that are largely using Amazon as the platform. But having inventory here versus us having to kind of source it and get it delivered from overseas is the kind of partners that we're looking for in the U.S. And I think given the -- particularly in food and beverage, it's going to have to be the case that it's either kind of locally warehouse, but even beyond that is probably locally produced. Having it readily available make sales through Temu an easier sell and much more attractive for us.

Great. Kevin, maybe a quick last question. You seem to have obviously a lot of opportunities with online marketplaces, but occasionally we've discussed physical marketplaces. So maybe a quick update there. Is that something you still you're considering or are you making an effort to penetrate? Where are you with physical marketplaces?

Yes. So it absolutely is still a focus for us. It is and has been a slower process. The physical limitations of a store and kind of the limits of shelf space in any kind of superstore, like a Home Depot or a Lowe's, means the opportunity to go in and take share really is a function of them kind of moving someone out of an incumbent position to get some shelf space. And so that doesn't happen on a daily basis. It happens on cycles. There are certainly products in our current catalog that are absolutely well-suited for physical retail, largely because they are the kind of products that you find in these DIY home stores. And there ends up being a function of coming up for evaluation and kind of meeting the timeline for those companies. They don't -- like I said, they don't come up every day. And so we continue to push. The other thing that we're doing with some of these -- I should call the [ mommy ] channel because they're not clearly all just physical distribution entities. Homedepot.com and lowes.com are both platforms that we sell through. The SKU count on those are still fairly limited because they're still kind of engaged in the assessment of us. But any of the stuff that we're selling there and, so think fans, think shelving, think some garden equipment, all those absolutely have the potential to move to physical retail. And I don't want to use cliches all the time, but it is -- it is a little bit of a Trojan Horse strategy. If we can be successful on those platforms, and we think given our success on Amazon, which is even more broad than kind of the DIY kind of focus, that those products should be able to break through. And so we've been on Home Depot and Lowes.com for a little over 6 months at this point. I think that's right. And so we hope kind of being there and seeing some success there will result in a real opportunity to get invited into the kind of physical evaluation space. And there's others as well. Walmart.com is a place that we're selling already. And we already do sell to kind of Walmart proper. We are engaged with Ace Hardware. We've got a discussion going on with Menards, which is a kind of Home Depot competitor in the Midwest. Costco is another area where we think with some of the products that we have, that there would be some real opportunities. So we've got a really big initiative. It's just the dynamics of how you're successful there are a little different than what you do with an online marketplace. So it's just a little bit of wait-and-see still.

Right. Well, Kevin, I think that was a very interesting, good review of all the channels. I want to thank you for your time. I also want to thank our audience both our live and recorded audience. We will have a transcript of this conversation in 2 or 3 days on our website, watertowerresearch.com, which is open to all investors. I need to quickly remind you all that the views expressed in this fireside chat may not necessarily reflect the views of Water Tower Research and are provided for information or purposes only. This fireside chat may not be distributed or reproduced without the written consent of Water Tower Research and shouldn't be considered a recommendation. Water Tower Research provides research-driven communication and investor engagement. It's not a licensed broker, broker-dealer, market maker, investment bank underwriter or investment adviser. Additional disclaimers can be found at watertowerresearch.com. Kevin, thanks again for your time, and thank you all for the time. Have a good day. Goodbye.

Yes. Thanks, everyone. Thanks, Thierry.

Thanks.