iPower Inc. (IPW) Earnings Call Transcript & Summary

Hello, everyone, and welcome to today's fireside chat with iPower. I'm your host, Thierry Wuilloud. I'm the analyst at Water Tower Research for special situation and emerging growth company. Today, I'm joined by Kevin Vassily, CFO of iPower. iPower is an e-commerce company that uses 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 fan, shelving systems and also wellness products and pet care products. And also through its SuperSuite line of business, iPower also sells furniture and electronics, amongst other things. iPower has achieved robust growth over the last few years, thanks to its ability to design product, source and market a range of products that meet unmet customer needs. I should mention that iPower's safe harbor statements can be found on their website in the latest corporate presentation. Kevin, welcome, and thank you for joining us today.

Thanks, Thierry, and thanks for having me.

Great. Kevin, we've seen some nice progress on the margin side of your business over the last few quarters, but the revenue side has been uneven. I think there's been maybe 3 reasons for that. One being the inventory reduction, you had some excess inventory a year or 2 ago. We've seen maybe a switch in production. And then we've seen a deemphasis of the hydroponics line of business. I'm kind of wondering if you can give us some color around those 3 factors and kind of give us a sense of what's really been affecting the top line revenue.

Right. Yes. So I'll address them kind of one at a time. So correct on inventory reduction. We've talked about this, I think, before, but leaving the calendar year '22 and into 2023, we built quite a bit of inventory, a lot of which was based on forecast that we were getting from our supply chain channel partners about really, really robust demand that they were expecting. And we then entered into a different interest rate regime, which really kind of changed the footing for a lot of the people we were supplying to, namely our largest channel partner. And so most of the second half of '23, into the first quarter of 2024, there was quite a bit of work that we were doing to bring down inventory, a lot of promotion, a lot of -- not so much discounting, but incentives to move product and to actually get our channel partners to take product. And so that led to some, what I would say, better than seasonal kind of performance in certain quarters, which then made for some tough comps as we entered into that next fiscal year, which ended in June of this year and then into our first fiscal quarter of '25. So we think that's mostly behind us. We don't -- our inventory levels are below $10 million at this point, and we're back to being in an inventory turn position that we were prior to actually us going public, where we could turn inventory somewhere between 7, 8x a year with little trouble. So anyway, that's kind of behind us. But there were some quarters that looked more robust, creating some difficult comps for us on a quarter-over-quarter basis. On the production side, I wouldn't call them production issues as much as I would call them supplier rationalization and/or kind of supplier changes. Part of what we have to do, particularly in -- kind of in light of the new administration with the potential for some changes in tariffs is to constantly upgrade our manufacturing partners. And part of that is not only quality, but a big part of that is price. We need to make sure that we're getting good product at as cost-effective kind of level as we possibly can. And we made some decisions kind of over the summer and into the fall about switching out some of our production partners so that we could continue to bring costs down, not only to keep our margins expanding, but also to be on the right kind of footing if, in fact, we're facing potential tariffs in the upcoming 2 to 3 years. And so there wasn't really an issue with them not being able to make the product. It was a proactive decision on our part to find -- and actually, maybe the best way to say it is we kind of promoted kind of the second source in a couple of our product lines to be in first position because we'd like the price and the quality was similar, if not better. And then finally, on hydroponics side, we -- I don't think it's any secret that the suppliers of equipment into the kind of world that takes hydroponics durable goods have seen a really, really kind of dire demand environment. Now we're a little different than most of the people that we got compared to in that line of business. We were very much focused on the home consumer, the home hobbyist as it pertain to the use of this type of equipment, whereas I think the people that or the companies that people are most familiar with are largely supplying the commercial side and the commercial side has been in really, really dire straits. It's had some impact, though, on us in that there is the ability for that commercial or at least a portion of that commercial product to be repurposed or used in a home consumer setting. And so that's bleeding over into people selling into the consumer line. So while I think the demand environment that we've seen has certainly slowed, it's not -- or it's not nearly as dire as what you see in the commercial side, but it has had an impact. And so I think as we look back to our decision even right -- it actually predated our public offering in 2021, to make sure that we had a diversified set of products for home consumers, I think that decision has served us well because those businesses have been growing nicely while there has been a slowing and flattening of that hydroponics line. So those combined over the last, let's call it, 18 to 24 months have had some impact on the kind of steadiness of the demand environment. But again, I think that as we're kind of moving into this current fiscal year and as we look out over the next 18 months, those impacts should lessen over time because I think we're now at a right -- kind of rightsized and at a steady state for what we want to do into the future.

So with your current product mix, and you mentioned seasonality earlier, should we expect seasonality in the business or more or less even type of quarters?

No, no, no. There's always -- there's definitely going to be seasonality. I mean when hydroponics was over 50% of the revenue contribution, the seasonality there was quite strong. The strong year or the strong part of the season kind of started in late December and into early summer. But with our current mix of products, summer is very much the strong part of the year for us, largely driven by the contribution of our fan product line to the overall revenue. And so that then kind of turns this seasonality, which used to be stronger in the kind of wintertime to be the exact opposite. Summer should be the strongest and will always be the strongest and the December quarter tends to be and until we start bringing on additional products from kind of our SuperSuite efforts, it's going to continue to be the weakest quarter of the year.

And then also in terms of product mix, if you look at your 2 lines of business, your -- the goods you manufacture and sell versus SuperSuite, do those 2 businesses have different growth rates or growth trajectories in your mind?

So yes, I think it's still pretty early for us on the SuperSuite side. But we think that there's absolutely going to be kind of higher growth potential because we're still at a kind of smaller contribution from a revenue standpoint. Currently, revenues coming from our efforts in SuperSuite, which includes kind of both acting as a sales agent and then getting fee-for-service for other things, is roughly 10% of revenues right now at current run rates. And so we've talked about this in the past. We would like the SuperSuite business over the next, let's call it, 3.5 to 4 years to ultimately be the same size as our product business. And so the growth rates there are going to be well in excess of the kind of in-house product line if we're going to make that happen. I mean the math is fairly simple there.

Okay. So we've seen some unevenness on the revenue line, and we just discussed that. At the same time, there seem to have been a pretty steady progression on the margin side. In particular, your gross margin seemed to have been around 40%, plus or minus, and it seems you've lifted that to 45% or the mid-40s. Has it been product mix? Has it been something structural happened that you've managed to do that? Can you comment on that?

Yes. So the biggest piece is the work we've done with our manufacturing partners and suppliers to bring costs down. When we were in that kind of excess inventory position, we realized a couple of things. One, the -- not only the product mix, but kind of the number of partners or manufacturers that we were working with required us to be even more diligent on taking cost out. We also know that given that we're playing in categories, and these are categories of our choosing because we think we have the algorithm set to kind of thread the needle and take a little market share in some of these categories, they're categories that are not necessarily thought of as being well differentiated and they're very fragmented. And so one of the big variables in that algorithm that we have in terms of bringing product to market was we needed to have a price that was compelling, combined with the kind of features and benefits that our data was telling us people were asking for to get people to pay attention. And so the more room we had on the pricing side to reflect that kind of in our pricing strategies with our channel partners, the better off we were going to be. So we pushed hard with the entirety of our manufacturing base to take cost out. And I think that's what's showing up now. Product mix from, let's say, the fourth quarter -- or sorry, the September quarter of last year up till this year, didn't really have that much of a contribution. I think there was probably a little bit of contribution, though, the leftover kind of high-cost inventory that had been burdened by the really, really high shipping costs coming across the -- or container costs coming across the Pacific was starting to kind of trickle out. But the biggest impact on that move in gross margins was through the work we were doing with our manufacturing partners to take cost out, and it's starting to show up on a more consistent basis now.

Do you do that work when you have a SuperSuite client or you kind of remove from the interaction with the manufacturers in those cases?

Well, the current set of SuperSuite partners that we're working with, we're a bit removed. I shouldn't say a bit. We are removed. Those relationships are theirs. However, one of the things that we will make available to partners over time is the ability to tap our kind of manufacturing base and optimize, if so desired, their cost structure. Not everyone has well-optimized kind of manufacturing partners, and we think we can, as part of the overall suite of services, introduce them to people that we trust to help them continue to take cost out of their production. But as of now, we haven't done that with any of our kind of current partners.

Because I mean, again, in terms of margins, I think it's another aspect we should keep in mind is that as SuperSuite grows, the margin structure is a bit different, if I recall, maybe a lower gross margin and then you catch that up at the operating margin line.

Yes, that's right. That's right. In the SuperSuite relationships that we have, you can, in some ways, think of us as a distributor, you could also think of us as a sales agent. We're getting better than kind of traditional distribution margins for sure. It is, in some ways, more akin to us buying product from our manufacturing partners than it is a pure distribution model. But the margins -- the gross margins are lower. But for us, it's a much easier thing to kind of plug and play into a system that's already working for our in-house product lines. And so yes, so on the whole, the operating margin should be similar and net income margin should be similar, if not better, over time with our SuperSuite partners, partly because we'll also be able to offer them kind of ancillary or adjacent services to just acting as a distributor. We -- as you mentioned, we could help optimize their cost structures with their manufacturers by moving to some of the people that we work with, and we'll get a cut of that savings, one. We can help them with listing and merchandising work where a lot of companies kind of could really, really improve the visibility of their products by using the team that we use in-house. We've shown that we can do that with a bunch of products that most people would think would be hard to differentiate in a very competitive marketplace. We can help them with 3PL logistics. We have warehouse space. We have an ERP system they can access. We've got data that we can provide to them. All of that can be fee-for-service. And those are kind of revenue streams that fall disproportionately to the bottom line. So over time, it becomes a really compelling financial proposition for us if we can wrap around additional services beyond the distribution/sales agent work that we're currently doing.

Okay. If we think of operating margin, there's a number -- I'm wondering if there's a number that's kind of your optimal number in terms of -- you could think of a high number, but then your top line is going to be affected because it's harder to grow at -- if you have such a high hurdle in terms of your goal. Is there a number where, hey, I think we can do this kind of operating margin and maintain a good top line growth for the business? I'm wondering if you have a target like that.

Yes. We haven't talked about -- we haven't talked -- I mean, part of that is because it's a little early for us. And we're also -- we don't give at this point, formal guidance. So we haven't put anything out kind of publicly. I think the way maybe that I can answer that, though, is that prior to the IPO, actually prior to the kind of inventory build and kind of the challenges that we had to kind of work through to get there, we were in the, let's call it, 8% to 10% kind of net income margin, so let's call it, 10% to 12% operating margin level. I think the way to think about operating margin for us is we need to get back there, one. And then from there, as the business develops on the SuperSuite side, we'll have a better sense of kind of what that level is. I think the other thing that we've said is that we -- there isn't anything in the business currently that's going to prevent us from getting back to that, let's call it, starting 6%, then 7% and 8% to 10% net income margin. Nothing structural as the business is construed today to get there. And so it's going to be a function of sales levels, as an example, we've got a bit of a hurdle to get over just in terms of the fixed cost of the overall business. But other than sales levels, there isn't anything structural that should prevent us from getting there. And then beyond that, it will be a function of what wraparound SuperSuite services we can provide to our -- we call them partners, but they're essentially customers of ours to keep driving that operating margin and then ultimately, net income margin up from there. So hopefully, that gives you some sense of where we're trying to go.

That's helpful. Yes, that's helpful. Quick update on SuperSuite, can you tell us where you are in terms of how many partners, if there's any trials going on or where you're at?

Yes. So right now, we're working with 7 different partners. We call them partners, let me say it again, they're customers. Three of those are in trial. The -- and we're pretty pleased right now. Actually, one of the -- I'll share an anecdote because I think it's useful to show the kind of things that we can do. So we recently engaged with a company that's in the home goods space. I don't want to give the exact type of product, but they wanted to trial a single SKU with us. And we were at it for about 2 months and actually reached a sales level of around 15,000 of sales per day in 2 months. The ramp is so strong that this partner went out of stock of that product very quickly. They were surprised and delighted at how quickly we were able to kind of show progress with them. And this is a company that does already roughly $400 million a year in the U.S. So they're not a small company. And so we're in the process of getting them kind of restocked, one, or I should say they're in the process of getting restocked for what they can provide to us as a channel. And then two, were discussing several other SKUs with us. They, not in a million years, thought we'd get that level of success that quickly. And so our goal is to, again, find companies and brands, products, product categories where we can repeat that level of success. But that's an example of someone who came in with a very limited set of products that, in fact, very limited, one product in particular. And I think with very modest expectations that we exceeded, and we're happy of where we're going with that. So that's one. There's a couple of other things I think it's worth kind of talking about though, too. We've talked in the past about the -- what I would call true partners, people that are helping provide us with access and capabilities with adjacent services. We've got a 3PL partner, we recently engaged with a payments company. The idea there is those companies over time can provide ancillary services that we can resell on behalf of those partners. But they bring a set of customers who can ultimately end up being SuperSuite customers over time. So they act as sales funnels for us. We're currently in discussion with a data partner. And we've talked about kind of how important data is to our business, how it drives our decisions about what categories make sense, what types of SuperSuite partners make sense. So adding data to our current kind of data repository is, I think, going to be super helpful for us. But importantly, just like the 3PL partner we have, the payments partner, we can get access to their customers. This is -- we're in discussions with the company, and we haven't inked anything yet, but I'm pretty optimistic that we'll get there. They've got a -- they're a data company that works with e-commerce companies to help them optimize using sales data and other kind of categories, a little bit like us. And they've got 20 salespeople of their own, and they are eager to not only kind of augment their data with ours, but also provide us access to the companies that they work with in the e-commerce space. So we're building a bigger and bigger funnel every quarter. And I think that's going to serve us well as we keep building the number of customers we work with. And then the other thing is we announced this several weeks back. I want to say it was in late October before our earnings announcement. We went live with our customer portal for SuperSuite. So these are -- this is a way for our SuperSuite customers to kind of manage the -- and take ownership of the interactions with us, helps us because it reduces the headcount cost associated with managing this, if there's a self-service, if that's the way to think of it, aspect of kind of managing the relationship. We're onboarding kind of the first SuperSuite partner next week. And then ultimately, the goal is to bring any SuperSuite customer we bring on then has access to this and allows them to tap into the data that we have to optimize their products. Again, that will end up being a fee-for-service piece that will kind of feed the revenue stream. And then finally, I think we've referenced this in concept, and we're still a little ways out on this, but we're working on making our kind of custom-built ERP system accessible as a SaaS app for third-party brands. And so subscription to using kind of this system to kind of manage the value chain associated with inventory levels, ordering from suppliers, managing payments to channel partners, managing payments to suppliers to them. It's been a really valuable tool for us and one that we built specifically for e-commerce and for kind of smaller companies and brands. And we think that this has quite a bit of promise and is going to be a big part of our plans for SuperSuite over the next 3 to 4 years.

Great. Maybe last question. Obviously, some uncertainty about tariffs. I don't know, is there anything you do to prepare? Or curious what -- I'm sure you must be thinking about that whole issue.

Yes. Well, so part of the -- I think I mentioned this earlier, part of our thought process around constantly working with our manufacturing base to lower costs was in preparation for one potential outcome of the most recent election, which would bring tariffs back to the forefront. I mean, frankly, though, we had been dealing with tariffs since the first Trump administration, and there was no real reversal of those tariffs in -- during the Biden administration. So I think we were always in a stance that we had to make sure that we were doing as much as we could to take costs out of our kind of manufacturing base. As you know, we have moved a portion of our production to Vietnam in one of our kind of higher running lines. Our first orders from that production line shipped in October. And so far, so good. I mean there's -- like any transition, there will be some bumps along the way. Obviously, we had bumps in our current manufacturing base over the summer as we were migrating from kind of first share to second share to optimize some of our products. So we're certainly not out of the woods yet with that move to Vietnam, but we're happy with where we are now. And we believe that we can continue to move more there, and we're looking for partners outside of Vietnam as well. Prior to the pandemic, we had been contemplating places like Thailand and Malaysia to do some of this. And so those are going to be back on the on the stage for us at some point, but we're in the process of right now focusing on making sure we get Vietnam up and running. And I think the other thing that's worth kind of considering, too, is that there's nothing that will stop us from considering kind of onshore partners and suppliers. We just have to be able to find cost-effective partners in categories where we think we can apply our template, which is like we've said before, fragmented markets, not obvious differentiation, but something that our data tells us would allow us to kind of go and capture a little bit of share with the playbook that we run. So this will be a constantly evolving issue for us. Hopefully, we're not going to have to deal with anything dramatic. But when that time comes, we'll address it then.

Great. Well, when it's hot, people will need fans and people with pets will still need patch and things like that. So great, Kevin, that was great. Thank you for your time.

Yes, my pleasure.

This will kind of conclude our conversation. I just have to remind all of you that the views expressed in 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 or recommendation. Water Tower provides research-driven communication and investor engagement. It is not a licensed broker, broker-dealer, market maker, investment bank, underwriter or investment adviser. Additional disclaimers can be found at watertowerresearch.com. We will have a transcript of this conversation on our site in the next 2 or 3 days. Thank you again all, and I wish you a good rest of your day, goodbye. Goodbye, Kevin.

Thanks, everyone. Bye.