Owlet, Inc. (OWLT) Earnings Call Transcript & Summary

This Is Allen Lutz, health care analyst at BofA. Next up, we have Owlet. We have Kurt Workman, Co-Founder and CEO. Kurt, thanks for being here.

Yes. Thanks for having me.

So I think you guys went public last year. I think it's still relatively unfamiliar to a lot of investors. So I would love to hear about the company and we can go from there.

Yes, sounds great. I mean I love talking about Owlet and our mission because I think it's just something that anybody can get a line behind. - Dad, I've got 3 kids. There's that moment when you leave the hospital with your oldest and for the first time, realize that everything that was happening in the hospital is now up to you, you're the doctor, the nurse, the sleep trainer. And I remember going -- I remember thinking like, wow, I went through more training to get a driver's license that I did to become a dad and care for this new baby -- and there's a lot of worries parental with some really big challenges. There's 28,000 babies that pass away unexpectedly at home between last trimester of pregnancy in the first 6 months of life. Parents will care for up to 120 days of sickness in the first few years, and they'll lose up to 100 nights of sleep. The average parent gets less than 5 hours of sleep at night. So you exhausted untrained caregiver with limited support, poor tools and you're trying to navigate that first year and that drives the highest rate of health care utilization of any other time of life. There's 92 million health care visits for children under the age of 4, 97% of those visits are treatment release, they're peace of mind visits. They're generally non-urgent. Parents are just trying to figure out is baby okay? Do I need to do anything else? I haven't been to a doctor in years, but my kids go 3 or 4 times a year, right? So it's just a different psychology behind how we use health care. And we do that because of the 3% of babies that really do need attention. I'll take those odds all day as a parent, but it's inconvenient to our round trip. It's expensive. It costs $1,000 to take your child to the ER and there's an average of a one ER visit for every baby born. So these are some of the big, big challenges that parents face at home. And my wife and I were especially worried because our kids have -- because she's had 3 heart surgeries. When she was a baby, they didn't detect that something was wrong and so they sent her home from the hospital. And a few days later, Herman just had kind of that mother's intuition to go and check and look a little bit deeper. She sensed that something was off. They rushed her to the hospital. And that day, they did heart surgery that saved her life. And I remember we were visiting with our cardiologist to see if everything was okay to get pregnant, and they mentioned that our kids might have the same thing. And I just kind of spurred this whole new train of thought around how would I know and what kind of tools are available to me as a dad at home? And that's really where our mission was born. It's really to empower parents to deliver care at home. And we want to surround them with the tools and technology and information they need to fill empowered to do that. We launched our first product, the Allot Smart 6 years ago. Since then, we've monitored over 1.5 million babies. We just launched the newest version of our product, the Dream Sock and Dream Duo. We've come out with new products, and we're expanding. I think our vision for the future is that every baby will have access to health sensing technology. And that technology becomes really the voice of baby in these early years where they can't really communicate and we can use that data to really drive the connected nursery ecosystem, a suite of products and services that can really empower parents to give care at home and help close the loop between the home and the health care system.

That's great. And the Net Promoter Score of the product is really, really high. I guess what are the things that customers really like about the product?

Yes. I think some of the jobs to be done as a parent, first of all, babies spend 2/3 of their life, the first year sleeping or in a transition state between going to sleep and waking up, so this sleep is just life for new parents. You're constantly navigating that. And our monitors, I think, are the most intelligent way for parents to navigate sleep. So they really -- I think parents really like the fact that not only can they see baby and hear baby, but they know that they're sleeping peacefully and they know when they may need a little bit of extra attention. And so that peace of mind that you get from having an intelligent proactive monitoring system, I think, is really beneficial for parents. And then just those moments where you're wondering and you can open up the app and you can see, okay, they are sleeping peacefully. Their heart rate seems to be in a good range. Their oxygen seems normal; all the sleep quality indicators are where they should be. I think that's something that every parent wonders and worries about and then having that data has-- we've had thousands of stories now from parents where that data has been really meaningful and helpful and delivering better care at home.

Yes. And we were talking before, so I'm a new parent, I've a 13-month old. And I remember the…

So I am preaching to the choir here, if you like, you can.

Exactly, no problem. And I remember the first time my wife went out and let me to watch our baby alone and he was taking a nap, but I was so worried that he wasn't breathing that I woke him up from his nap. And we ordered one of the socks the next day just because I was so neurotic as a parent because I couldn't tell if he was breathing and it's just -- that's just the way that I think a lot of new parents are. So I think that it's striking a cord with a lot of new parents.

Well, there's the common story that's like you're waking up a bunch at night, but then that first night where they don't wake up, you wake up in a panic, right? Because you're like, why aren't they waking up? What's normal? What's not? And I think as a parent, you're trying to decide, one, what's the right time to get them to bed? How do I help them sleep better? When are they ready to wake up, but also when do they need my assistance during sleep? And so it's a big question mark and you've got this door barrier that you're trying to just kind of navigate when should I be there? So yes, we hear that from a lot of parents.

And one of the things that I -- I'm not sure what the data says, there's conflicting data, but I feel like COVID really accelerated the amount of new parents there are in the United States. A lot of people that were pushing off having kids decided during COVID that, that was the right time to have kids. I guess, have you seen that sort of theme in your sales or in the interest level from customers or is that something that maybe is not playing out?

Yes. The most recent stats that I've seen is that birth rates actually went down like 1%. So it's pretty small during COVID. But we're seeing that kind of sort of come out of that, that we're seeing more births though there are quite a few research reports expecting kind of a boom in births following COVID. So I do think we're seeing parents coming out of COVID now saying, okay, now we're ready, and they kind of waited a little bit. So we're expecting that. I do think that there's nothing more important to us than our children and our family. I think it's like, it's one of the things that life is all about. So you'll see like slight fluctuations, but really that's something I think parents and people think a lot about and then plan for it. And the other interesting thing that we're seeing is that the spend per child has gone up significantly over the last few decades. Parents are spending more time. They're spending more money. The focus on children has never been greater than it is today.

I think there was a stat 56% of customers hear about Owlet through word of mouth. So let's talk about the marketing strategy and sort of the go-to-market strategy because you're in a lot of retailers. I was -- I got an e-mail from Optum and I saw that you're in the Optum store.

Right.

So congrats on that. I guess how do you think about the go-to-market strategy? I know Amazon is a big place where you sell. Are there any major retailers where you would like to get in? You also are expanding internationally? Just trying to understand the growth from that perspective.

Yes. So I think about the best marketing strategy, I think we see this across any company is having a great product that people love. So 56% of our customers are referred organically. I think we're seeing that rise with our rising NPS scores and satisfaction ratings. But I think building a great product is the foundation of all of that. We took 3 years to get our product to market, the very first version. And as soon as it launches, we were already working on version 2. We're now on the fourth version of our technology. So we keep making it better and better. And we always manage a pareto list of customer needs and questions and concerns, right? There's always like, okay, what's the next big thing to solve for our customer? And we just sit very focused on our customers of Owlet. So I think that's, first and foremost, the most important thing. Owlet has raised relatively little capital prior to going public. And yet we saw really great growth rates, really interesting penetration across the United States. So this is number one for me. I think number 2, for our market is we just want to be everywhere that parents are. So there's a lot of good direct-to-consumer work that we do, but registry plays a really big role in our category. It takes a village to raise a child and registry is one of those sort of events that is really unique to having a baby. And so we want to be everywhere where parents are. And so getting into retail channels is important. The big ones really are Target, Walmart, Best Buy, buybuy Baby and Amazon. That makes up the majority of the retail landscape. And we're in all the Target doors, all the Best Buy doors. We're expanding into Walmart this year. We launched a year and a half ago and now we're expanding doors there. But that's really important. And then I think just meeting parents where they are, where they're having conversations on the web which is social media. And that's the number one thing for us. We're expanding into some more TV type channels and working with influencers, but social media still is the number one kind of referral and most effective source to reach parents.

That's great. And then on the call yesterday, I think that you mentioned that international revenue doubled, it's about 13% of revenue, I believe. Where are you focused internationally? And are you staying laser-focused in specific areas? Or is it really sort of a broader reach?

Yes. A few years ago, we opened up our first international market, which was -- I guess, we -- Canada was our first, but kind of first sort of outside of North America was Australia. And what we saw was just an incredible reaction in Australia. We saw early penetration matched the United States, really great growth, interest from retailers. And we said, okay, this definitely resonated. And the big question as we moved into Europe was, will it resonate in sort of as we get beyond English-speaking countries, can we navigate the unique cultures of each area, especially in Europe, which is a very diverse kind of place. But one of our core beliefs is that we're addressing something that's pretty fundamental on the parents' kind of Maslow's hierarchy of needs, having that peace of mind and knowing how your baby is doing, I think, is something that every parent cares about. And so we opened up Nordics, in the U.K., and then we went to Nordics, Germany and France. And we've seen similar results in those geographies that we saw in Australia. And so we feel like that thesis continues to play out, and it's driving growth for the business. And so we're going to continue to open up new geographies. It's a pretty efficient way to scale our growth. And then as we expand our ecosystem, we've got more locations that we can bring products to. And so that so far has worked for Owlet and I think we're going to continue to do that.

As you think -- you mentioned social media as a potential way to get new customers. In the direct-to-consumer channel, there's been just for consumer companies, I think it's really subsector dependent how challenged some of those verticals are in terms of getting keywords and advertising and getting a good ROI. What is Owlet seeing in those channels? Are advertising costs going up? Are they staying flattish? Is there anything, any read through there?

I think there's been quite a bit of change especially with a lot of the new privacy rules that have gone in with iOS 14 and some of the changes that Facebook has made. I think we're lucky because we're in a very focused time period. There's so many life changes that are happening around having a baby. And there's a lot of ways to reach parents during that time because they changed their shopping habits, they changed their behaviors. There's a lot of good ways to just make sure we're really targeted in our advertising. We have expanded our portfolio of channels. We're always testing new channels. But really for us, it's about sort of as they get into that third trimester, that's when we want to be really heavily communicating with parents and helping them understand our value prop, and there's a lot of ways to do that.

Okay. And there seems to be a lot of products on the product road map to name a few, the Owlet Dream Sleeper, the Cam 2, the smart crib, the pregnancy band. I believe that you were also looking into telehealth. Where do these all fit in terms of priority level and, I guess, excitement level?

Yes, it's a good question. I think we're really excited about, first and foremost, kind of the core monitoring system and making that better. So on top of some of the new products, we have a robust road map of features for Dream Sock and Duo and the camera. Cam 2 is one of those, but you'll see some new features come out with the camera. We really believe that the monitor is the voice of baby that first year. And the data we collect puts us upstream compared to anything else in the nursery to actually drive intelligence and help really hold parents' hands that first year. So we believe for us parents are always trying to either access the sock or you're changing the diaper and there's some pain points with the current sleeper designs that we think we can solve that integrates with our system. You'll see more accessories coming out around the crib as well and the sock. And then the pregnancy band is something I'm just personally really passionate about. I think our first focus is building out this ecosystem from birth on and extending that relationship. But as we get the FDA clearance going from there to the kind of conception to kindergarten is really exciting. Telehealth was delayed a little bit with the FDA warning letter. We want to make sure we get those clearances before we start those integrations. But the predictive health side is something that's really interesting. We did the largest publication ever done on infant cardiac issues with the Cleveland Clinic, where we analyzed hundreds of millions of hours of infant biometrics. And the results, I think, are really promising in detecting some of these issues that go undetected at home. So we want to get more aggressive in telehealth as we get those clearances. And I think the other big opportunity is just that we spend $30 billion a year on Peace of Mind care for babies in the United States. That can be done at home. It can be a lot more convenient and efficient and just having a little bit of data can empower a physician remotely to help make decisions that are best for the baby.

Got it. And what's the latest with the FDA clearances?

We're working on 2 different products that we're seeking clearance on. The first one is called BabySat. It's a prescription device for babies who are sick or need medical monitoring that a doctor can prescribe. We've been working on that for a few years. We've done the majority of the safety and accuracy testing that we need to do. We've got a few more data points for gathering, and we expect to submit that this summer. I feel like we have a really, really clear understanding of what the FDA wants to see. And so we're going to put that submission in and hope that, that will be smooth. FDA right now making sure we understand everything that they want to see in that submission, and that will probably follow the BabySat at some point.

Great. So the Dream product was launched in 1Q. Can you talk about what you observed in the market during the first quarter? Was it with the, I guess, rebranding, was there anything where people couldn't find the links or maybe they were unsure? I guess, talk about the rollout, anything that you observed there?

Yes. I think the first thing I would mention is that when we launched the Dream Sock, it wasn't just about reacting to the warning letter. We took a fundamental look at what do parents need at home. I don't think the Smart Sock was ever intended to be diagnostic, right? Parents weren't sitting there with an oxygen tank ready to deliver therapy or some sort of medication. It was really just about heads-up parenting, knowing when your baby needs you and having a more proactive sleep monitor. So that's the position we took, and we designed it to be very much in the sleep lane for the everyday parent, with a healthy baby, dealing with those challenges that they have. And we did a lot of work with our customers to make sure that the features were features that they were really excited about, and we combined some of our Digital Sleep Coach into the platform. We're enhancing that experience. So that was first for us is like making sure we delivered a product that customers really wanted. We launched in January, the product wasn't perfect, but we saw the first 2 days of our launch were the highest online sales days we've ever had that were not promotional. We announced it at CES. So that was really positive. We got 100% commitment from our retailers to put the Dream Sock in their shelves, which a lot of credit to our sales team and just great partnerships. But it took the quarter to really get fully back online. It's like Target's reset date was March. It wasn't specific to Owlet. That's just when they were resetting. So Target wasn't sort of in-store until the end of March. Amazon, we had to work through getting back online with Amazon that took until about March. And then it's really about improving the rankings in these different channels, building our review program. And then registry is another big driver for the business. So we've got to load the registry back up. But all of that in, we did $21.5 million in revenue that first quarter. I think we were able to get back to 100% of our doors. We're seeing sell-through ramp, double digits' month-over-month. International is growing like crazy for us. Our Net Promoter Scores are back up to Smart Sock levels, which is fantastic. So that to me says the fundamental opportunity here is really clear, and we're just going to execute on continuing to drive sell-through and building out each of those channels again.

Let's talk about the competitive landscape for a little bit. So 2 or 3 years ago or maybe a year ago, the capital markets were flushed. There was a lot of companies, a lot of VC funding available to different start-ups. And I know that in my home, there's a bunch of different baby technologies. I guess you mentioned the camera, the crib, the pregnancy band, all these different things that creates an ecosystem around your product. As you think about the way that this industry evolves over the next 3 or 4 years, clearly, there are probably going to be some smaller competitors that just won't have the capital or the scale to exist. So how do you think about Owlet's position over sort of that intermediate time period, knowing that some of your competitors may not have access to capital, given what's going on?

Yes. Again, I think our focus has always been, first and foremost, with the customer. Like what is the customer saying? And your competition will come out in those customer interactions to say, well, we want this or that. And really innovating for the customer, I think, is the North Star. And Owlet, more than any other company in our space, I think, is customer obsessed and innovating for our customers. And that includes all the regulatory work we're doing. We see a huge need in bridging the gap between healthcare in the home and helping parents navigate when baby is sick and having more information. So I think that's kind of our North Star. But it's a very fragmented category. I think it often gets overlooked. Cameras in our category are just finally getting Wi-Fi. They are just these old outdated IP security cameras that are rebranded for baby and it's just sort of finally catching up. And I think Owlet stands out because we're ahead of the curve. We're actually pushing with artificial intelligence and wearables and biometrics and integration and ecosystem. And so it's a really amazing category to be in because there just isn't the same level of competition in some of these other categories. I am probably overstating that. But we see a lot of blue ocean to go build and create. And when we first went into retail, our retailers were surprised because you knock someone off a shelf, but they saw the overall category grow with Owlet. We're creating the category in our space, and we're going to continue to do that. I do think there's some interesting consolidation opportunities as we head into the kind of the near term. But it's just stay focused on the customer, build what they need and make sure that we're doing that. I think we're the most well-funded company in our space to go out and do this.

Yes. On that point, how do you think about some of these new products that you're looking to launch and the expenses around building out those products with managing the cash on the balance sheet. How do you think about capital allocation from that perspective?

Yes. I mean I think you have to go back to your priorities. Luckily, Owlet, prior to going public, we'd raised $48 million, we launched 4 generations of our product. We've launched 2 new products in the market with just $48 million. And we raised $130 million at the end of last year. We've built a team. We're investing heavily in 2022 for what we believe is really a fundamental change in 2023 with the launch of Crib, with the launch of some of the expansion in our ecosystem, which is going to extend the customer relationship. We're excited about that. We're excited about the medical clearances. And we just have to manage. We have to manage our costs with our top line growth, but our goal is to get back closer to that profitability mark while delivering some of these products to market.

And one question that I believe I asked you during our diligence process was around potential insurance reimbursement. And it didn't seem like it was sort of within scope at that point in time. I guess if you're able to get FDA clearance on some of these products, is it possible that you could go to an insurance company and say, hey, we're providing this product, it has value. Is this something that you could reimburse or at least co-insure for new patients? Is that on the radar or is that just not within scope?

No. Definitely, as I think we'll see that come in phases. The first phase is getting clearance on BabySat, which is prescription device, it's a 510K. We're demonstrating that it's equivalent to what's in the market. So there's existing insurance reimbursement codes for that kind of monitoring. So we're going to work on that. We're going to build out our remote patient monitoring platform with all the data that we have. There's opportunity there. And then we want to expand the use case of the technology, both with our over-the-counter clearance for the software features, but also for the BabySat. Now that our products are 100th the size, they're 10th the cost, they're wearable, they're wireless. There are so many advantages to the Owlet technology over the traditional hospital monitoring technology that we think the use case should expand as well now that the data is so much more convenient to gather. And so then we're going to work on expanded claims. But it's going to start with just BabySat will hopefully be eligible for the same reimbursement that the hospital monitoring is.

Got it. He's going I guess as you think about near-term priorities when it comes to things like gross margin and EBITDA margin. What are some of the biggest push-pull dynamics that impact those margins? And how are you trying to improve those?

I think first and foremost, we see a really big growth opportunity. And I know that the markets have kind of reacted to growth in early stage lately, but we still see a really big growth opportunity that we're going after. So that's first for us. There's been some short-term headwinds on margin, both from the warning letter and all the RTB and rework that we're doing. When you launch a new version of the product, your return rates are generally higher as people are switching to the new version. So there's a little bit of that going on that's making up some of the margin headwind. Then, there are some of the macro stuff that we're focused on. But I think we still want to be a growth story. We're investing in growth. We're investing in 2023 and beyond. And for us, it's more about managing cash and getting closer to breakeven with the different headwinds as we're growing. But top line, I think, is still our main focus. We want to grow the business and we want to grow our portfolio and our platform and make sure we have the cash to do that this year and into next year.

Focusing in on the top line. Obviously, the macro has changed a lot, but the consumer is relatively flush with cash and new parents are obviously, as you mentioned, really focused on spending for their child. Have you seen any impact from the macro environment? Any type of new parents pulling back on spending or are you just not seeing that?

We've looked at some of the trends and from what we understand, I don't think consumer spending has caught up yet to what's happening in the kind of public markets. Consumer spending is still fairly high. I do think that Owlet is addressing questions and concerns and needs that are lower on Maslow's hierarchy of needs for parents. And we've seen the sort of various times over the last 7 years. I think this market is one that parents still prioritize over many of the other choices that they have, whether they go on a trip or camping. But like remember, as a first time dad, I am looking at these 3 different air purifiers for the small apartment in New York and like which am I going to buy the $50 one or the $150, right? Like this is like the quality of error that my child is breathing and we didn't have a lot of money, but went with the better air purifier because we really care about our kids. And like you feel good when you prioritize that. So I think that like that adage of babies and puppies are recession-proof. I think there's a little bit of truth to that. We're still seeing great growth in Europe. The overall baby monitoring category was in line with expectations in Q1. So we're just again focused on solving real problems for parents and I think addressing those fundamental needs, I think, adds a little bit of insurance with some of the fluctuations in the market.

And then last question from me, just on pricing. There's been some cost pressures all across the board from a macro perspective. How do you think about pricing products? Are you taking price increases? What is your philosophy there?

I think Owlet has done a great job over the last 4 years. Our price has not changed in 4 years, but we've been more efficient with our cost while adding more value to the product. So that I think we've executed really well on. There are some macro headwinds, we're getting ready to launch some new versions of our product this summer. And so we're considering price changes as we're adding more feature functionality, data storage, things like that, that I think are an opportunity kind of a win-win for the business and the customer. But we haven't announced anything yet, and we're still considering that.

Got it. I see the double zero. So thank you so much for the time, Kurt.

Yes. Thank you. I appreciate it.