Charles Reed; Analyst; Cowen Group, Inc.
Good afternoon. Thank you for attending the outlet First Quarter 2024 earnings call. My name is Cameron, and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. And I would now like to pass the conference over to your host, Mike Cavanagh, Investor Relations. You may proceed.
Good afternoon, everyone, and thank you for joining us today for our baby care, Inc. First Quarter 2024 earnings call. We appreciate your time and interest in our Company earlier today, outlet Inc. released financial results for the quarter and full year ended March 30th, 2024, at least currently available on the Company's website at w. w. w. dot investors dot Alacare.com.
Our speakers for today's call are Kurt Workman, our Co-Founder and Chief Executive Officer, and Kate Skolnik, our Chief Financial Officer. Kurt will begin with an overview of our performance and key developments, followed by Kate, who will provide a detailed review of our financial results. Following their remarks, we'll open the call for your questions.
Before we get started, we would like to remind participants that today's discussion will contain forward-looking statements based on current expectations. These statements are only predictions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.
These risks and uncertainties include, but are not limited to those described in our most recent filings with the SEC and in the Risk Factors section of our annual report on Form 10 K for the fiscal year ended December 31st, 2024 please note that the Company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
With that, I would now like to turn the call over to our CEO, Kurt.
Thanks, Mike. And also joining us on today's call is Jonathan Harris, our President and Chief Revenue Officer, and good afternoon, everyone, and thank you for joining our earnings call today. As always, we appreciate your ongoing support of outlet for starting off the year with strong double-digit revenue and sell-through growth, gross margin expansion, significant operating cost savings and adjusted EBITDA improvement over last year.
In addition to our significant Q1 operational achievements, we met our business objectives in our health care business as we launched our go to market channels to include medical device sales, have now integrated our first telehealth partnerships with we'll on our Care.com, our recent announcement of TE. medical authorization in Europe.
In addition to the recent FDA clearances are a powerful endorsement of our technology, establishing ourselves as a leader in safe and effective health monitoring trends. There's robust and discernible momentum for our than the market. We believe this year is the turning point, propelling us to our vision of a safe and healthy journey for every baby and a sustainable growth company.
In 2024, we have three main growth objectives. First, with the first FDA-cleared monitor on the market now is the time to drive significant adoption of the Dream Sock. Second, with the approval of babies that we're opening medical distribution channels to directly serve the babies who need the convenience and reliability of the very most with insurance reimbursement.
Finally, we will be launching our new subscription service this year, leveraging our vast and growing data set to help guide parents through health and sleep challenges. They face when caring for their newborns.
I'll turn the time over to Jonathan Harris, our President and Chief Revenue Officer, to talk about the first two areas of focus for 2020 for accelerated adoption in our new medical sales channel.
Jonathan Harris
Thanks, Kurt. I've been fortunate enough to be a part of numerous hypergrowth companies such as GoPro, Jawbone and some of the key parallels I'm seeing with outlet are the passion for the brand by the core audience and a strong word of mouth sharing their stories with the global audience. And as Kurt just mentioned, we have some really strong momentum building, not only in the U.S. but across the globe. I'd like to start with adoption.
The response to the new FDA cleared DREAM stock here in the US has been outstanding. We've witnessed strong parental engagement with over 30 million organic views of our video content across TikTok and Facebook in the first quarter and over 1.3 million followers across our social channels.
The early response to the FDA clearance of Dream SoC has been strong with sell-through achieving over 60% growth compared to Q1 of 2023. Customer satisfaction supports this growth with NPS scores exceeding 70, and Dream Sock hitting an all-time high in this category. We achieved this market enthusiasm while maintaining strong growth trajectory, including 50% gross billings growth and 35% revenue growth over Q1 last year.
Here in the US, our partnerships with major retailers Target and Walmart are growing with expanded merchandising and placements to bring the outlet experience to life. Specifically, we are seeing sell-through at Target increase by over 31% year over year, and our baby list registries grew at over 64% versus the previous year, proving our messaging is resonating with expectant parents.
Owlet is still in the beginning stages of growth for Dream SoC with about 8% of the 3.6 million births every year going home with an Owlet Sock. We believe that just like car seats, breast pumps and strollers, every baby will have access to health sensing technology at home. I'm also very excited to announce that we recently obtained CE medical clearance clearing the way for outlet to increase reach in this significant European market where over 3.8 million babies are born every year. Oliver is extremely well positioned to take advantage of our EU clearance with key retail partnerships across the European market, U.K. and into Australia, where we are already seeing sell-through up significantly.
For example, Baby Bunting, Australia's largest baby retailer, we saw year-over-year sell-through increase of over 200% with Owlet product. Our partners are helping us share our story globally within their markets and in their own languages. We expect continued growth and momentum as we launch dream SoC as a medical device across these regions.
This exciting growth opportunity comes on the back of continuing operating discipline. In 2023, we honed our efficiency showing an impressive near 80% reduction in CPA, cost per acquisition, compared to prior periods, down to a lean $22. This efficiency extends throughout operations, improving our gross margin by 500 basis points over Q1 2023. We've also maintained disciplined control of our operating expenses holding steady at roughly $10 million per quarter, excluding stock-based compensation. All of this demonstrates our commitment to maximizing growth while moving decisively towards profitability.
Secondly, opening new medical channels. In a similar vein, the response of pediatricians to Alex babies that has also been overwhelmingly positive in the first three months, we've seen hundreds of pediatricians prescribing babies. The feedback we are receiving from doctor tells us a baby fat is a powerful new tool, which enables not only remote monitoring of babies under their care, but also informs more effective ongoing disease management of various conditions. We launched our partnership with AdaptHealth in Q1 to expand our distribution and medical channels, adapt serves as a cornerstone for successfully entering this vital market. We've integrated with all major insurance plans, including Aetna, Cigna, United and many of the Blue Cross networks, removing barriers and ensuring families can access dataset when they need it most.
We're also streamlining adoption through partnerships with providers like we are offering telehealth services directly through Alacare.com or prescription access. Parents can now seamlessly get a prescription and submit for reimbursement through the Owlet website with nearly 70% of private insurers integrated with babies at AdaptHealth then handles all the verification and fulfillment of the babies. That device is a national nationwide V. We've also begun educational kitchens to adapt a large sales force with relationships across over 100 hospitals. We expect this channel will take some time to mature, but we see this as a very large opportunity to offer the families with medical necessity, our innovative technology reimbursed through insurance in 2024. We'll continue to add new distribution partners to help us reach every baby as they leave the hospital.
I'll now turn it back over to Kurt to talk about our product development efforts. Subscription?
Kurt Workman
Thanks, Jonathan. And in addition to our channel expansion, we're also focused on driving additional value to our customers through a new subscription service. Our unparalleled dataset informed by capturing over a trillion baby heartbeats, provide deep insights into infant health and sleep, and we're unlocking its potential. Parents lose over 44 nights of sleep in the first year alone and there's over 92 million health care visits for kids zero to four years old.
When navigating these challenges, parents want to know what's normal and when they need to get professional support, parents want access to information that can help them better navigate when to visit the doctor and wind to stay home and they want the ability to seamlessly share that information to a doctor from the comfort of their home. They also want information that can help them personalized coaching for their baby health and sleep are the fundamental concerns of every parent.
Our subscription service will analyze this data to offer parents, personalized recommendations and support engineering work on the services progressing rapidly, and we expected beta launch this summer that parents can subscribe to for an additional monthly fee. We believe this subscription will address real pain points for families, creating a compelling and valuable monthly offering.
Apart from offering data and insights to parents during the initial year of their child's life. We firmly believe that our products and services can extend their value well into the toddler years and beyond. By focusing on core parenting pain points and health and sleep and leveraging our data to drive continued releases of software features.
We believe this can expand our TAM and significantly extend our LTV per customer. Alan is in a stronger position than ever for a growth-oriented company operating efficiently and bring innovative solutions that address the fundamental needs of parent as our landmark FDA clearances were established as a pioneer in infant health technology. This unique set of circumstances has the company poised for success, and we continue to deliver value for our families and stakeholders alike.
Thank you. We're excited to share this incredible journey with you. I'm now going to turn the time over to Kate for the financials.
Kathryn Scolnick
Thank you, Kurt, and thanks to everyone joining us today in Q1 2020 for our demonstrated strong financial performance.
I'll spend the next few minutes walking through our key financial metrics and providing some additional detail. Gross billings for the first quarter were approximately $18.4 million, up over 48% year over year. Product promotions and discounts were $2.2 million and returns and allowance reserves were $1.4 million, approximately 8% of gross billings and with in our average range.
Q1 net revenue, which includes promotion, discounts and returns and allowances of approximately $14.8 million, up over 37% year over year. Revenue growth was primarily driven by higher sales of Dream type products, reflecting an increase in consumer demand and sell-through as compared to the same period in the prior year.
Gross margin for the first quarter was approximately 44.4% from 38.7% margins in Q1 of last year. Gross margins increased year over year, primarily due to higher revenue and lower direct product and fulfillment costs. During the quarter, we experienced some cost of goods expense impact from elevated transportation costs related to the global disruptions in inventory routing, along with other companies seeking shipping alternatives. We're working to mitigate these factors.
Operating expenses in the first quarter were approximately $12.3 million, including stock-based compensation of $2.2 million, representing a 19% decrease in operating expenses year over year. Operating costs decreased year over year, primarily due to transaction costs and lower spend in G&A to support the business. Excluding stock-based compensation, Q1 operating expenses were approximately $10.1 million.
First quarter net income was approximately $3.3 million for the quarter compared to a net income loss of approximately $11.9 million in Q1 2023. Net income in the first quarter of 2024 was primarily driven by Owlet demonstrating stronger operating results over last year and a gain related to the company's common stock warrants outstanding of approximately $9.2 million from a decrease in the fair value of common stock warrants outstanding. This compared to a gain of approximately $1.9 million in the fair value of common stock warrants outstanding in the first quarter of 2023.
Adjusted EBITDA loss for the first quarter was approximately $3.1 million, improving approximately 46% from adjusted EBITDA loss of approximately $5.8 million in Q1 of last year.
Turning to the balance sheet, Q1 ended with approximately $18.4 million in cash and cash equivalents, including a $9 million financing announced in February. Being here with good financial flexibility to execute on our 2024 growth initiatives and the necessary working capital resources to meet the growing customer demand for FDA-cleared products, remaining focused on executing on our strategic initiatives to further strengthen our commercial and financial performance in 2024 and the year is off to a strong start.
Looking ahead, we will be refraining from providing specific quarterly revenue guidance. We are focused on executing on the core business activities in 2024 that will maximize the following initiatives supporting dream product commercialization globally and driving continual balance of sell-in and sell-through of consumer retail inventory.
From a sell-in linearity perspective, we anticipate a seasonal sell-in revenue increase from Q1 to Q2 for Mother's Day holiday promotions and Prime Day. Following Q2 sell-in to retailers for the November December holiday. Seasonal promotions usually take place from Q3, continuing to make strides in baby care commercialization with new DNA partnership, and we'll integration on all at owletcare.com. As a reminder, we anticipate that product revenue will be ramping in 2024 as we develop these partnerships, and we'll align for revenue impact in 2025. Focusing operationally on driving gross margins within our target range of 45% to 50% per unit volume, product mix and operational efficiencies and driving leverage in our business operations towards breakeven and sustainable profitability.
Through 2024, we are targeting operating expenses, excluding stock-based compensation between $10 million to $12 million per quarter.
With that, I'll turn the call over to the Q&A portion. Operator, please open up the call for questions.
Operator
(Operator Instructions) Charles Reed, TD Cowen.
Charles Reed
Yes, thanks. Thanks for taking the questions. I he wanted to talk about the quarter itself and obviously the gross billing growth, 50%, it sounds very strong. Just curious, obviously, we're kind of coming off sort of depressed levels if you were to compare that to levels prior to the FDA warning letter, how would that compare? I'm just trying to get a sense on are we back to pre warning letter levels yet?
Kurt Workman
Yes, we were getting really close. Charles, thanks for the question, and I'll let Kate kind of follow on with this. But yes, we're getting we're getting closer to that. I definitely wouldn't say Q1 is all the way back to at SMART stock levels, but we're seeing the demand, the demand there. We're seeing the growth, and we believe that we'll be able to surpass that. But we're not quite there yet.
Kathryn Scolnick
Yes, I agree on Kurt's comment, too. And yes, I'm great.
Charles Reed
Yeah. I think you're --?
Kurt Workman
(multiple speakers) We're doing a lot of work. I was going to say we're doing a lot of work to build the word of mouth this quarter is kind of we launched both devices the beginning of Q1 and have done a ton of work to build demand and word of mouth in the market. And we're seeing that really take hold. We're building the medical distribution channels. We're updating POPS all the retail channels for updating our registry programs. We're seeing registries grow. So all the all the time point in the right direction. And this is our first quarter kind of back in the market with now the FDA clearance.
Charles Reed
Got it. And then just maybe on the other businesses, it's good to hear sort of the positive commentary on Visa and physicians already looking to prescribe. Any you don't maybe talk a little bit about sort of your DME partnership with AdaptHealth here is that fully up and running, then our physicians able to get access to the product and given sort of that commentary, I know, Keith, you kind of mentioned that you still can expect really contribution more of a 2025 event and any reason why we couldn't see more of a benefit this year.
Jonathan Harris
(multiple speakers) So I'm going to say I'll take I'll take the I'll take the first part. Charles, thank you for the question. Yes, so we are fully up and running on. We launched with AdaptHealth at the beginning of Q1 and then we launched with our real integration, Artelon Telemedia and for prescriptions. So we are seeing those numbers increase dramatically.
In addition, we are beginning at the early stages of healthcare reimbursement insurance reimbursement, and we really see that as a driving factor. So adapt has been a fantastic partner, really helping us get up and running. But as you know, the medical community and health care takes a little bit longer than consumer. So we are definitely building that and we're driving it to be I'm conservative, but we're very optimistic about where we're going and the direction we're heading and the feedback we're hearing so far.
Charles Reed
Got it. And just to be clear, there's existing reimbursement codes for that even apply for the data center. You're not waiting for the creation of any new codes or --?
Jonathan Harris
No, no, that is totally correct. What we're doing now is just bringing on more insurance partners.
Charles Reed
And then Kate, can you remind me you talked about sort of promotion level. Obviously, you're going to have greater margins in Q2 for Mother's Day and ahead of Prime Day. Can you remind me you know, on a relative basis, I think you said for 1Q promotions were about $2.2 million. Does that double in 2Q? Like how should we think about sort of net revenue in 2Q relative to 1Q perhaps?
Kathryn Scolnick
Yes. Usually what we do is on as it relates to promotions, we take a reserve on just depending and usually it just depends on what we get that when we did the timing come in. As you know, what we've talked about, too, is that we have Mother's Day during that time from a sequential standpoint.
The big swing factor too, is that depending on when we load in her Prime Day, that can also have an impact for Q2. So our sequential growth there but the where we've averaged just kind of as it relates to that kind of Q1 or sorry, the difference between on the gross and the net on we've talked about that being kind of the average on the 8% difference and just in that walk. But Q1 to Q2 sequentially, I'd say that you will expect to see that we'll have probably back to a pretty healthy run rate from Q1 to Q2.
Charles Reed
For revenue?
Kathryn Scolnick
Yes, for gross sell.
Charles Reed
Okay. All right. And then if I could ask you, obviously, that was announced I think today, Masimo just also received FDA approval for an over-the-counter monitoring product. Maybe can you talk about sort of how a second product in the market would mean for you guys -- could that be actually a good thing because the category itself is growing maybe gives you something to compare yourself against some now maybe thoughts on that and then maybe just remind us sort of how your relationship with Target and Amazon work? And does is there any exclusivity with Target perhaps that would keep the multiple product off the shelves or any kind of color there would be helpful.
Kurt Workman
Yes. Thanks, Charles. I'll take the first part and then Jonathan, if you want to jump in at the end. I mean, this is a massive market. We mentioned in the call today, there's 3.6 million babies born every year in the US, 3.8 million babies born in Europe. Owlet has built this category. We created it. We're expanding it and we're leading it. We're in the market with two FDA-cleared products. We just announced our CE. Medmarc with the highest levels of brand awareness. We have an amazing products. We believe we have the most unique and valuable feature set trusted technology with the FDA clearance. We're clearly the leader in the category. We've also developed a large distribution footprint with channel partners. We expect the other health monitors in our category will need the same approvals. And Massimo coming in, I think is validation of the category for sure.
And we believe that eventually every baby will have access to health sensing technology like Alice, and that we will lead that category. So I think it's a good sign for us addressing any IP concerns where we see them. Most importantly, we're going to do what we've always done, which is leading the category and driving innovation for parents in terms of the distribution with the Target and Walmart and some of these other, our retailer has finished now and I'll let Scott. We've negotiated improved placements across all of these channels. We have the largest footprint and I think we have the strongest. We definitely have the strongest brand awareness and reputation. And when parents come in to buy a health monitor, they're thinking about outlet. And I think that's the most important thing we'll focus on.
Jonathan, any other comment?
Jonathan Harris
No, I would just expand on the relationship and the partnership with our major retailers, not only here in the US, but also internationally and really driving that relationship and the outlet brand and word of mouth amongst parents, not only the parents who are using our products, but them speaking to new parents coming in, get our new newly expecting parents a strong, strong driver for us.
Charles Reed
Great. And then maybe Kate, one last question for you here is I know you're not really giving a formal full year guidance, but maybe just to help folks think about sort of trajectories in terms of revenue as we move through the course of this year, sort of any high-level thoughts as you think about this year and then going forward and then obviously with the profitability I think last quarter and in our ex one-time items, you would have had a positive this quarter were still down a couple of million bucks. Maybe give us a sense for trajectory on profitability as well? That be helpful.
Kathryn Scolnick
Yeah. We'd like to see and we really feel like we're starting out this year with a very strong start. Obviously, with the two domestic clearances for both of our core products. And then we just announced the CE mark as well internationally, which is very important for our business. So I think those opportunities are very important to us, as Curt mentioned, and we're going to be layering in a new product with subscription. So I think we'd like to be ahead of well ahead of where we were last year. We had specific headwinds outside of on waiting for those clearances. We have specific headwinds. Last year was with some customers that we do not anticipate repeating this year as well.
So strong double digit growth in revenue is what we're striving for Q2 and Q3 will be very telling for those opportunities. But more importantly, the benefit of setting up baby fat with the partnerships that Jonathan mentioned and setting up subscription with the launch here this summer is what we see the momentum for 2025 beyond where we get to in 2024. So we're really excited about what that kind of puts us even further into going out in terms of the profitability opportunity, we're very focused on getting to the -- on the other side of the adjusted EBITDA side. We have maintained that kind of $10 million to $12 million on the actual operating spend, excluding the stock-based compensation. There's a little bit that we're spending on just run some very discrete items.
But other than that, we're really trying to control costs as it relates to employee costs and hiring and anything that's discretionary. So as we move into the opportunities around revenue, I think that's where the leverage of the model kicks in. So we're really trying to get there as we move through the year and that that will be the lever and getting into these higher growth, higher growth ranges for revenue.
Operator
Thank you, Charles. We will now hand the call back over to Mike Cavanaugh, who will share some questions received via e-mail.
Mike Cavanaugh
Thanks, operator. First question's for Kate. Can you please give us an update on your investor outreach efforts and how you're engaging investors in the Owlet stock?
Kathryn Scolnick
Yeah, sure. So as we've just been talking about, first and foremost is delivering strong operational results and communicating on the execution. We've been talking about our financial results, our growth objectives and accomplishments around our products around our channels, both domestically and internationally.
Our regulatory clearances and then growing that investor engagement. So we've been growing our presence, both virtually and in person. We've announced a number of conferences that we've got at in Q1 and Q2 here. So look for more opportunities as we head through the year.
Mike Cavanaugh
Great. Thanks, Kate. Next question for the team. Can you please discuss the growth plan in terms of new product pipeline, new channels and new marketing efforts?
Jonathan Harris
Yes, I'll take that one. This is Jonathan. I think we answered a lot of this, but I'm reiterating really focusing on the retailers that we have today on. We're in process of expanding our in-store merchandising throughout target and over 1,000 Walmart stores to really bring to life the outlet experience for parents and newly expecting parents. And additionally, we're working increasing our marketing efforts focused on sharing parent stories from our customers with new parents, showcasing how outlet help provide better parenting insights and peace of mind.
So really sharing those story, the storytelling of our existing parents and customers, our growing channels. We've talked a little bit about international, continuing to strengthen and grow international, which is critically important to us as well with our CE. clearance and medical sales channels. We're presently partnered with AdaptHealth national DME, and that will provide direct access to babies at Tom and in many cases, full insurance reimbursement for the baby SAP product to parents.
Lastly, subscription and subscription service of rent, lengthening our LTV offering data and insight to parents during the initial year of their child's life. We firmly believe that our products and service can extend their value well into the toddler years and beyond. So we really believe that we have a strong partnership on distribution platform here and internationally, we continue to expand medical channels and build out our subscription services.
Mike Cavanaugh
Thanks, Jonathan. And last question for the team. So can you tell us where you are in terms of working with health insurance providers to secure reimbursement for baby set?
Jonathan Harris
Yes, as we previously mentioned, through AdaptHealth with our baby set products. We've integrated with many major insurance plans, including Aetna, Cigna, United and many of the Blue Cross networks. So we're expanding on focus on expanding our DME and provider partnerships as well as integrating with Medicare and Medicaid, Tom, to expand the opportunity for every baby who needs outlets to have the ability to have.
Mike Cavanaugh
Thanks, Jonathan. That is that is all the questions we have. I think with that, we can turn it back over to Kurt Workman for final remarks.
Kurt Workman
Thanks, Mike. Thanks for joining us today. It's been an exciting journey for Alan, and we are grateful for the continued support. I'd like to take this opportunity to thank our talented team for their incredible dedication and hard work. Your commitment to our mission and drive for innovation is just inspiring. We've achieved significant milestones this quarter, demonstrating strong financial performance and continued growth as we move forward. We remain focused on executing our strategic initiatives to further strengthen our commercial and financial performance, and we're confident that our innovative solutions, unwavering commitment to quality and passionate team will continue to drive success for Owlet.
Thank you again for your trust and partnership.
Operator
That concludes the Owlets's first quarter 2024 earnings call. Thank you for your participation and enjoy the rest of your day.
