iPower Inc

NASDAQ:IPW

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss iPower's Financial Results for its Fiscal Second Quarter 2024 Ended December 31, 2023.

Joining us are iPower's Chairman and CEO, Mr. Lawrence Tan; and the company's CFO, Mr. Kevin Vassily. Mr. Vassily, please go ahead.

[Kevin Dean Vassily, executive]

Thank you, operator, and good afternoon, everyone. By now, everyone should have access to our fiscal second quarter 2024 earnings press release, which was issued earlier today at approximately 4:05 p.m. Eastern Time. The release is available in the Investor Relations section of our website at meetipower.com. This call will also be available for webcast replay on our website. Following our prepared remarks, we'll open the call for your questions.

Before I introduce Lawrence, I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the state of the economy and other future conditions.

Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes and circumstances that are difficult to predict and many of which are outside our control. Our actual results and financial condition may differ materially from those indicated in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC, including our annual report on Form 10-K, which was filed with the SEC on September 15, 2023.

Do not place undue reliance on any forward-looking statements, which are being made only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements.

With that, I would like to now turn the call over to iPower's Chairman and CEO, Mr. Lawrence Tan. Lawrence?

[Chenlong Tan, executive]

Thank you, Kevin, and good afternoon, everyone. In our fiscal second quarter, we continue to expand gross margin, drive down operating costs and generated another period of positive cash flow from operations. We also gained further traction in our SuperSuite supply chain business, which represents an exciting opportunity for us as we continue to work through a robust pipeline of prospects with compelling product portfolios.

Due to the improvement in the supply chain environment, our largest channel partner, has progressively tightened their inventory management as shipping lead times have become more favorable. Although our order volumes were impacted for the quarter, we believe this channel partner's inventory is now at the preferred level, and we are well equipped to meet the demand with the high-quality marketing products that our customers expect.

Over the past several quarters, we have placed a strong emphasis on diversifying revenue, showcased by the launch of our SuperSuite supply chain offerings. We have also created a strong brand presence on social channel -- commerce channel like TikTok shop, where we are an approved seller for both short-form videos and live shopping. Although the sales channel is now in its infancy, the early results are compelling, and we will continue to invest in the channel as it grows both in the U.S. and abroad.

As I mentioned earlier, we are building positive momentum in our SuperSuite business, which is growing at a strong clip. The acceleration of revenue alongside a growing pipeline of prospects, reflects the strength of our superior supply chain, warehousing and merchandising expertise. We are optimistic about this area of our business and hope to have a few more partners in the coming quarters.

In addition to evaluating new partners for our SuperSuite business, we have also continued to pursue additional sales channel in the U.S. to expand our reach, diversify our client base and explore omnichannel opportunities. For example, we currently have relationships with Home Depot and Lowe's, allowing us to sell product through their captive e-commerce sites. Although we have initiated the -- with a small subset of our categories, we believe our portfolio is well aligned with Lowe's and Home Depot's in-store and online customer base. We are optimistic that this partnership will bring future omnichannel opportunities, specifically in brick-and-mortar. We look forward to deepening our relationship with Lowe's, Home Depot and other current partners as well as expanding into new channels across the United States.

Turning to OpEx. We continue to drive material savings in our selling and fulfillment operations. We no longer bear the burden of additional warehousing expenses as we have sold through the bulk of our excess inventory. With the normalization of supply chain, we can run our business with lower levels of inventory, specifically due to faster overseas shipping lead times. As of December 31, we have brought down inventory level by 23% compared to June 30, 2023. We have also begun to outsource our warehouse staffing to a third party, lowering our production overhead we will -- we expect to realize cost savings from this initiative over the medium to long run.

Looking ahead, we will continue to evaluate each segment of our business to ensure our cost structure is both lean and position for future growth. We are seeing early signs of normalized order volume with our largest channel partner and look forward to continue providing them with our high-quality products. These actions, coupled with the acceleration of our SuperSuite business, will enable us to deliver on our goals with the aim of returning to profitability in 2024.

I'll now turn the call over to our CFO, Kevin Vassily, and take you through our financial results in more detail. Kevin?

[Kevin Dean Vassily, executive]

Thanks, Lawrence. Unless reference otherwise, all variants commentary is in comparison to the prior quarter last year, so let me dive into the fiscal Q2 results. Total revenue was $16.8 million compared to $19.3 million in the prior period last year. The decrease was driven primarily by lower promotional activity as compared to last year, given our normalized inventory level right now as well as lower order volumes from our largest channel partner who is more tightly managing inventory levels due to the improved supply chain environment and shorter lead times to receive product. This was partially offset by growth in our SuperSuite supply chain business.

Gross profit in the fiscal quarter of 2024 was $7.3 million compared to $8 million in the same quarter of fiscal 2023. As a percentage of revenue, gross margin increased 220 basis points to 43.6% compared to 41.4% in the year-ago period. The increase in gross margin was primarily driven by favorable product mix as we have worked through the bulk of our higher-priced inventory.

Total operating expenses for fiscal Q2 improved 18% to $9.9 million compared to $12.1 million for the same period in fiscal 2023. The decrease was primarily driven by lower selling fulfillment and marketing expenses. As Lawrence mentioned earlier, we've reduced our warehousing space now that we can keep lower levels of inventory on hand given the improved supply chain environment.

Net loss attributable to iPower in the fiscal second quarter improved 42% to $1.9 million or $0.06 per share loss compared to a net loss of $3.3 million or $0.11 per share loss for the same period in fiscal 2023. The improvement in net loss was driven primarily by the higher gross margin and lower operating expenses.

Moving to the balance sheet. Cash and cash equivalents were $1.5 million as of December 31, 2023, compared to $3.7 million in June of 2023. Total debt stood at $5 million compared to $11.8 million as of June 30, 2023. The decrease was driven by our continued efforts to pay down debt, resulted in a 56% reduction in net debt to $3.6 million compared to $8.1 million as of June 30, 2023. And for both fiscal Q2 and year-to-date, we continue to generate positive cash flow from operations.

As Lawrence mentioned above, the work we put in place to reduce our supply of high-cost inventory and optimize our cost structures to -- sorry, continues to bear fruit as we have achieved another period of 40% plus gross margins and some meaningful OpEx savings. In addition, we reduced total debt by approximately $2 million compared to the last quarter, demonstrating our commitment to strengthening the balance sheet where we can. Between these efforts, we've built a foundation to continue to deliver on our growth objectives and profitability objectives in 2024.

This concludes our prepared remarks, and we'll now open it up for questions. Operator?

[Operator]

[Operator Instructions] Our first question will come from the line of Scott Fortune from ROTH.

[Scott Fortune, analyst]

You mentioned lower promotional activity and tightened inventory by your largest channel partner leading to kind of the lower order volumes here. Did seasonality play into this? And where are we kind of in the progression of reaching normalized levels? We just want to get a sense of how you're viewing the overall health of the consumer and the sustainable trends kind of in your non hydroponic category. And a follow-up on that and looking at the kind of do-it-yourself hydroponics side of the business. Has that stabilized? Or is sales still decreasing in that segment with the nonhydroponic sales as a percentage increasing the overall mix? And just kind of follow up on -- are you investing in the hydroponic space still? And then kind of further updates on the big partnership -- big box partnerships, you mentioned Lowe's and Home Depot and kind of meaningfully moving that forward? Sorry, a lot there, but just kind of get a sense for this quarter's revenue and kind of normalization where we can expect that kind of moving forward here?

[Kevin Dean Vassily, executive]

Sure. Right. Yes. Go ahead, Lawrence, take the first, and then I'd like to add in after.

[Chenlong Tan, executive]

Okay. So we start -- the first -- to answer your question, I think the inventory level from our channel partner now normalized. I think in the level where they will start to ordering on a pre-pandemic paces. So we have seen inventories being piled up. We have seen the reduction inventory efforts. And now I believe the [ sample ] quarter finally to reduce the level to a pretty normalized level that we prefer to see. So that's pretty healthy.

The second question for hydroponics. The hydroponics overall market has been pretty stable for us over the past couple of years. I don't see the sales drop, but I don't think it will substantially expand in the near future. It will more go with the overall bigger market segment. By saying that during the pandemic, we have captured some of the market share even though the whole market segment has gone down and have been able to keep the sales in dollar amount. But as the organization grow, the percentage of hydroponics will keep decreasing as it does not grow as fast as other parts of the organization. Is that -- does that answer your question?

[Scott Fortune, analyst]

Yes. Just a follow-up on the big box partnerships you mentioned. Is that going to become more meaningful here in 2024? How do you view that?

[Chenlong Tan, executive]

It's still in the early days. We're making slow progress, but steady. That was the right direction. We have build relationships and we have got vendor IDs, and we've been working with multiple vendors through the online platform first. Should the online sales take off, and it will naturally introduce our product into their preferred buying for their off-line sales channel, meaning going to the store. So it's work in progress compared to 12 months ago, where we had nothing. Now we have sales, we have channels. It's just -- I think it's making good progress.

[Kevin Dean Vassily, executive]

Scott, it's Kevin. Just real quickly on the -- your first question as it pertains to seasonality, too. So I think we've talked about this before and -- with you. The December quarter has historically been our weakest quarter seasonally. The reference to promotional activity was with reference to last year's December quarter. If you recall, we entered that December quarter pretty close to our peak in inventory levels. And we were pretty aggressive at promoting portions of that product catalog in an effort to bring that inventory level down. So the December quarter last year probably was a little stronger than it would have otherwise been had we not been so promotional. Now that our inventory levels are back to what we think is a healthy level, we made the decision in this quarter not to promote because we are trying to make progress getting back to that breakeven and then to the kind of profitability threshold. And so I think that -- those were the 2 drivers as it pertains to kind of what happened last year and kind of the seasonality of the business.

[Scott Fortune, analyst]

I appreciate that color. That's helpful. And then shifting gears kind of, obviously, last year, you rolled out the business services offering and you brought on 2 partners. But can you provide more of an update on the SuperSuite supply chain growth and the partnerships kind of moving forward here? I believe last quarter, you were generating about $600,000 a month or about $7 million annualized in revenue run rate. Just a little additional color on the next steps or the traction of offering by adding new partnerships and what categories are really taking more interest from that side of the business here?

[Kevin Dean Vassily, executive]

Yes. Lawrence, why don't you take that as it pertains to kind of who we're looking at and kind of what we think could happen over the next couple of quarters.

[Chenlong Tan, executive]

Yes. That part of the business has been growing. It's been growing substantially quarter-over-quarter. And for the existing partners, we've been working well -- particularly well with a lot of them. And I believe we'll expand our portfolio with more consumer electronics as well as some other consumer goods, including food and beverage. We have signed more supply chain in the food and beverage part. That part -- I think SuperSuite is working well to -- as planned.

[Scott Fortune, analyst]

Got it. Okay. And last one for me, just on the operational side. Obviously, you're up against higher cost inventory, higher inflation costs -- freight, you mentioned, warehousing. But that seems to all be cleared now. Are we going to see kind of steadily improvement in margins, just kind of provide an update on the gross margin drivers here? And then kind of the cadence throughout '24. But more importantly, as you bring on higher service margins there, the improvement towards returning to profitability. And any color or view on the timing of profitability throughout '24 here?

[Kevin Dean Vassily, executive]

Sure. Let me take that. So we don't give specific guidance. I think we're still committed to the goal of getting to profitability in 2024. I think the things that we've put in place to help take expense out where we can, aren't short-term fixes, but we're making progress. On one front, I'll talk about the cost of product. We've put in place a number of initiatives with some of our key contract manufacturing partners to help lower the cost of goods sold for us, which will, over time, provide us with even healthier gross margins. I think that's one of the areas where given our experience with the supply chain and our long relationships there, our ability to improve on that front is a real one, one.

And secondly, we've never been either the lowest cost provider or the highest premium provider. We've been -- we like to call kind of the sweet spot of value for customers, which means our prices do have some room to go up if we choose to selectively do that. So there are some areas where we could pursue and will pursue very small price increases that will help also boost that gross margin line. So while there's going to be variability from quarter-to-quarter, we still feel good about the idea that we can get -- continue to push gross margins upward from here. So that's one area.

Secondly, we are working on a number of other initiatives on the OpEx side that we think can help bring costs down as well. One that I think we can talk about is we've engaged with another kind of logistics/shipping partner, where we feel like we can take meaningful cost out of the cost of shipping product out to customers that we just kind of [ being ] the contract over the last -- probably in the last 2 months. And so as the balance of this calendar year rolls out, some of that cost savings will roll through as well. So I think the foundation has been laid and -- to continue to improve. But I mean, you hit on a pretty important point. Some of the hard work is in the rearview mirror for us now.

We have reduced that inventory. Our inventory now sits at a more normalized level. Aside from some pockets, we haven't completely cleared all of it out, but we can believe some of the rest of that out in a way that won't be hugely detrimental. And then just the cost of operating with that lower inventory accrues benefits to us as well. So I still think that we see profitability kind of on the horizon. The question will be how quickly we get to that horizon, but it's there. So we're optimistic.

[Operator]

And our next question will come from the line of Thierry Wuilloud from Water Tower Research.

[Shawn Severson, analyst]

This is Shawn Severson in for Thierry. Just had a question about the move into kind of the bricks-and-mortar side. And when you're talking about going from online to in retail. What are some of the criteria that you're looking at over the near term? I guess, how would that rollout look? And are there certain metrics or decisions that need to be made by the retailers or what's the framework for a rollout there?

[Chenlong Tan, executive]

Once the -- it's pretty much based on 2 things. One is the sales on particular SKUs. Now once the sales become a certain volume -- the retailer will have the data to support their decision-making. Now secondly is the product road map, how well, the line of products that we can bring in, in the future as well, not just the ones that lead our way into the store. So the first -- we are working on the first step and the second step at the same time, where once the sales volume has achieved a certain level, we will get more attention than potentially some SKUs get opportunities into the store.

[Shawn Severson, analyst]

Now would this be just for a limited number of stores initially? Or is this kind of going to be looking across a region or a small region or large region? How would they address the size of rollout?

[Chenlong Tan, executive]

It depends on specific retailers and the category manager. Usually, I think it will be a trial to a certain number of stores. And then depends on whether the product is a national product, it will go to all the stores.

[Shawn Severson, analyst]

Great. And my last question is, any update on international in the quarter?

[Chenlong Tan, executive]

There's nothing particular. I think it's similar to what before. There's not much that I can mention here.

[Operator]

Looks like we have a follow-up from Scott Fortune from ROTH. And there are no further questions in the queue. I'll turn it back to Kevin for any closing remarks.

[Kevin Dean Vassily, executive]

Okay. I just want to say thank you again to everyone for joining us today. We look forward to speaking with you again next quarter or at an upcoming conference. Thanks again. Bye.

[Chenlong Tan, executive]

Thank you.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.