iPower - Q3 2024

Transcript

Operator (participant)

Good afternoon, everyone, and thank you for participating in today's conference call to discuss iPower's Financial Results for its Fiscal Q3, 2024, ended 31 March 2024. Joining us today are iPower's Chairman and CEO, Mr. Lawrence Tan, and the company's CFO, Mr. Kevin Vassily. Mr. Vassily, please go ahead.

Kevin Vassily (CFO)

Thank you, operator, and good afternoon, everyone. By now, you should all have access to our Fiscal Q3 2024 Earnings Press Release, which was issued earlier today at approximately 4:05PM Eastern Time. The release is available in the investor relations section of our website at ipower.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 in circumstances that are difficult to predict, many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in these forward-looking statements. Our presentation today also includes certain non-GAAP financial measures, including adjusted net income and EPS, as supplemental measures of performance of our business. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation tables and other important information in the earnings press release and Form 8-K, which we furnished to the SEC this afternoon.

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 15 September 2023. Do not place undue reliance on any forward-looking statements which are being made only as of the date of this call. Except, except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to forward-looking statements. With that, I would now like to turn the call over to iPower's Chairman and CEO, Mr. Lawrence Tan. Lawrence?

Lawrence Tan (Chairman and CEO)

Thank you, Kevin, and good afternoon, everyone. We achieved the strong financial results in our fiscal Q3 as we generated double-digit revenue growth, record gross margins, and improved operating leverage, resulting in our return to profitability. We are also gaining momentum in our SuperSuite supply chain business, which contributed to our top-line growth in the quarter and now accounts for approximately 10% of the total revenue. In fiscal Q3, our largest channel partner returned to a normalized inventory position and purchasing cycle, which led to stronger order volumes during the quarter. We are pleased with the demand from our largest channel partner and will ensure our product catalog is stocked with the high-quality offerings that our customers expect. Our SuperSuite business, as we have often stated, provides us with valuable insights that we can utilize to enhance our internal capabilities.

The acceleration of revenue reflects the value we provide through our superior supply chain, fulfillment, and merchandising expertise. We will continue to invest in this new business as we work through our robust pipeline of prospective partnerships and believe this business will continue to take a greater share of revenue mix going forward. We have always placed a strong emphasis on diversifying revenue, demonstrated by the launch of SuperSuite last fiscal year. We have also deepened our online presence with social e-commerce platforms like TikTok Shop, where we continue to see solid growth. In April, we expanded our sales channels by launching on Temu and have seen promising early results in the kitchen and pad categories. Over the last couple of years, we have purposely shifted our focus from hydroponics to prioritize our core competence as a data-driven consumer products and services company.

More recently, we've begun to wind down our legacy commercial hydroponics business, where we sold directly to local commercial distributors. We are working through the remaining inventory now and expect to sunset this channel altogether in the coming months. Turning to OpEx, we continue to benefit from our internal initiatives to drive savings in our selling and fulfillment operations. With a healthier supply chain environment, we are no longer required to hold high levels of inventory as we have returned to normalized lead times. We have also sold through most of our high-cost inventory, enabling us to eliminate short-term warehousing costs and improve margins. As of 31 March we further reduced our inventory level by 25% compared to 31 December 2023. We are also in the early stage of benefiting from third-party warehouse staffing and expect to realize additional savings in the future.

Looking ahead, we are well positioned to close our fiscal 2024 on a strong footing between the strong demand from our largest channel partner, accelerating growth in SuperSuite, and expansion into new e-commerce channels such as Tmall. I will now turn the call over to our CFO, Kevin Vassily, to take you through our financial results in more detail. Kevin?

Kevin Vassily (CFO)

Thank you, Lawrence. Unless referenced otherwise, all variance commentary is in comparison to the prior year quarter. So let me dive into our fiscal Q3 results. Total revenue increased 15% to $23.3 million, compared to $20.2 million. The increase was primarily driven by greater product sales to our largest channel partner, in addition to growth in our SuperSuite supply chain offerings. Gross profit in the third fiscal quarter of 2024 increased 41% to $10.9 million, compared to $7.8 million in the same quarter of fiscal 2023. As a percentage of revenue, gross margin increased 850 basis points to a record 47%, compared to 38.5% in the year ago quarter.

The increase in gross margin was primarily driven by improved pricing through our key supplier negotiations, as well as favorable product mix. Total operating expenses for fiscal Q3 were $9.3 million, compared to $9.6 million for the same period in fiscal 2023. As a percentage of revenue, operating expenses improved 740 basis points to 40.1%, compared to 47.5% in the year ago period, reflecting the operating leverage in our business, as well as lower selling and fulfillment costs resulting from, among other things, some vendor credits. Net income attributable to iPower in the fiscal Q3 improved to $1 million, or $0.03 per share, compared to a net loss of $1.5 million, or a loss of $0.05 per share for the same period in fiscal 2023.

Adjusted Net Income attributable to iPower, which excludes legal fees for arbitration, net of tax impact, improved to $1.6 million, or $0.05 per share, compared to an Adjusted Net Loss of $1.4 million, or a loss of $0.05 per share in the same period in 2023. Moving to the balance sheet, cash and cash equivalents were $2.7 million as of 31 March 2024, compared to $3.7 million at 30 June 2023. The decrease was driven by our continued efforts to pay down debt, which resulted in a 59% reduction in net debt to $3.3 million, compared to $8.1 million of net debt as of 30 June 2023.

Cash flow from operations was essentially neutral in fiscal Q3, largely driven by an increase in our direct import business with Amazon, which carries both higher operating margins, but slightly longer payment terms. To summarize, we are beginning to realize the benefits of less high-cost inventory and internal optimization efforts, which drove our record gross margin and improved operating leverage for the quarter. We also continued to strengthen our balance sheet by reducing net debt by nearly 60% during the quarter, compared to 30 June 2023. And as Lawrence touched on, we've got multiple initiatives in place to drive further growth, as we look to fiscal Q4 and the year ahead. This concludes our prepared remarks, and we'll now open it up for questions. Operator?

Operator (participant)

If you'd like to ask a question at this time, please press star one one on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question will come from the line of Scott Fortune with Roth MKM.

Scott Fortune (Managing Director and Senior Research Analyst)

Yes, good afternoon, and thanks for the questions. Congratulations on the strong quarter, and it seems that a lot's driven from the strong order from, obviously, you've called out the largest channel partner, as they return to more of a normalized inventory kind of purchasing cycle. But moving forward, how should we look at this kind of going forward? Can we kind of take historical kind of growth from years past as far as going forward with this, moving forward with him, or... And just kind of call out the products that or the kind of industries that's driving a lot of this growth through that large channel partner? Because it seems like the consumer demand remains strong for your products, so what is your partner telling you as you look out for the rest of the year with him?

Kevin Vassily (CFO)

Lawrence, why don't you take the second part of the question, the products and kind of the overall demand, and I can talk a little bit about kind of what this means kind of going forward.

Lawrence Tan (Chairman and CEO)

Sure, sure. So, the largest channel partners, they historically has been, in the last couple of years, being at a similar position as us, like going through the high-cost overstock inventory. Now, we moved quite a bit faster than the industry. Now, our partner seems to work better than the rest of the, that, those comparable larger partner channels. So what this means is that the, what I think is that going down the road, it has been returning to a steady, normal, healthy replenish mode. As for our product mix, since our products are focusing on value, of the commercial, I'm sorry, consumer products, those products are pretty resilient to economical change.

What I think is that it will, the demand will continue to grow. So even during the years where we, iPower has been trying to recover from the overstocking, from the high cost inventory, what we see is the demand is still there, is demand is still grow. And I believe this is gonna be a trend going forward. As we introduce the SuperSuite, we will add on more of these supply chain partners to provide good value product to the consumers in our network. I believe going down the road, we have pretty good future to catch on.

Kevin Vassily (CFO)

Then, Scott, just on kind of how to think about kind of this quarter versus, you know, prior quarters. I'll remind everyone, we don't give specific guidance. But what I'll say is, anyway, I think we talked about this a little bit on the last quarter. The kind of order rates from our largest channel partner in the December quarter were really a reflection and probably a larger than we anticipated work on kind of their own inventory management. And we did expect a bit of a rebound in this quarter, and we saw it.

So I think, you know, some combination of historical kind of quarterly trends, with, you know, some caution on our part, because we wanna make sure that, you know, we're not seeing kind of a bit of a bullwhip from that channel partner where, you know, they may have, you know, potentially brought a little bit of extra demand into this current quarter. But I think what Lawrence Tan touched on is correct. We have multiple additional opportunities to work with, partners on the SuperSuite side, all of which, we can use that large channel partner as a sales avenue for them. So, you know, still a little early to say in this quarter, but we're very optimistic about where we're headed. So hopefully, that's enough for you to, you know, kind of take to your model and, you know, we can talk, you know, a little bit more if you've got other questions.

Scott Fortune (Managing Director and Senior Research Analyst)

Yeah, that's helpful. I appreciate that color. Just following up with that, the SuperSuite of services that now account for what? 10% of the business. But are you expanding your existing partners there, or will you, a lot of this came from the new kind of food industry partner that you're bringing on board. Just kind of step us through kind of the partnerships you have and kind of the growth from a capacity side and extent side to kind of you have enough room here without adding too much more on the extent side to continue to add and service new partners here, which will continue to drive the growth margin side. Just kind of remind us, gross margins on the service side business, and is that ticking up or kind of the overall gross margins as it helps for that gross margin improvement? Just kind of more color on the service suite would be helpful.

Kevin Vassily (CFO)

All right, so there were a lot of questions there. Let me try to do a couple of them one by one. I think we've said in the past that early on, as we bring new partners on, our gross margins, in particular, as we're using as our entry with a new partner, the sales and fulfillment service offering, those gross margins are gonna be at or even slightly below our normalized gross margins. But as we grow those individual partners, I think we can get better than our kind of historical gross margin average. And I think, you know, we were seeing some of that in this quarter. I'll let Lawrence talk a little bit about some of the kind of opportunities that we have.

Most of what we're doing in the quarter was growing our current partners. And so I think, you know, when I said, you know, as these partners mature with us, we can see better than corporate average gross margins. I think it's important also to point out that, over the last year, in addition to working hard to bring down inventory, remove the additional costs that we had, both from kind of the high freight burden, but as well as kind of excess costs associated with temporary warehouse space.

We were working with quite a few of our suppliers at ways of taking additional costs out of the products that were being manufactured, such that we can then bring to market products that were carrying better gross margins. We're seeing the fruit of that as well. So I think, you know, we've been working hard on both the cost of goods sold as well as operating costs, and I think, you know, we're, you know, we're very pleased so far as to where we are, and we, you know, we think we still have some work to do going forward.

I will remind, and I think we said this on the last call, too, there still is some inventory that we have, particularly in our fan business, which is strongest in the summer months, that carry higher freight cost burdens than, you know, products that we're selling or buying now in that category. So we're gonna have to bleed that through. It's not a ton, and we don't think it will materially impact gross margin. But we're not selling any of that in the January to March period, as you might expect. People aren't buying a whole lot of fans when it's cold outside. Lawrence, maybe you could touch on just the kind of potential companies that we might be working with as we bring additional partners on in the SuperSuite business.

Lawrence Tan (Chairman and CEO)

Sure, sure. So, the SuperSuite really come out of the internal capabilities we'll be developing as a retailer online. So with the logistics ability, the software and technology and business intelligence, where we develop both internally and working with external technology suppliers, enabled us to become a effective sales and merchandising platform and fulfillment platform for supply chain brand. Now, we started to get inquiries from these partners in a couple years, starting a couple years ago, about working together and marketing and merchandising their product.

So the, where the SuperSuite, that's where the SuperSuite comes from, and the few categories we've been already working on, including electronics, and home products, we'll probably share with more details in the coming short time to see to give more details to the market. Now, what I, what the framework has been working on by internally for a while, and I do have quite a bit of down the road in the pipeline, where we are actively working on, and hopefully start to see good results going down the road. As for the gross margin, it actually depends on the product categories.

Our in-house products will continue to grow. It will still drive the business substantially for a period of time until the SuperSuite starts to explode. But the SuperSuite side can grow much, much faster than our in-house parts of the business. So that's why we have a pretty good. We feel like that part might start to see much, much better growth rate than the in-house part. Now, as for the gross margin, in as a growth faster, it may carry, it may not carry as high as the gross margin of the in-house product, but the revenue side gonna be a lot higher. That's what I tend to see down the road. Yeah.

Scott Fortune (Managing Director and Senior Research Analyst)

That's helpful. And Lawrence, real quick, just to follow up on that, you know, you've had Super Suite in play here for a little while. Are you seeing the pipeline looking to accelerate? Are you having more discussions kind of further down the road on bringing on new clients to the Super Suite? Just kind of help us understand kind of the expansion opportunity here near term. Obviously, long term is a pretty good opportunity, but kind of near term, what are you seeing from those discussions?

Lawrence Tan (Chairman and CEO)

In the near term, I'm working with both the brands and supply chain partner to bring on board, as well as key strategic partnerships to bring on board. I tend to think that SuperSuite is kind of like open platform, where we can bring key partners into this platform and where they can bring more supply chain and brands into the platform. So that's what I see down the road, and I've been working on it for a while. Yeah.

Scott Fortune (Managing Director and Senior Research Analyst)

I appreciate the color. I'll jump back to the queue. Thanks.

Operator (participant)

Our next question comes from the line of Thierry Wuilloud with Water Tower Research.

Thierry Wuilloud (Managing Director)

Yeah, Lawrence, Kevin, good afternoon. Congratulations on the quarter. You covered quite a bit of ground, but maybe just a few questions. First, on the gross margin, is cost input like a big factor? You get better pricing on or lower cost on the input for your product. Is that what I'm reading?

Lawrence Tan (Chairman and CEO)

... Kevin do you want to take this?

Kevin Vassily (CFO)

I didn't hear the question.

Thierry Wuilloud (Managing Director)

There's two reasons for improved margin, favorable product mix, and then improved pricing. Does it mean the input costs have been going down or have been better than expected?

Kevin Vassily (CFO)

Ah, okay. Yeah, I heard, I heard that part now. Do you want me to take it, Lawrence, or do you, do you want I take it?

Lawrence Tan (Chairman and CEO)

You can take it. It's fine.

Kevin Vassily (CFO)

Yeah, yeah, yeah. So, it's both. Every quarter, you know, I think I've, I try to emphasize this. We, given the size of our catalog now, as well, including the SuperSuite partners that are utilizing our sales channel, there is a distribution of margins. They're not all at obviously sitting at, you know, 43%. And so, you know, the mix skewed towards our higher market products for sure. This other thing that's been, and I think I referenced this in my answer to Scott, was that there, you know, there have been a number of initiatives underway for the last year, with some of our largest contract manufacturing partners to take costs out of the products that they're manufacturing for us. That allows us to bring products to market with a lower cost of goods sold, and those efforts are starting to show up. So it's both, Thierry.

Thierry Wuilloud (Managing Director)

Okay. In terms of sales channel, you mentioned you started Temu in April, so obviously that was not in that quarter's result. But can you give us a sense of which channel are developing the fastest besides Amazon? And if you're going to have any meaningful, maybe physical channel also?

Kevin Vassily (CFO)

Lawrence, you want to take that?

Lawrence Tan (Chairman and CEO)

Yeah, sure. So, like, Temu is a very interesting channel. Now, they approached us, and we are working with them since April. So far, we've been seeing pretty good results early on, and the platform is pretty value-centric. So it's more like very, very similar to Amazon, where it's trying to bring the best value to the consumer, and that fits our category and our catalog pretty well. So I think we're gonna do well there, on this channel. So far, I think this channel is growing pretty fast. On the social media side, on TikTok Shop, we've been seeing a steady growth, and we've been working pretty well on there.

But we all know that the uncertainty of TikTok Shop going down the road is uncertain. But fortunately, it's not a big part of our business so far, so we'll play and see. We already have the infrastructure developed, we already have a methodology, and so far it's doing well, so we'll see. We've also been working on HomeDepot.com, Lowes.com, Target.com, where those have pretty different model working with these platforms than the Amazon. Give a comparison, where we work with buyers, and we work with the product selections, and we've been getting more product being improved. We're still working on that now. But a good thing about that is once we do well on the dot-com, we may get an opportunity to entering the physical stores, if that's what you've been asking questions.

Thierry Wuilloud (Managing Director)

Great. Okay, then maybe one last question. You mentioned that the SuperSuite business is helping you enhance your internal capabilities, and I'm kind of curious how that's working or what that means.

Lawrence Tan (Chairman and CEO)

Okay. So along the way, where we working with our partners on the SuperSuite platform, we also gaining more knowledges on industry different categories, and we're also enhancing our abilities of data software as well as fulfillment. So we think of that as an open platform where we not only just work with supply chain partners, we're also working with logistics partners as well, and other technology partners. So along the way, well, where we working with everyone, we've been getting better and better enhanced capabilities, and we absorb and working with all these partners. So not only we services people, we also gain knowledge and expertise and other strengths along the way.

Thierry Wuilloud (Managing Director)

Great. Thank you, guys.

Kevin Vassily (CFO)

Thank you, Thierry.

Operator (participant)

That concludes today's question and answer session. I'd like to turn the call back to Kevin Vassily for closing remarks.

Kevin Vassily (CFO)

Okay. Thank you, everyone, for joining us today. We look forward to either speaking with you when we report our fiscal Q4 and full year results for 2024 in September, and/or seeing you or speaking with you at a conference in the interim. Thanks again, and we'll talk again soon. Bye-bye.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.