Hello, and welcome to the Owlet's Q1 2023 Earnings Call. My name is Elliot, and I'll be coordinating your call today. If you would like to register a question during the presentation, please press star followed by one on your telephone keypad. I'd now like to hand over to Jay Gentzkow, Investor Relations. The floor is yours. Please go ahead.
Thank you, Elliot. Good afternoon, and thank you for joining us today. Earlier today, Owlet, Inc. released financial results for the quarter ended March 31, 2023. The release is currently available on the company's website at investors.owletcare.com. Kurt Workman, Owlet's Co-Founder and Chief Executive Officer, and Kate Scolnick, Chief Financial Officer, will host this afternoon's call. As a reminder, some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date.
You should not place undue reliance on these forward-looking statements. The company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. Please refer to the company's SEC filings for further guidance on this matter. With that, I will now turn the call over to Kurt Workman, Owlet's Co-Founder and Chief Executive Officer. Kurt?
Good afternoon, and thank you for joining us for Owlet's Q1 2023 earnings call. Before we dive into the details, let's revisit our objectives from our last update in March. Through category-defining products with FDA clearance and a focus on operational discipline and cost management, our goal is to position Owlet on a pathway to long-term sustainable growth and profitability. We believe that by focusing on these objectives, we can advance our mission to improve infant health and wellness and deliver value to our shareholders. Owlet has made significant progress towards these goals in reducing operating expenses year-over-year by approximately 50% on a run rate basis, and including cutting marketing Cost Per Acquisition by 80% year-over-year, resulting in a significant improvement in the Adjusted EBITDA loss from Q4 to Q1.
Despite these aggressive cost reductions, channel sell-through was up 36% year-over-year as we continue to see strong consumer demand for our products. From a revenue perspective, we typically see a sequential decline in revenue from Q4 to Q1. As you recall from Q1 last year, we had our first large initial load-ins for the Dream Sock late in Q1, so year-over-year sell-in comparisons reflect that impact. In addition, for Q1 2023, we managed channel sell-in, specifically reducing in certain areas to support our goal of improving our channel health and in-stock levels. We have more work to do here, but we are making improvements.
Overall, implementing continuous cost reductions and achieving marketing efficiencies while achieving strong consumer demand and improving channel health will create a stronger, more sustainable business as we continue to work towards clearances and be in a favorable position to eventually accelerate in long-term healthy growth. Q1 was the anniversary of our Dream Sock launch, I thought it appropriate to take a look back at the past year. Owlet has made significant progress with our new Dream Sock. Since launch, we've monitored over 1.2 trillion heartbeats, sold over 450,000 Dream Sock and cam units, and achieved a Dream Sock NPS over 60, demonstrating high levels of customer satisfaction. Over 300,000 parents added Owlet to their registry in the last year, showing strong demand for our products.
Owlet also remains the number one considered brand in the health and wellness monitoring category for multiple quarters in a row, demonstrating the strength of our brand and reputation in the market. We have ranked number one on Amazon for smart baby monitors year to date, further highlighting our market leadership and customer appeal. We've also received hundreds of life-changing stories from parents who have used our products, reinforcing our mission to improve the lives of families. We are committed to driving technology that improves infant health and safety into the future. Turning to Q1 results. In Q1, we continued to focus on rebuilding our channel health, reestablishing our baseline operating expenses, and making progress towards regulatory approval for our 510(k) and De Novo product applications.
Revenue for Q1 was $10.7 million, down sequentially from $12 million in Q4 due to both seasonality and intentional focus on normalizing channel inventory with our retail partners. We faced gross sales headwinds in Q1 after a large retailer, buybuy BABY, announced financial trouble in January and followed with its bankruptcy announcement shortly thereafter. As the largest specialty retailer in our space, it will take time for the demand to transition from buybuy BABY to other channels. We anticipate this will be a sell-in revenue headwind for Owlet for the balance of 2023. We are working aggressively with other channels such as Babylist, Target, and Amazon to ensure recapture of this lost demand.
We are pleased to report that our Q1 sell-through was up 36% compared to Q1 2022, indicating continued strong consumer demand for our products since introducing the Dream Sock in Q1 last year. We're continuing to focus on raising awareness and driving consideration through our organic activities. In Q1, we saw great success with over 25 million organic video views of our content through social media. We expect this trend to continue and drive further growth in Q2. Following some anticipated and unanticipated revenue challenges in Q1, we expect revenue to sequentially increase in Q2 as we begin to normalize our channel health and begin to see a healthier balance between sell-in and sell-through. Specifically, in Q2, we are expecting seasonal catalysts to drive sell-in revenue growth, such as upcoming events like Mother's Day and Amazon Prime Day in July.
In Q1, gross margin was 39.3%. This was a significant sequential increase in gross margin and is a testament to the hard work and dedication of the Owlet team as we continue to optimize our operations and focus on efficiency. While there is more to come, we are pleased to see our efforts paying off as we work towards stabilizing the business following the RTD activities of last year. Moving forward, we remain committed to driving margin improvement with the goal of returning gross margins to the 40%-50% range over time through optimizations in our warehousing and shipping and reduction in our PPV as we reduce inventory levels and improve our returns and lowering discounts. Our Adjusted EBITDA loss for Q1 was $5.8 million.
We successfully brought down our operating expenses, cutting our Adjusted EBITDA loss by more than half sequentially from Q4. We remain committed to continuing to identify areas of efficiency to create a leaner and more efficient organization. As we shared in our March call, we closed a $30 million financing round in Q1. We amended our loan and asset-based lending agreement with SVB to include an extension of our principal payback period and an increase to the eligibility in our borrowing base. Combined, this puts Owlet in a cash position that will enable us to continue moving the business forward, support our FDA clearances, and ultimately get the business turning towards Adjusted EBITDA break even in late 2023. I'd like to briefly touch on the letter of non-compliance we received from the New York Stock Exchange.
We continue to evaluate options available to cure both the $1 minimum price rule as well as the minimum market cap threshold. We have 18 months to cure the market capitalization listing requirement. We will be sure to keep you updated when we have material news to share. Turning to our regulatory work. We've made significant progress towards pursuing FDA clearances for our monitoring platforms in 2023, including two distinct paths forward for our submissions. The BabySat submission to the FDA is for a new medical device that will be available through prescription for babies who need home monitoring. The health notification De Novo submission is for an additional Software as a Medical Device to our existing Dream Sock product that will enable parents to receive real-time notifications about their baby's health status at home.
We are currently in the review process with the FDA and are working to respond promptly to any questions or clarifications that come up. Additionally, we will be filing our European regulatory submission to a notified body in Europe in Q2. We are very pleased with our progress here and believe that achieving these regulatory clearances will unlock further long-term opportunities and growth for Owlet, allowing us to better help parents navigate the gap between the hospital and the home, and use our large and growing data set as a critical tool for pediatric care. In conclusion, we made significant progress in the quarter towards our goals of profitability and FDA clearance on multiple fronts. These achievements include our brand health remains at all-time highs with Net Promoter Score for our products at all-time highs.
We've reduced and stabilized marketing spend and Cost Per Acquisition by 80% of early 2022 levels. Our channel sell-through has grown over Q1 last year, and inventory in the channel is normalizing to healthier levels. Our corporate spending has decreased across the business, putting us on track to spend no more than $40 million in adjusted operating expenses, excluding stock-based compensation for the full year. We've been in constant communication with FDA on our two regulatory submissions and believe we have a clear path forward towards these clearances. Finally, we have secured critical capital, renegotiated our loan agreements, and see a path towards profitability. We're excited about the progress we've made towards creating an efficient and profitable organization, and we are confident that we're building a strong foundation for sustainable growth as we move forward.
We believe that the FDA clearances we are pursuing will accelerate the adoption of our products and position us to be the platform that bridges the gap between the hospital and the home. As we hold parents' hands through this journey, we are confident that our products and services will make a meaningful impact on their lives. We remain focused on executing our operational strategy and achieving our long-term goals while continuing to deliver value to our customers and shareholders. Thank you for your time and continued support. We look forward to updating you on our progress in the coming quarters. Kate, over to you.
Thank you, good afternoon, everyone. Kurt covered a number of our financial highlights in his overview. I will repeat a few items with some color and provide some additional financial commentary. Gross billings for the first quarter of 2023 were $12.4 million, down from $15.4 million sequentially. Q1 product promotions and discounts were $700,000, primarily associated with promotional activity for Owlet.com and Q1 retail promotional discounts. Returns and allowances reserves for Q1 2023 were $1.1 million, 8.9% of gross billings. This compares to reserves sequentially in Q4 of $1.5 million, 9.7% of gross billings. Total revenues in the first quarter of 2023 were $10.7 million, a sequential decrease from $12 million in the fourth quarter of 2022.
Total revenues were driven primarily by sales of Dream Sock and Dream Duo. Cost of revenues were $6.6 million in Q1, resulting in gross margin of 39.3% compared to 27.5% gross margin in the fourth quarter. This sequential improvement in gross margin was primarily due to improvements in purchase price variance costs prior period inventory adjustments in the declines in promotional activity. Operating expenses in the quarter were $15.1 million, including stock-based compensation of $2.8 million and transaction costs of $2.1 million, which was a sequential decline of 37% from $24.1 million in the fourth quarter. Excluding stock-based compensation and transaction costs, Q1 operating expenses were $10.2 million. The sequential decrease in the operating expenses was primarily due to employee-related costs, bad debt reserves, and marketing expense.
Operating loss in the quarter was $11 million, compared with operating loss of $20.7 million in the fourth quarter and $21.7 million in the first quarter of 2022. Net loss in the quarter was $11.9 million, compared with $19.5 million last quarter and $28.8 million in the first quarter of 2022. Adjusted EBITDA loss for Q1 was $5.8 million compared to Adjusted EBITDA loss sequentially in Q4 of $15.2 million and $18 million for Q1 2022. Our focus on operating efficiency has delivered multi-quarter improvements in our expense management. We will continue to identify areas to leverage as we work towards Adjusted EBITDA breakeven later this year. Turning to our balance sheet, cash and cash equivalents as of March 31st, 2023 are approximately $25 million.
With the additional capital raised in February, we can continue to build our brand and execute on our growth initiatives, while at the same time reducing our overall cost structure to extend our cash runway. Looking ahead, we will again refrain from providing specific revenue guidance for the year as we want more visibility around both sell into retailers and sell-through to parents, which we believe is approaching a healthy balance. As Kurt said, we anticipate Q2 revenues to improve sequentially from Q1 due to holiday and Prime Day promotional sell-in, although we are taking a more cautious approach than prior years to ensure a balance with sell-through channel inventories. We are continuing to focus on operating expense controls. We are forecasting expenses in Q2 to be relatively flat or approximately $12 million-$13.5 million, including stock-based compensation.
Owlet leadership in the connect category and by our determination to empower more parents globally. For the areas that are within our control, we are focused on the core business activities in 2023 that will maximize supporting and achieving sell-through of our core products and therefore driving balance in retail inventory for future sell-in opportunities, making strides in our medical device clearances, and efficiently managing our operational plan towards breakeven and profitability. Thank you for your time today. Operator, please let's open up the call for questions.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Charles Rhyee with TD Cowen. Your line is open.
Yeah. Hey, thanks for taking the questions. wanted to start with the sort of the impact of the buybuy BABY bankruptcy. Can you give us a sense for what percent of your sales go through that channel or that retailer specifically? Then you said that it'll take some time for this to... the impact to materialize. Is that because the stores are still operating and there's still inventory there? Maybe if you just give us a little bit more color on the dynamics going on.
Yeah. Thanks, Charles. great question. I think, you know, buybuy BABY is our fourth largest retailer, so not insignificant, but also not, you know, one of the larger, you know, contributions in terms of revenue. buybuy BABY was a key specialty retailer that assisted, you know, in customer education in our space. They were, you know, the largest specialty retailer in the category. That said, I think Owlet has, you know, fantastic customer awareness independent of channel because our product is so highly considered and there's so much awareness around it. Most of the time, parents will actually do quite a bit of research outside of channel before then deciding which channel to purchase in. I think long term we'll be very resilient to the changes in channel mix.
I do think it will take some time for that demand to shift to new channels. Specifically, you know, in Q2, buybuy BABY will be liquidating inventory, so that will have some pull-in effect from other channels. As we get into Q3 and Q4, we're gonna work aggressively with other channels like Babylist, Target, Amazon to bring that demand back through other channel opportunities. Short term, there are some headwinds with inventory liquidation and consumers finding their new shopping partner. I think long term, this category will continue to grow, and we'll reinforce a great shopping experience with new partners. We're excited about, you know, what Babylist specifically is doing to capture this demand. Amazon continues to grow as a channel, Target, we're hoping will play a big role as well.
When a retailer liquidates inventory, in this kind of situation, what you're basically saying is that we're not gonna get the sell-in, you know, into that retailer as they're just winding down. Is that the right way to think of it? That's the headwind to two key revenue and the rest of the year?
That's right. Yeah. The sell-in in Q2 won't be balanced, you know, the sell-through won't be balanced with sell-in in terms of revenue. As we move throughout the rest of the year, you know, we'll start that base on hand and inventory calculation for other retailers, I think will start to change as we see, some of that demand shift to other channels. We hope to be able to move some of that sell-in revenue, into other channels as their sell-through starts to pick up with buybuy BABY going out of business.
Okay. Does this impact at all your ability to reach Adjusted EBITDA breakeven by year-end, in your view?
I think we still are on track to do that, but I'll pass it over to Kate to answer that question.
Yeah, I mean, you know, no one likes to have a additional headwind with what we're trying to accomplish this year. You know, it's a signal that we have here in May, and I think we see a lot of opportunity in Q2 with the holidays that we have coming up. We obviously have the Prime opportunity with Amazon that's been very successful. We've been experimenting with some additional ways to maximize our own online presence with Owlet.com. There's a lot of opportunity to be successful as we head into the back half of the year, especially as we see this momentum that's starting to improve with the sell-through. You know, not a headwind that we wanted, but it's at least a signal that we understand now that we'll try to overcome.
Great. Maybe the last question for me. The sell-through being up 36% sequentially, you know, sounds really pretty impressive here. Can you give us a sense in terms of magnitude, you know, on a revenue basis, what that kinda looks like to give us a sense on, you know, once we kinda get the balance on inventory, you know, we could, you know... what is the real selling power of the brand right now?
Kate, do you wanna takep that or do you want me to take that?
Go ahead, Kurt.
What I would say is that our sell-through in Q1 again outpaced the sell-in as we look to kind of rebalance inventory levels. Overall sell-through, we believe is on a healthy track. Keeping in mind that we've significantly reduced our, you know, Cost Per Acquisition across the business, and we held that, you know, from Q4 into Q1, and we'll continue to maintain that efficiency this year. We feel, you know, we feel really healthy with that. Generally, Q1 sees a 10%-15% decline in sell-through based on promotional activity. You know, we were sort of in that ballpark from Q4 as we were reporting Q4, and then we'll see an increase as we move into Q2, and then Prime Day in Q3, and then you have the holidays in Q4.
We feel like we've got the revenue baseline to get to profitability this year.
Okay, great. I'll stop right there. Thanks
This is all the time we have for questions today. We'd like to thank you for your participation. You may now disconnect your lines.