Good afternoon, ladies and gentlemen. Thank you for joining today's Owlet Q3 earnings call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to your host, Mike Cavanaugh, Investor Relations. Please proceed.
Good afternoon, and thank you all for joining us today. Earlier today, Owlet Incorporated released financial results for the quarter ended September 30, 2023. The release is currently available on the company's website at www.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 actual 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, and 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?
Thanks, Mike, and good afternoon, everyone. Thank you for joining us today for Owlet's Q3 2023 earnings call. I'd like to start the call with a reminder of our main 2023 strategic objectives. First, obtaining FDA clearances for both BabySat and our consumer Dream, Dream Sock monitors and driving towards EBITDA breakeven. Owlet is spearheading new standards for consumer and medical solutions, allowing caregivers to provide better care at home for their babies through access to advanced digital health technologies. In Q2, we were thrilled to announce that we received FDA clearance for our BabySat monitoring device. As a reminder, BabySat is a home monitor for use with babies under a doctor's care and will be available by prescription. Early feedback from pediatricians has been overwhelmingly positive, and we are targeting market introduction by the end of this year.
Following on that positive momentum, last week, we announced clearance for the Dream Sock as the first and only over-the-counter pulse oximetry solution for infants. Dream Sock will monitor and display baby's live health readings, including pulse rate and oxygen saturation level, and will provide health notifications, which will alert caregivers with lights and alarm sounds if their infant's readings fall outside of preset ranges. These new medical-grade features will be available to all existing and new Dream Sock users and will be launching soon. Achieving De Novo Marketing authorization from FDA means the Owlet Dream Sock was clinically tested in both home and hospital environments and proven to be as accurate as medical-grade baby monitoring technology and compliant with all relevant performance and safety standards by independent laboratories.
This new technology will equip caregivers with the right information at the right time and will provide them with the confidence and clarity on their baby's well-being. Securing over-the-counter clearance for the Owlet Dream Sock is poised to catalyze substantial growth for us in three key dimensions. First, is the evolution of our value proposition. The clearance marks a pivotal shift in the value proposition of our Dream Sock. It transforms from being solely associated with sleep tracking to assume a more critical role as a health monitoring device. This transformation empowers us to communicate directly about our capability to accurately and safely monitor vital signs, providing caregivers with a heightened level of assurance through timely alarms. We believe this will increase the consideration and conversion of customers who are researching Owlet as a solution for their family. Second, is category leadership.
The attainment of FDA clearance for Owlet establishes a clear distinction in the market. This regulatory validation not only addresses numerous queries and apprehensions potential customers may have, but also positions Owlet as the world's foremost FDA-cleared health monitor for babies at home. This regulatory status underscores our commitment to product safety and efficacy. We believe this will help catalyze word of mouth among parents and open up significant retail opportunities. Third, is enhanced connectivity with healthcare providers. With the regulatory hurdle cleared, data emanating from our devices can now be seamlessly shared with pediatricians. This newfound capability equips parents with a valuable tool for assessing and triaging their child's health at home. Recognizing that there are 92 million healthcare visits in the U.S. for babies and toddlers, providing parents with access to safe and accurate technology becomes an indispensable asset, facilitating informed decision-making and proactive health management.
We believe this will add enhanced benefit both to parents and physicians as they consider the value of our products. Both BabySat and Dream Sock clearances are significant foundational breakthroughs in our journey to bring care to the home and empower parents. They signify not only our commitment to innovation in the infant health category, but more importantly, our dedication to helping ensure the health and well-being of every baby. I am extremely proud that Owlet is setting new standards in at-home infant care, arming parents with reliable real-time information and providing enhanced peace of mind. In the medical market, the FDA clearance of BabySat was a pivotal step as we penetrate this critical market. BabySat is our prescription monitor for home use that extends our wireless pulse oximetry technology to babies who need it most through a prescription from their doctor.
We've already seen demand from parents, providers, and DME channels, which is both gratifying and unsurprising as remote patient monitoring becomes more important in the delivery of healthcare. This innovative addition fosters growth in several crucial dimensions. First, it broadens distribution channels into healthcare. BabySat facilitates an expansion of our distribution network to include durable medical equipment or DME providers and hospitals. By reaching these key healthcare institutions, we enhance accessibility to Owlet's technology for critical care needs at home, ensuring that our solution is readily available where it is needed most. Second, it will be made accessible to families in need. BabySat aims to democratize access to Owlet's technology, particularly for families facing medical challenges with their children.
Through insurance reimbursement, BabySat becomes an attainable solution for families who require it most, ensuring that financial barriers do not impede access to vital monitoring technology and expanding Owlet's customer base. Third, it allows us to address a new customer segment directly. BabySat allows Owlet to provide a targeted solution for infants deemed high risk or facing health challenges. This presents an opportunity to communicate directly about medical accuracy of our solution to both parents and physicians. By honing in on the unique needs of this demographic, we can emphasize the precision and reliability of our technology, offering peace of mind to caregivers and medical professionals alike. More information about BabySat is now accessible through our website, and we are working to announce a partnership soon that will enable quick and efficient access through hospitals and online, similar to breast pumps.
Additionally, the app is available on Apple devices, where physicians can request a demo and additional information on our website. Internationally, our CE Mark submission is progressing and remains on track, and we believe our successful relationship with the FDA will translate over to our work with non-U.S. regulators. Revenues for the quarter came in at approximately $9.2 million. I'd like to offer some color on our go-to-market strategy and the revenue dynamic we experienced in Q3 by starting with an announcement that Owlet has signed a significant distribution agreement with Amazon that will drive increased gross margin, enable better access to the customer, and will give Owlet significant marketing credits to drive future growth globally in our largest channel. While our agreement was signed at the end of September, shipments under this Amazon.com arrangement began the first week of October.
The timing of this transition impacted our total revenue in Q3, as no sell-in revenue was recognized related to the former distributors of Amazon.com in Q3. All Amazon sell-in revenue for Q3 and Q4 will be recognized in Q4. For comparison, gross billings in October this year were 3.5 times higher than the gross billings in October of 2022. So far in Q4 this year, we've already shipped into the Amazon channel 90% of the volume we did in Q3 and Q4 combined last year. In addition, we believe we are finishing the year with strong momentum across the rest of our retail channels as we head into the holiday season. As a result of the shift in Amazon sales from Q3 to Q4, adjusted EBITDA loss is expected to improve in Q4, with higher growth sales and relatively flat operating expenses.
We remain focused and optimistic on our Adjusted EBITDA loss profitability objective exiting the year. From an overall brand health perspective, our customer satisfaction and ratings continue to maintain high Net Promoter Scores across multiple products. Dream Sock with cam usage continues to grow quarterly, along with the mobile use of our sock and cam products. We've grown our sell-through sequentially every quarter this year, while reducing our marketing spend by 75%, reflecting our strong focus on channel health and inventory levels. Combining with the new FDA clearances, with continued growth and demand and a more efficient operating base, will set Owlet up for healthy, profitable, and growing business in the future. From a leadership perspective, in Q3, we announced the appointment of Mark Stolz to our board of directors and Jonathan Harris as Owlet's President and Chief Revenue Officer.
Mark and Jonathan have already made an impact with insights and corporate strategy and operational excellence, and are working closely with the team to drive growth and expansion with our new medical device clearances. I'm thrilled about the continued progress we've made towards creating an efficient and profitable organization. We remain committed to building a strong foundation for sustainable growth as we move forward, and we believe that the FDA clearances of our BabySat and Dream Sock products will accelerate the adoption of our products and position us to be the platform that bridges the gap between the hospital and the home. Thank you for your continued support of Owlet, and I look forward to updating you in the coming quarters. On that, Kate, over to you.
Thank you, and good afternoon, everyone. Kurt addressed a number of our financial highlights in his overview, so I will repeat a few items with some color and provide some additional financial commentary. Gross Billings for the third quarter of 2023 were $11 million and did not include any sell-in revenue for Amazon distribution, as those purchasers and shipments were recognized in October. Product promotions and discounts were $1.3 million, and returns and allowance reserves for Q3 2023 were $700,000, 6% of Gross Billings. Q3 revenues were $9.2 million. Total revenues were driven primarily by sales of Dream Sock and Dream Duo. Q3 sell-through was up 7.4% sequentially, demonstrating a third consecutive quarter of sell-through growth in 2023.
This year, we offered less promotional discounting with Prime Day in July to maintain overall channel sell-through health versus last year, when we had recently launched Dream Sock and had loaded in significant inventory to support channel restocking. As Kurt discussed, the main difference in Q3, both sequentially and last year on a gross billings from revenue basis, was a shift in timing of Amazon sell-in revenue from Q3 to Q4 this year. As we have discussed previously, we've been managing sell-in revenue with retailers over the course of the year as they target lower inventory levels across their balance sheets, primarily reflecting macroeconomic conditions. We also lost a category-leading retailer with the Buy Buy Baby bankruptcy, and as discussed today, had a timing shift in our Amazon sell-in revenue from September in Q3 to October in Q4.
While our total revenue has been impacted by some macro and business transition headwinds year to date, sell-through has improved 7% year to date over last year across retail channels. At the same time, our cost per acquisition is down 75%. This is an important aspect of our channel health focus efforts as we become more efficient in reaching parents and driving demand for our products. We anticipate sell-through for Q4 to grow sequentially, again, demonstrating four quarters of sell-through improvement in 2023. Cost of revenues were $5.9 million in Q3, resulting in gross margin of 36.3%. This compares to 40% gross margin sequentially and margins of 26.6% in Q3, 2022. The year-over-year improvement in gross margins was primarily due to improvements in purchase price variance costs, prior period inventory adjustments, and improvements in product mix.
Sequentially, outside of total lower revenue, margins were stable, with focus on operational efficiency, product mix, and lower Purchase Price Variance costs. Moving forward, we remain committed to driving margin improvement with the goal of stabilizing gross margins within a range of 40%-50% through optimizations of product mix, reducing costs in our warehouse and shipping, reduction in our PPV as we reduce inventory levels, and managing our return rates and discounts. Operating expenses in the quarter were $11.2 million, including stock-based compensation of $2.2 million, representing a $15.2 million decrease year-over-year. Excluding stock-based compensation, Q3 operating expenses were $9 million. The year-over-year decrease in operating expenses was primarily due to employee-related costs and marketing spend.
Operating loss in the quarter was $7.9 million, and net loss in the quarter was $5.6 million, compared with $21.8 million and $19.4 million year-over-year. Adjusted EBITDA loss for Q3 was $5.5 million, compared to adjusted EBITDA loss year-over-year of $18.4 million for Q3 2022. Our focus on operational efficiency has delivered multi-quarter improvements in our expense management. We will continue to identify areas to leverage as we work towards adjusted EBITDA break-even later this year. Turning to our balance sheet, cash and cash equivalents as of September 30, 2023, were approximately $15.2 million. We remain focused on our stated goals of managing our costs and use of capital as we move into the final weeks of 2023.
Looking ahead, we will again refrain from providing specific guidance for the year. For those areas that are within our control, we are focused on the core business activities in 2023 that will maximize supporting and achieving improvement in sell-through of our core products, and therefore driving balance in retail inventory for future selling opportunities, making strides in ramping our BabySat and new Dream Sock product commercialization, and efficiently managing our operational plans towards break-even and profitability. Thank you for your time today. Operator, let's open the call for questions.
We will now begin the Q&A session. If you would like to ask a question, please press Star followed by one on your touchtone keypad. If for any reason you would like to remove that question, please press Star followed by two. Again, to ask a question, press Star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate. The first question comes from the line of Charles Rhyee with TD Cowen. Please proceed.
Yeah, thanks for taking the question, guys, and congrats on, you know, all the progress so far. You know, maybe first, just wanted to quickly ask, on the Amazon agreement, is that the partnership, is that the new Dream Sock then, with the repackage, with the FDA approval on it, or was it the original Dream Sock?
Yeah, great question, Charles. So, the underlying product is the same between the cleared product and the product that's available today. The same hardware, you know, has the same app. The FDA-cleared features will begin rolling out towards the end of this year. So what we ship them with the current product that's compatible with the FDA-cleared features. The main reason for the shift to Amazon 1P is we felt like that was a better business arrangement for Owlet, provided better gross margins, the ability to grow the business, connect more directly with our customers through Amazon. So it was really a kind of a business shift that led to us transitioning from third-party sellers on Amazon to selling to Amazon directly.
No, that, yeah, I appreciate that. I was just curious, like, when... But when customers go to Amazon to look at the Dream Sock, what they're purchasing, what, what, what will they see when they go to Amazon? Will they see that this has been FDA approved, and so that's the differentiator when they're, like, looking or, or, you know, what kind of messaging will they receive that they, you know, will get additional functionality, you know, when they buy the sock?
Yeah, it's a great question. So we, we've already started to message around the FDA clearance and make it clear to all of our current existing customers that they'll have access to all of those features, and that their Dream Sock will be an FDA-cleared Dream Sock and future customers. So we're working on rolling out into all of our retail channels that same messaging, so that somebody knows, you know, as we're approaching the holiday season, that the Dream Sock they're buying is compatible with and will get access to all of these FDA-cleared features before the end of the year. Does that answer the question?
Yeah, yeah, it does. That's helpful. And then, I think, Kurt, you mentioned that, and Kate, you maybe can answer this as well, right? You said you shipped 90% sell-in of the volume that you did in gross billings from last back half of the year. And if I look back, you know, I think gross billings for Q3 and Q4 last year was around $39 million. So am I right in thinking that you sold in $35 million as of October? Is that the right way to think of it?
Just for clarification, that's just regarding Amazon, to give an understanding of where we are in terms of the pace of the Amazon business. So really-
Oh, I see. Not total Gross Billings of the Amazon portion.
Right.
Right.
Exactly.
Okay.
Just to indicate where we are in the Amazon pace of business. Yeah.
Okay. So then, you know, maybe outside of Amazon... So if we look at the 9.9, that's it sort of less the Amazon piece, is it right to think that had we had the Amazon portion, we would've seen more normal kind of revenues, that kind of you kind of discussed before? And instead, we'll get the rest of that in the fourth quarter, so we should expect a much steeper step up, given that we're gonna we're capturing the Q3 sell-in for Amazon in Q4?
I think that's accurate.
Okay. So then I guess just the follow-up to that: So when you said there was a 7% increase year-over-year in sell-in, that's sort of over the course of the full year, inclusive of the shift in the timing. Is that the right way to think of it?
That's sell-through. The 7% was in sell-through.
Sell-through.
We've seen Sell-Through, yes.
Oh, sell-through. Yeah.
To talk about the, because that's really been the main focus, right? As we've seen some of the fluctuation in the sell-in demand, there's been, you know, on a year-over-year basis, it's really not indicative of what we're seeing for the demand from parents for the product. And that's, as you know, we've really been focused on sell-through and partnering with the retailers. We also think, you know, heading into the back half of the year, heading into the beginning of 2024 with the clearances of both products, it really sets us up for next year very nicely in terms of this, you know, this rate of sell-through that we focused on.
While also we've decreased the amount of cost for acquisition for customers, you know, maybe, you know, than other industries or, or other customers are seeing, you know, what people are doing to utilize getting to—getting the word out of their products. So just the fact that we're spending less, but yet increasing sell-through about our product, means that, you know, we're seeing also the NPS on our products getting back to where we were with our prior products. We think that we're heading in with real channel health and real product health into 2024.
Great. And then maybe last question for me. With BabySat, you know, Kurt, you talked about, you know, we should expect an announcement at some point for a distribution channel. You know, the way I understand it, you know, getting into getting coverage, you know, getting reimbursement codes and all that sort of stuff, that takes time, typically, and working with all the payers. Is this distribution partner channel meant to kind of accelerate that and relying on the partner to, you know, you know, kind of get those approvals and stuff for you? Or maybe kind of explain that a little bit more, because, you know, I would think that, you know, when you think about devices coming into the market and getting coverage, that tends to take time.
Just curious on, you know, what the strategy here is to kind of accelerate that, you know, such that, you know, physicians and can start prescribing the product?
Yeah, that's a great question. One of the. There are several, you know, complexities or challenges with, with, you know, introducing BabySat into the market, including, you know, shipping and fulfilling a medical device, you know, to and through providers. You know, how you handle prescription verification and insurance verification. How do you help customers get the right prescription for the product? You know, those are all kind of significant challenges, and Owlet has interviewed lots of different partners in this space. We feel like we have one that can help significantly reduce that complexity, and will not only help us kind of manage the back-end process of all of those pieces and make it really seamless for the consumer, but also will help us increase our distribution faster with providers and hospitals as a take-home monitor.
So we're really excited about it. The opportunity we're sitting on in the near term with BabySat is that, there are existing insurance codes for home monitoring, and so it's not the creation of a new code. They're already sending babies home with these big, bulky, wired monitors that, you know, are intrusive into parents' lives. Owlet's, you know, it's, it connects right into your smartphone, it's wireless. There are a lot of benefits, and so we, you know, the BabySat will be eligible for existing reimbursement codes, and this partner is helping us manage that with, you know, all of the different insurance carriers and companies across the United States out of the gate. So we're excited about that. There's, you know, will be more to come, but, you know, it's not creating a new code.
It's really taking advantage of the market that's in place right now to start.
Got it. Sorry, one last for Kate. You kinda mentioned, are we still on track then for sort of, EBITDA breakeven early end of this year, early next year?
That's our focus, absolutely, on an operational basis. And in terms of, you know, the operating expense profile, we're at a steady state runway. We're still looking for places where we can optimize both in terms of how we're running things on the operation side, you know, whether it's on the margin or cost of goods, but also within the business. We've been status quo in terms of employee costs. We've been very measured in terms of marketing, as we've talked regularly about. Getting over the hurdles in terms of our clearances is important, as we've been putting kind of, you know, additional focus there based on our regulatory. There's been costs related to that. So that's our, you know, the next piece for us to manage too.
But we wanna continue going through 2024 there. So that's gonna be the, you know, the major focus in 2024, is growing and growing profitably, beyond as we start talking to what our business model looks like, you know, in the next phase at our next earnings call.
Great. Thank you.
Thank you. We will now turn the call over to Mike Cavanaugh to ask questions that came in via email. Mike?
Thank you, operator. Kurt and Kate, the first question that we received is: Now that Owlet has a medical and consumer product, how does that play into your go-to-market strategy with the retailers that are expanding into healthcare, such as Best Buy, Amazon, which has been mentioned, and Babylist, with their purchase of a DME?
Yeah. Thanks, Mike. So the gap between consumer and medical technologies and channels continues to shrink, and I think, you know, timing could not be better for Owlet with big box, your e-commerce sites, and specialty baby all moving into this DME opportunity. It's kind of the perfect overlap of existing channels with our new medical focus. So Babylist recently acquired a DME to expand its breast pump offering, and Best Buy is significantly expanding its capabilities in the healthcare. We're having active conversations with each one of these players to roll out BabySat and Dream Sock next year, in addition to exploring new channel opportunities that BabySat opens up.
Great. Next question. Excuse me. Are you expecting to see a revenue lift from your FDA clearances this year in 2023, or are they 2024 events? And what do you need to spend differently to support the launch of those products?
I can-
Kate, do you wanna take that one?
Take that question. Yeah, sure. You know, we're planning on making both the BabySat product and the FDA clearance features available before the end of the year. Or I think at this point where we are, we'll see minor or modest revenue improvements this year, but really, the majority of the benefits are yet to come in 2024 and beyond. And in terms of supporting those opportunities, those you know, those will really be- the support will come primarily in 2024. But as we'll see with the support of Dream Sock, we'll really be within. It's a software opportunity, and so that will be readily available before the end of the year.
Great. Thanks, Kate. The next question is, are you experiencing any impact from your competitor launching a consumer monitoring product at select retailers?
Yeah. Owlet is the clear leader in this category. We've invested millions of dollars into establishing this category, and Owlet's De Novo FDA clearance sets a new standard for our category, that other pulse oximeters and health monitors are gonna have to adhere to. You know, this is a clear benefit to Owlet in terms of our market leadership and availability moving forward.
Great. The next question is, given your recent FDA clearances and future entry into remote patient monitoring, what is the current long-term vision for Owlet, and has that changed at all?
Yeah, I think we've shared this before, but we really believe that just like every baby has access to a breast pump, you know, reimbursed by insurance, or goes home from the hospital with a car seat, we believe every baby will have access to a health monitor at home. And Owlet created this category. We've now established it with the recent FDA clearance. Our vision is to drive that tipping point, both in the U.S. and globally, and we'll see that as a significant opportunity over the coming years. We also know that every year in the U.S., we spend tens of billions of dollars on primary care for children in this age group, just in this first few years of life. And I think that's a tremendous opportunity to move the center of triage from the clinic into the home.
Owlet's well-positioned with our data to become the platform, and with our data set, you know, we believe we can, we can create the services, and it's a platform that speaks both to parents in the home and to healthcare providers. There's so much we can do right now with our current regulatory approvals, our distribution that's expanding, our data, and our community, and that's our focus right now to drive growth.
Okay, great. And then the next question, I think this is probably for Kurt, but, do you think that—do you envision that Dream Sock, the over-the-counter, monitor, would eventually have a Telehealth component, or would that kind of feature be, limited to BabySat?
So I think both products will have interesting telehealth health opportunities. They'll be a little bit distinct. With BabySat, it would be focused on monitoring babies who have known health conditions. With Dream Sock, the opportunity is to focus on home triage for healthy babies. There's 92 million primary care visits in the first few years of life, and partnerships with telehealth could help parents and physicians better understand babies' health at home without having to expose them to more sickness in the clinic.
Okay, great, and one last question: how has the product roadmap changed over the past few years compared to what was shared previously, with the band and crib, for example?
Yeah, so kind of like I just mentioned, we believe that there's a significant opportunity to become the health platform in pediatrics, similar to other well-known patient monitoring companies in their markets. Our focus right now is to dramatically increase adoption of home monitoring, you know, both for well baby and at-risk, you know, babies with Dream Sock and BabySat, and both in the U.S. and in Europe. We believe we can significantly grow market share over time and position Owlet for LTV expansion with our data and services. And so we, we wanna see healthy growth with improving gross margins that allows us to grow from our strength. And for us, that means increasing, increasing adoption of our sock and our cam, launching value-add features with our data, that customers and providers are willing to pay for, and then lengthening our customer relationship for extended LTV.
Great. Thanks, Kurt. And that's all the questions we received, so, operator, back to you.
That is all the time we have for questions. Handing the call over to Kurt for closing remarks.
Yeah, just as we wrap things up, I wanna express, you know, my gratitude and thanks to each and every one of you who joined us today. Your presence on this journey means a lot. Owlet's obviously overcome a lot as a business, and, you know, the recent news of FDA clearance is an exciting milestone, probably the most exciting milestone along this journey. And, you know, when it comes to the world of pediatric care, the future looks incredibly promising. Owlet is driving that progress, and we're making meaningful strides that bring us closer to our vision of better care for our little ones. So thanks once again for your time and your belief in Owlet.