OWLT finally reported its disastrous (we knew it would be) Q4 results on March 7 after close. We're glad that's over. The earnings provided a mixed bag of positives, negatives, and unanswered questions; however, we did not see anything in there to change our original thesis. In fact, developments over the past quarter have actually emboldened our views as we continue to accumulate warrants at these low prices. We expect a minor selloff post-earnings, as traders ran the stock up anticipating FDA news, creating a great buying opportunity for those willing to hold 2-5 years.
For those who have not read our initial post on how and why we are investing in OWLT, please check out the original post here.
Key Updates
How bad was Q4 with the FDA requiring OWLT to pull its lead product, the Smart Sock, off shelfs in the US?
Unfortunately, due to non-normalized operations in Q4, most of these numbers are not particularly relevant for the long-term view of OWLT
"In partnership with U.S. retailers and to support strong retailer relationships, the Company accepted returns for Smart Sock and Owlet Monitor Duo products. As a result of the accepted and anticipated product returns from U.S. retailers, the Company recorded a contra-revenue adjustment of $23.2 million, resulting in total net negative revenues of $2.5 million for the fourth quarter of 2021. Owlet does not anticipate additional material return adjustments for Smart Sock in the U.S. in future periods."
This is a rough blow for a small company, but they have enough cash to absorb this hit after the SPAC, especially now that sales have fired back up in Q1 2022
We knew revenue was going to be close to zero this Q with no lead product in the market in the US, but now that the Dream Sock is showing positive early sales data, OWLT may be able to escape this ordeal with only a single quarter of lost sales
Expanded product availability across Europe, with over 100% growth in international revenue from 2020 to 2021
OWLT is also moving up its launches in South America and Asia from 2025 all the way to 2022, which should help bolster the large international growth numbers we are seeing
No timeline for the Smart Sock FDA marketing application
Many traders ran OWLT stock up in anticipation of good news here, which we feel is a very amateur approach to investing, especially in this situation
The CEO maintains that they are in constant contact with the FDA on this application and it remains a top priority at the company
They received ISO 13485 and MDSAP certifications, as they work toward the necessary requirements for medical device manufacturer quality systems
However, the CEO did provide some detail on their approach to regulatory concerns:
"In regards to an update on US regulatory matters, our ongoing conversations with the FDA center around three areas. First ensuring that the Dream products are not intended for use as medical devices, which could make them subject to FDA pre-market clearance or approval. Second, working toward gaining FDA pre-market authorization on the heart rate and oxygen notification features previously in the Smart Sock product line. And finally, similar to the second point, continuing to pursue the development of a prescription only stock for babies who need medical monitoring at home."
This tells us that the Dream Sock has been cleared by the FDA as being good to sell without their approval, the Smart Sock is still on track to come back but may take longer than anticipated, and their are many new products still in the pipeline
"Gross billings for January and February 2022 were slightly higher than the same time period in 2021. Gross billings is defined as amounts invoiced to customers prior to the impact of adjustments, such as promotions, discounts and other allowances. Additionally, all of the Company’s major U.S. retailers have the Dream product line available online and many have the Dream product line in their stores. The Company anticipates all of its major U.S. retailers will have the Dream product line fully available online and in stores by the end of the first quarter of 2022."
ie, revenue likely bottomed in Q4 and OWLT is reestablishing growth through the Dream Sock while waiting on other positive FDA catalysts to bolster the product suite
No forward guidance was provided, which should be expected!... the company has no data to go on with the Dream Sock, having just launched it in January
The Dream Sock is not the only new product for 2022. The company also announced the launch a new version of the Owlet Cam later this year, as well as working to grow their sleepwear product line. In Q4 of 2021, they launched the Outlet Sleeper, a wearable blanket, and in 2022, they plan to expand that sleepwear line.
The CEO also hinted at launching a smart crib, which is in line with their goal of a connected ecosystem of products -- we feel there is lots of potential here with few competitors if they can come in at a lower price point
"The Dream Duo and Dream Sock monitor babies while they sleep. They help parents understand their little one's sleep and know when to assist their baby for better sleep, empowering parents with information and insights to support better sleep. The Dream Duo is our most intelligent monitoring system yet.
Let me characterize the first few weeks of the Dream Sock and Dream Duo launch. On Outlet online January 5 and January 6, were our best non-promotional sales days ever. Additionally, all retailers that previously carried the Dream Sock are now selling the Dream Sock line. Our retail rollout is still in progress, and we are pleased with the initial results, both in terms of demand and customer feedback. We'll report back to our next call on the results as we need some additional time to be thoughtful on the look ahead so we can share the outlook for 2022." - Kurt Workman, Owlet CEO
Positive News
The Dream Sock may not have the O2 monitoring/alerts the Smart Sock had, but it's sales through launch are outpacing Smart Sock sales over the same period in 2021... In fact, OWLT registered it's largest ever DTC sales (non-promo) when they launched the Dream Sock in January
This was the most important aspect of the call in our opinion, as it shows we have likely bottomed from an earnings perspective, and OWLT will get back to its growth story moving g forward
The Dream Sock is still early in its ramping stage as a product, with marketing use now starting to permeate the market, so we expect to see a strong sequential rise in Dream Sock sales throughout the year
The product aims to pair with the Owlet App to track baby sleeping patterns
OWLT did not lose a single channel partner or retailer as a result of the FDA suddenly deciding it wanted to regulate the Smart Sock's marketing
While OWLT did have to recognize a contra revenue hit from these retailers as returns were processed, maintaining and growing these channels is much more important for the long-term success of the company
Clearly retailers recognize the value of OWLT's brand, as they are still carrying all of its products
PIMCO, a $2 trillion family of funds, and one of the more prestigious managers of money out there, has announced a ~6% stake in the company
Funds like PIMCO are not in the business of losing money, and for them to take the time to take such a substantial position in such a small company serves as a clue to the average investor that something positive is in the works
We hope that PIMCO will take a board seat, as the earnings calls have made it quite clear that this team could use some help from more professional investors in navigating the stock market as a company
Amazon is still holding its shares out of its venture fund
We anticipate more funds adding OWLT as a high-reward play now that most of the negative news has been realized and the ship has seemingly been righted
