Brendon Frey - ICR Terry Pearce - Founder and Chairman Mark Watkins - CFO.

Peter Keith - Piper Jaffray Brad Thomas - KeyBanc Capital Keith Hughes - SunTrust.

Good afternoon, ladies and gentlemen, and welcome to the Purple Innovation Fourth Quarter and Full-Year 2017 Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded. Now I'd like to welcome and turn the call to Brendon Frey of ICR. Brendon, you may begin..

Thank you. And thank you everyone for joining us today to discuss Purple Innovation's fourth quarter 2017 earnings results. On today's call are Terry Pearce, Founder and Chairman, and Mark Watkins, Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Purple's website at www.purple.com.

I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Purple Innovation's judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting the company's business.

Accordingly, you should not place undue reliance on these forward-looking statements.

With more thorough discussion of these risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to disclaimer regarding forward-looking statements that is included in our fourth quarter 2017 earnings release which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC reference in that disclaimer.

We do not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today.

With that, I'll turn the call over to Terry Pearce.

Terry?.

Thank you everyone for joining us today for our first earnings call as a public company. This is Terry Pearce, and I'm one of the Founder's of Purple. Before we get into a discussion of the company and our recent results, I want to take this opportunity to thank Sam Bernards for his numerous contributions to Purple's recent success.

We wouldn't be where we are today without his effort over the past year and a half. As we announced in a press release today after the close, Sam has stepped down as Chief Executive Officer to pursue other interests. The Board has initiated a search for a new CEO to lead the company through its next phase of dynamic growth.

Until that process is completed, I will oversee the day-to-day operations of the company. Now to our recent results. During the fourth quarter demand in our direct to consumer channel was incredibly strong fueled by increased investments aimed at building awareness of our brand and understanding of our differentiated products.

At the same time, recent expansion of our manufacturing capacity allowed us to better capitalize on our growth prospects by fulfilling orders in a more timely manner. Q4 sales increased 156% to $63 million and for the year sales were up 201% to $197.

We believe these are incredible milestones given the fact that the company only started selling mattresses about two years ago. To better understand how we got to where we are today past as we did, let me tell you some of the back story.

Purple is a leading comfort technology company that my brother Tony and I founded more than 20 years ago with a mission to improve how people sleep, sit and stand. Our IP protected cushioning technology was initially used on wheelchairs and hospital beds as it is able to prevent pressure sores.

For approximately two decades we licensed cushioning technology, the various companies inside and outside of the healthcare space. In late 2015 we realized there was a massive opportunity to make the world feel better through this hyperelastic polymer technology which we've since renamed Purple.

We invented our own proprietary machinery and processes that could efficiently produce our mattresses at scale. Since Purple launch, we've been focused on becoming the leader in the direct to consumer mattress space which space has grown over 400% in the last two years.

We believe that disruptive DTC players like Purple will drive the majority of growth for the bedding industry going forward as consumers become increasingly willing to buy mattresses online.

Within the DTC category, we believe that Purple has surpassed most of the competition in terms of size, the customer acceptance of our products and effective marketing.

In terms of online penetration within the mattress industry we believe that we're still in the very early beginning and we believe there is a meaningful upside as DTC players continue to capture share from traditional mattress retailers.

With our products and processes, vertical integration and marketing prowess, we believe Purple is well-positioned to continue to capture market share, built brand recognition, drive strong financial results, and generate value for our shareholders.

Now I'll turn it over to Purple's CFO, Mark Watkins, who will provide more details on the quarter, year and our outlook for 2018..

Thank you, Terry. As most of you are aware, on February 2, we completed our business combination with Global Partner Acquisition Corp. also known as GPAC. Through this transaction Purple became a wholly owned subsidiary of GPAC. On the date of completion GPAC changed its name to Purple Innovation Inc.

and the company's stock began trading on NASDAQ under the ticker PRPL on February 5. The fourth quarter and full-year results that I'm going to review today are for the predecessor company which is Purple Innovation LLC which will be on a standalone basis.

For the three months ended December 31, 2017 net revenue was $63 million, up 156% compared to $24.6 million in the prior-year period.

The revenue increase was primarily due to higher demand for our mattresses and related companion products in our direct consumer channel driven by increased marketing investments and generating awareness of our brand and understanding of our differentiated product offerings.

Additionally during the quarter we enhanced our manufacturing capabilities with the addition of a third Mattress Max machine to allow us to increase our output and better fulfill demand. Gross profit dollars were up 191% to $28.5 million during the fourth quarter of 2017 that's compared to $9.8 million during the same period in 2016.

Gross margin increased 540 basis points to 45.2% compared to 39.8% in the fourth quarter of 2016. The increase in gross margin was attributed to efficiency gains from our increased scale and manufacturing improvements. Operating expenses were $30.4 million in the fourth quarter of 2017 versus $10.0 million in the prior-year period.

The increase in operating expenses during the quarter is mainly attributable to a higher marketing spend in the effort to extend our brand awareness and drive direct consumer demand for our products. During the fourth quarter we reported an operating loss of $1.9 million compared to an operating loss of 235,000 in the fourth quarter of 2016.

Adjusted operating loss which excludes one-time nonrecurring costs which were primarily related to the business combination transaction with GPAC was 885,000 compared to an operating income of 414,000 which also had an exclusion for loss of disposal on property in the fourth quarter of 2016.

Net loss for the quarter was $2.0 million compared to a net loss of 236,000 in the fourth quarter of 2016. And EBITDA was negative for the quarter at $1.7 million compared to a negative 193,000 in the fourth quarter of 2016.

Adjusted EBITDA which excludes [indiscernible] legal fees associated with the GPAC transaction was negative 609,000 versus adjusted EBITDA the positive 456,000 in the fourth quarter of 2016. The year ago adjusted EBITDA excludes related party royalty fees, loss on disposal of property and equipment and legal fees.

Moving on to our full year view, net revenue continues to see tremendous growth increasing 201% to $196.9 million compared to $65.5 million in 2016. Similar to what we saw in the quarter, the increase in revenue was due largely to a certain demand for our Purple mattress and associated companion products through our direct to consumer channel.

2017 gross profit dollars were up 312% to $88.4 million versus $21.5 million during the same period in 2016. Gross margin increased to 44.9% from 32.8% in the prior year period driven by multiple efficiency gains associated with scale and manufacturing improvements.

Operating expenses were $93.8 million during the year ended December 31, 2017 compared to an operating expense of $23.4 million in the prior-year period.

This is due to a combination of the increase in marketing spend, infrastructure investments to support our manufacturing capabilities, the addition of key new hires and related team members, and an increase in R&D allowing us to further develop our product offerings.

For the year we reported an operating loss of $5.4 million versus a loss of $1.9 million in 2016.

Adjusted operating loss which excludes [indiscernible] legal related fees and disposal property and equipment was $3.5 million compared to an adjusted operating income of $2.5 million which excludes related party royalty fees, loss on disposal of property and legal fees from 2016.

EBITDA was negative for the year at $4.6 million compared to a negative $1.8 million in the prior-year. Adjusted EBITDA which excludes [indiscernible] legal fees and loss on disposal of property and equipment was negative $2.7 million versus positive adjusted EBITDA of $2.6 million in 2016.

Last year's adjusted EBITDA excludes related party royalty fees, loss on disposal of property and legal fees.

Adjusted EBITDA margins were impacted by a marketing spend and efficiency due to increased digital marketing and brand awareness cost, primarily in the second half of the year also impacted by capacity constraints and negative publicity from false competitor claims in 2017. Moving onto our balance sheet.

As of December 31, 2017 the company had cash and cash equivalents of $3.6 million as compared to $4 million at the end of 2016. Inventories totaled $15.8 million for 2017 compared with $5.3 million at the end of 2016. The increase in inventory was once again due to the demand for our products.

I also would like to note that our cash balance significantly increased with the completion of the recent business combination with GPAC such that we have sufficient cash on the balance sheets for working capital need and drive for future growth of the business throughout 2018.

So looking ahead to 2018, we expect net revenues to approximately double from 2017 levels and adjusted EBITDA to be towards the lower end of the range established in our investor presentation which was filed with the SEC on January 8, 2018.

For the first quarter of 2018 the company expects net revenue will be between $53 million and $56 million and adjusted EBITDA to be between a loss of $3.5 million and a loss of $2 million.

With respect to the start of our year, we are very pleased with the consumer response to the recent launch of our new mattress models which began selling in our direct consumer channel in early February.

These new models are differentiated from our original Purple mattress by the depths of the Purple material and the use of coils as the core of the mattress as it was found.

Due to the weight of the larger sizes of our new mattresses, we aren’t able to economically ship units to consumers using major carriers like we do with the original Purple mattress. Instead we're offering a white glove delivery service that utilizes a third party to deliver and set up customers new mattresses and remove their old mattress.

Like any new endeavor, there have been some early obstacles to overcome which have delayed shipments and pushed out our ability to recognize revenue on some recent sales. This headwind has been incorporated into our Q1 guidance.

We are confident that we will soon work out all the kinks associated with this new service and catch up on our current backlog of orders.

Finally with respect to our 51 store test with mattress firm, we continue to meet or exceed initial expectations and based on our ongoing dialogue we anticipate expanding our physical presence sometime in the second quarter of this year. In summary we are pleased with the progress we have made in our first two years of business.

We are excited to have finalized our transaction with GPAC which allowed us to become a publicly traded company and provided liquidity to fuel continued growth. We look forward to updating everyone on our progress during our first quarter conference call. I'll now turn the time back over to the operator for question.

Operator?.

[Operator Instructions] We'll go first to Peter Keith with Piper Jaffray..

Congratulations on the transaction and becoming a public company. I was curious on the manufacturing - you had capacity constraints throughout much of 2017, how did you wind up and maybe the last month of the year and maybe even a little bit insight into where you are now.

Are there any continuing constraints with manufacturing right now?.

So regarding capacity constraints in 2017, you're right we were capacity constraint from a manufacturing standpoint for the majority of the year. In December, we were able to bring online our Mattress Max three machine so that’s our third Mattress making machine.

And as part of that that allowed us to quickly catch up on the backlog that we had experienced. And we actually ended the year with very little backlog just a few days of production, a few days of sales. As we've moved into 2018, we've already brought on our Mattress Max four machine which came online here in early February and continues to scale.

As we look further into 2018, we do not anticipate any capacity constraints from a manufacturing standpoint. And as we continue to scale we’ll bring on our Mattress Max five machine during the year and potentially look to six depending on how growth scales, but right now no anticipated capacity constraints..

Just looking at where the gross margin ended up, now I guess where you had guided your sales and gross profit ultimately were above the - I guess the guidance you had provided. But on the margin rate it was a little bit below the range that was provided a 45.3 to 45.6 on the year.

Was anything that popped up in Q4 that caught you as a negative surprise?.

So we did have some surprises they were not significant in terms of any one thing, but there were several smaller things that did surprise us. They were really one-off type things, some inventory write-off that were not anticipated was probably the most major.

But outside of that we were largely in line with our expectation, it just turned out that a lot of the small differences all went in the same direction..

And then last one for me. So just on the outlook I guess within the ranges that you had initially provided back in January 4, 2018, but I guess will say both on sales and EBITDA basis you're at the lower end. Is there anything that in less two months has changed or is it just trying to set a more reasonable bar for yourselves..

Yes, we are trying to be conservative, but the real change in the approach to the guidance is that we have a lot of dynamic and unique opportunities ahead of us. We want to prioritize those and be reasonable in what we can actually accomplish for the year with a focus it allows us to truly execute against those.

So we just want that the expectations, that we can accomplish that. We can execute against those initiatives in the most effective manner. And so we may choose from a strategic standpoint not to tackle every one of the opportunities in front of us and that's really reflected in the guidance..

We'll go next to Brad Thomas with KeyBanc Capital..

Let me add my congratulations as well on becoming a public company here. I wanted to follow-up on the outlook for the first quarter in particular bank up the range that you provided 53 million to 56 million. It does look like it would be kind of step down sequentially in where sales clocked in 4Q.

Mark anymore color you could share with us on the magnitude of impact that you're expecting from, sounds like the delay is associated with the white glove delivery?.

Yes, so we’re still trying to get our arms around exactly what that's going to be, but there is an impact call it somewhere between 3 million and 5 million. And the reason for that is largely due to the hiccups in getting that white glove delivery service up and running in a smooth fashion.

We expect that we’ll be able to clean that up in short order in fact we’re making tremendous progress right now, but we got off to a little bit of a slow start and that’s what is kind of put us behind the April, so we’re playing catch-up right now.

The catch up is factored into that guidance and so those sales we do expect will flow through into the second quarter, but as we look at the overall business for the year and where we want it to be. We were expecting a slight step down from Q4 to Q1, but we are on track for our expectations for the year.

So there is nothing that’s happened in Q1 that has put us off of those expectations..

And then in terms of the new models, can you share any more about who you're partnering with to do the delivery any other details on how that's working?.

Yes, so we have one firm that we’re currently working with and we may expand that depending on demand, but the one firm I'm not going to use their name, but they are a national firm. They deliver for several other furniture companies and fitness equipment companies, so they are very well known and experienced.

And they have a national footprint that we are leveraging with multiple distributions centers across the country.

So does that answer your question?.

It does, yes. And then this is leveraging the expanded assortment that you initially rolled out in mattress firm and currently have online. I was hoping you could share a little more detail on how that's playing out from a mix perspective. How much you're seeing customers trade up into some of these newer higher price point models.

And what you think the financial benefits of that trade up maybe?.

So I would just point out for the broader group. We started selling those new models in mattress firm in November of 2017. And we launched selling these new models online along with our original Purple bed in February the second week of February during 2018.

We were very pleased with the performance and it is still very early and so I don't want to share too much information and expectations because we see a lot of variability from day-to-day in the new versus original mattress sales.

And part of the movement that we see from day-to-day is us testing what works and what doesn't work as we use our digital marketing to reach out and attract consumers to those different models.

And so there is a lot of testing going on our side to figure out what is the most efficient way to bring a consumer to our website that we bring them to the original Purple bed and have them converted so we bring them to the new models.

And so because that variability, I don't want to share too much information, but I would say that its being very well received, frankly exceeding our expectations right now. But we’ve only been selling them for a handful of weeks..

If I could just squeeze in one more here, just on the marketing side of things. Was hoping Mark you could give us an update on what you're seeing out there in terms of the underlying customer acquisition cost and as you all have got in a better understanding of the data behind it and what you're spending.

What kind of success you may be having at getting more efficient with your marketing?.

So you’ll recall at the end of 2017 primarily starting in Q3 and then carrying into Q4. We did see dramatic increases in the cost of our digital marketing, the cost of our platforms and providers passing those costs on to us. We've seen those decrease in Q1 that's just because of the seasonality.

We do expect that we will continue to see moderate increases in the cost per CPM throughout 2018, but we are testing a lot of different platforms. And so far things are looking very good in terms of our ability to manage through those increases.

So similar message to what I think we shared with you and others as we are going through the process of the transaction that we felt like we could manage those and we believe we are effectively doing that here in the first part of 2018..

We'll go next to Keith Hughes with SunTrust..

Just on the revenue guidance for the first quarter, what is that represent in terms of year-over-year growth in dollars and also if you’re willing to talk about in terms of units?.

So on a year-over-year basis our sales for 2017 were approximately $30.1 million and so the growth rate I don't have it right in front of me, but high 80% low 90% year-over-year growth rate depending on where we are in that range..

And would units be about the same?.

And so, we are seeing a slight increase in Q1, 2018 to our average selling price because of the new model. I don't have an exact number in front of me, but our ASP is going up so model account relatively speaking would go down as a overall percent.

But it still little early to tell where our mix of new model and where that ASP is going to land, but I would say its slightly under the dollar increase..

And finally I know you have a test going on here with mattress firm.

Can you update how many cities around - if there is any plans an outsize to expand that in 2018?.

So we are currently in three geographies, three cities or broader areas within the city in 51 stores. We have continued to see success and consistency in our sales of mattresses in those geographies. And so we do have plans with mattress firms to expand.

The details of that expansion are still being worked out, but we do expect several new geographies and expect that to happen during Q2 of 2018..

[Operator Instructions] We’ll go next to [Bhardwaj] with Raymond James..

Congratulations again on becoming a public company best of luck on that Terry and Mark.

I guess is there any information you can give us on the list that you got from firm on revenues?.

Sorry, but I didn't quite catch the question..

How much sales lift that you had that you get from mattress firm.

What was the addition to revenues for firm in the fourth quarter?.

I actually don't have that number in front of me..

I understand and - I know you gave to Keith the revenues last year, any help on the adjusted EBITDA results from the first quarter of last year the comparison I know we’ve got six months but now that they’ll be quarterly?.

That is correct, and apologize for that. We went through this process with GPAC on the merger and we actually did not end up with Q1 specifically review financial and so those have not been disclosed.

They will be part of our Q1, 2018 Q we'll go through that process and have a review, but not comfortable disclosing any of that right now just for that reason..

And how is the backlog look now and other products, as well as some as mattresses?.

So at the end of 2017 the backlog was really only a few days of sales because we're able to catch up with the help of the introduction of Mattress Max three.

Currently as it stands for the end of Q1, we will have some backlog specifically for those reasons that I mentioned with the delivery issues with our white glove service that we expect we’ll be able resolve here early Q2. But we don't have any capacity constraints so backlog would not….

Same on pillows too? I know pillows had been an issue at least a couple of months ago?.

So pillows have been an issue when we've done promotions, but we now have several new injection molding machines that enable us to catch up very, very quickly if we do get on a backlog within a matter of days. So nothing that’s pushing us out weeks like we had been in the past..

What about expenses or costs. So chemicals have been an issue for some and for a lot, we're seeing inflation in a lot of different places throughout the economy.

What are you all seeing?.

So our biggest item that we've seen increases on has been foam, and our increases have been in the neighborhood of really around 20% on a year-over-year basis. We saw those increases happen throughout 2017 but in Q4 that’s kind of moderated and have not increased for us through the end of Q4 or the beginning of 2018.

And so any increases in the future might - would be a little bit of surprise just because they do seem to have stabilize. Any of our other raws, we do have mineral oil which is a petroleum byproduct.

We do see that fluctuate a little bit based on the cost of petroleum, but our cost do not fluctuate exactly they are much more stable and moderate than the overall oil price.

Other cost we've not seen any increases and I would just point out because of the foam increases have not been substantial in terms of what we're showing on a trend from our cost of sales simply because we've been seeing improvements to our manufacturing processes.

And so that’s enabled us to keep those cost of sales roughly flat, even though we saw those increases in some of the in some of the raw going in specialty foam. We expect that will be able to continue to realize improvements to our cost of sales line primarily from efficiency improvements that we have planned throughout 2018..

I think that those efficiencies are coming in the factory I know there was a lot of work being done on process.

So I suspect that's where we’re going to see most of the efficiencies?.

That's correct. It's process and then equipment. So the GPAC transaction gave us a nice liquidity position that’s enabling us to reach out and get some automation equipment that we did not have the ability to do in the past. So that’s going to reduce our labor as a percent and allow for more efficiencies there.

And then the other thing I would point out in terms of the foam is that as we continue to see some of the shift from our old model which was a foam base to a spring coil base in the new model that also reduces that impact from the foam increases..

And finally from me, the news about Sam came as a bit of a surprise at least to me maybe others who are aware, I certainly wasn't.

Can you share a little bit about what the plans are and how you're going to determine his successor and what’s your timeframe is for doing that or what you think the - what the investment community should expect?.

This is Terry. I was the CEO with my brother Tony we were co-CEOs before Sam and I'm stepping in to take over until we find a successor. There is nothing really evil or unusual I respect Sam very, very much and probably everything you need to know is in that press release.

We’re going to continue to grow like we have been disrupting the overall mattress market as well as the DTC market. And our plans remain aggressive towards that end. We are doing a national search with the help of a consultant yet to be determined, but we’re interviewing right now to go after another world-class CEO..

And when do you think you’ll have that firm chosen and is there an independent committee of the Board been chosen to do this or is it basically you and….

We do have board members on an ad-hoc committee it’s not an official committee but very much active. We have identified players in the consulting and we probably can wrap that up by the end of next week. No, just the beginning of the search I'm not saying we’ll have the CEO by the end of next week..

No, I understood that I respect it..

Okay..

Well best of luck to you all and we certainly will be very interested in your progress..

At this time, I would like to hand the call back over to Mr. Pearce for any additional or closing remarks..

So, thank you. I really appreciate everyone calling in. We are at the beginning of a very long runway, we're differentiated, we're marketing very well right now. Our cost of marketing ratios are staying constant in the face of price increases because marketing efficiency is better.

We are doing a great job and I just want to know I'm still excited about Purple..

It does conclude today's conference. We thank you for your participation..