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ATER Aterian

Participants
Ilya Grozovsky Investor Relations
Yaniv Sarig Co-Founder and Chief Executive Officer
Fabrice Hamaide Chief Financial Officer
Tom Forte D.A. Davidson
Brian Kinstlinger Alliance Global Partners
Allen Klee National Securities
Scott Searle Roth Capital Partners
Call transcript
Operator

Ladies and gentleman, thank you for standing by. And welcome to the Mohawk Group Holdings Incorporated Q1 Earnings Report Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker, Ilya Grozovsky. Please go ahead.

Ilya Grozovsky

Thank you for joining us today to discuss Mohawk's first quarter earning results.

On the today call are Yaniv Sarig, Co-Founder and CEO and Fabrice Hamaide, Chief Financial Officer.

A copy of today’s press release is available on the Investor Relations section of Mohawk’s website at mohawkgp.com.

I would like to remind you that certain statements we will make in this presentation are forward-looking statements. And these forward-looking statements reflect Mohawk’s judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting Mohawk’s business. Accordingly, you should not place undue reliance on these forward-looking statements.

For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our first quarter earnings release, as well as our filings with the SEC.

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 non-GAAP metrics on this call. Explanation of these metrics and a reconciliation of non-GAAP to U.S. GAAP metrics can be found in the earnings release filed earlier today.

With that, I will turn the call over to Yaniv.

Yaniv Sarig

Thanks, Ilya and good afternoon everyone. Thank you for joining us today for this call. I would like to first and foremost thank our entire team at Mohawk for all their hard work during the last several months. Many of whom have been working remotely during this challenging time.

Keeping our people safe continues to be our number one priority. I would also like to thank our vendors, suppliers and other business partners who have been incredibly supportive in helping us ensure we have business continuity.

For those on the call, we hope that you and your family and loved ones are safe and healthy.

COVID-19 has been a clear reminder to all of us that that we can't retake our reality for granted and I don't end up driving your mindset is essential to adapt in times of crisis. Mohawk’s vision is rooted in leveraging data and supply chain agility to quickly adapt to market needs, without limiting ourselves to a particular category of products. The events of last month were an important opportunity to put our business model and our culture to the test.

I’m very proud of the adaptability that our team has demonstrated through this crisis. We announced last week that we have launched a new consumer brand called Holonix to meet the demand for personal protection products. Identifying through the data, the type of products consumers need during a pandemic is less of a feed in a case of a black swan event of this magnitude.

Our market research model within AIMEE, we used more to validate market size and competition than to find white spaces in the market, which nevertheless was very, very useful.

Based on our supply chain side, marketing and operation that swift reaction was required to identify the right partners and set our roadmap for products for our new brand.

While launching Holonix was a top priority for the company.

We also recognize that we have the ability to assist those in great need for PPE, personal protection equipment, and have dedicated a cross-functional team to this effort.

I want to thank the members of this team for working around the clock to help with the effort we are making to secure product for the many, many essential workers and others who are in need.

As a company involved in manufacturing, importing and selling products across various categories, we believe we have all the moving pieces are required to assist in the current situation. It is therefore our responsibility to step up and do everything we can to join the fight against COVID-19. And we will continue to do so in a way that is commercially viable for our company while maintaining strong ethics and responsibility.

COVID-19 has also played an accelerating role in our company's core model. E-commerce dramatically moved forward in its adoption, whether it's through our owned and operated brands or through our managed SaaS business. We believe that the capabilities that we've been building are now more than ever incredibly valuable. With our main channel, Amazon seeing massive growth in demand for its services, our sales has accelerated as we announced an increase of approximately 43% in our revenues during the first quarter of 2020 versus the first quarter of 2019.

Our technology platform, AIMEE and supply chain integration with 3PL warehousing partners proven valuable during the first few weeks of the pandemic.

As we were able to maintain high levels of service and delivery where other logistics services saw disruptions and delays in delivering items to consumers.

As we announced in our press release earlier today, we're continuing to witness an acceleration in our growth in April. We closed April at approximately 75% of growth versus the same month last year while seeing improvements in overall contribution margin as well.

At this time, pending any unforeseen events or disruptions, we maintain an expectation that the company will show positive adjusted EBITDA in Q4 of this year, as well as – as in Q3 as well as in Q4.

Given the uncertainty surrounding COVID-19, we put forward these estimates, cautioning those on the call are reading the statement that macro global events or other unforeseen incidents related to COVID-19 including further supply chain disruption could interfere with our plans. From a strategic perspective, Mohawk Group’s management is convinced that we need to take steps to secure profitability at the adjusted EBITDA level while maintaining healthy growth.

We've built an incredible company in a powerful supply chain and technology platform in the last few years.

Now more than ever, our execution on our model is essential to our mission of building the CPG company of the future. I want to thank our entire team for all the hard work and dedication we have shown through the years. We're looking to make 2020 a turning point year for Mohawk Group.

Finally, I'd like to thank Peter Datos for his tenure as Mohawk’s COO in the past years. We're excited to welcome from Pramod K C starting June 1 as our new COO based in Shenzhen. We believe that cultivating our executive leadership at the operational level in Asia is an important strategic investment for the company.

Pramod joins Mohawk over 18 years of experience in consumer product development, operations and supply chain management in China. His strong technical background in electromechanical engineering, as well as his senior management experience, which includes overseeing teams of up to 200 employees across product development, sourcing and procurement, quality control, making an ideal choice to run our operations department. We're thrilled to bring Pramod leadership to our executive team.

With that, I'll pass it onto Fabrice to discuss our financial results.

Fabrice Hamaide

Thanks Yaniv and good afternoon everyone.

Before discussing our results, I also want to take the opportunity to thank the first responders, healthcare workers and medical providers who are on the front-lines of the COVID-19 battle, and our thoughts are with those that have been impacted of course. I would first like to note that we have and other companies decided to provide monthly revenue information as a COVID-19 situation creates significant uncertainty for outsiders as to its impact on our business and providing such information will give better visibility. We plan on providing the monthly revenue results through Q2 and we'll reevaluate the need for monthly results in Q3.

Now moving to reviewing the operational performance details of our first quarter.

For the first quarter of 2020, net revenue increased 43.6% to $25.6 million from $17.8 million in the year ago period and was in line with our positive pre-announcement in early April.

The increase was primarily attributable to increased direct sales volume of $8.1 million or 47.7% growth of existing products as well as new products launched in the second half of 2019.

Our Q1 performance also benefited from the accelerated shift to online spending that began mid-March with the outbreak of COVID-19 even as overall consumer spending experience to pull back due to the pandemic.

Following a 62% year-over-year increase in March net revenue, the trend picked up pace as we moved into Q2 with April 2020 net revenue increasing approximately 75% versus April 2019. Gross margin for the first quarter increased 280 basis points from a year ago to 40.2% and was up 160 basis points on a sequential basis, excluding the write-off of expired inventory products that impacted the fourth quarter. The year-over-year improvement in gross margin was due to improved product unit economics in our sustained products, as well as lower price promotions and coupons on our launch products.

As mentioned on our last call, we're now reporting our net revenue by each phase of our owned and operated products.

As a reminder, they are launch, sustain, SaaS, liquidation and other. We defined the launch phase, with which on average, last approximately three months as the period of time where we are investing aggressively to – in marketing spend being pricing, coupons, brand rebates or advertising that have a negative contribution margin on the product in order to gain a foothold in the marketplace.

As defined, contribution margin is revenue minus all of our variable costs.

After the launch phase, products are expected to enter the sustain phase. We target that these products will have a positive contribution margin of 10% or more.

Our target contribution margin can be impacted by charges related to excess inventory, exceptional logistics charges related to Amazon and FedEx or UPS relationship, and all prime status to name a few.

Finally, for products that do not reach sustain or that we decide to exit, they moved to our liquidation phase.

The other categories include maybe SaaS and liquidation and other.

For our first quarter 2020, our sustain revenue was approximately $16.9 million versus first quarter 2019 sustain d revenue of $13.3 million.

For our Q1 2020, our launch revenue was approximately $6.2 million versus our Q1 launch revenue of $2.7 million, in Q4 launch revenue itself was $3 million on a trailing basis. In Q1 2020, we launched 16 products, which is less than the expected 20 products and primarily due to COVID-19 related delays.

The increase in launch revenue in the quarter was also due to late launches in Q4, which still were in their launch raise in Q1.

Our Q1 2020 SaaS revenue was approximately $0.4 million versus our Q4 SaaS revenue of $0.3 million and $0.5 million in Q1 2019.

Finally, Q1 2020, liquidation and other revenue was approximately $2.2 million versus our Q4 liquidation and other revenue of $2 million, and $1.2 million in the first quarter of 2019.

Our overall Q1 2020 contribution margin was negative 2.9% an improvement versus the prior year 4.5%, and the Q4 2019 of 6.6%.

And our sustain contribution margin was 6.4% versus the prior year’s negative 0.8% and the Q4 2019 of 5.8%. The year over year improvement was driven by significantly improved unit economics and margin expansion on our sustain revenue, which more than offset the margin drag from the increase in launch revenue. On a trailing quarter basis, the improvements was probably driven by the liquidation phase, as our Q4 results contained impacts a certain inventory write-offs.

I would note our sustain contribution margin was impacted as we incurred one-time costs related to the opening of our additional warehouses, were now at nine operational warehouses and over 50% of our sales are now delivering in one day to our customers at a lower fulfillment costs. Fixed costs for Q1 2020 were $5.7 million or 22% of net revenue, compared to $4.8 million or 27% of net revenue in the first quarter of 2019. The $0.9 million increase was driven by public company costs, such as auditories and D&O insurance.

Our headcount at the end of Q1 2020 was 146 versus, 142 at the end of Q1 2019.

The improvement in fixed cost as a percentage of net revenue from 27% to 22% highlights our ability to launch new products and grow revenue, while keeping fixed costs essentially flat.

We expect significant fixed cost reductions in the second half, both of our public company costs as well as of our operational costs as we continue to benefit from the automation provided by our platform.

Adjusted EBITDA for the first quarter of 2020 decreased to a loss of $6.4 million from a loss of $5.6 million in the first quarter of 2019, driven by public company costs and as well as additional launch of new products. On a sequential basis, adjusted EBITDA improved from the loss of $7.6 million in the fourth quarter of 2019.

Our path to profitability is a function of more revenue reaching the sustain phase, margin expansion of or sustain products and continuing to optimize our fixed cost structure as we continue to automate through any and lead to continued improvement in adjusted EBITDA.

Turning to the balance sheet.

As of March, 2020 we had $14.1 million of cash, compared to with $30.4 million at the end of December 31st, 2019. Cash used in operating activities for the first quarter was $17.2 million, compared to cash used in operating activities of $12.1 million in the fourth quarter of 2019, which was impacted by increased cash operating loss and increased cash usage in working capital, as we increased our inventory on hand, as a result of traditional seasonality due to Chinese New Year, as well as the tariff risk in Q4 2019 and the COVID-2019 impact on the supply chain as well. Based on historical trends, we expect that to generate cash from working capital in Q2 and Q3.

Overall cash burn was $16.3 million, compared to $5.3 million in the fourth quarter of 2019, due to the significant increase in working capital spending.

Our total debt as of March 31st, 2020 was $39.9 million, consisting of borrowing under our revolving credit facility and our $15 million term loan, as compared to total debt of $37.9 million, as of December 31st, 2019, increases a direct reflection of our planned increased inventory.

As it relates to coronavirus, as discussed on our Q4 call, the outbreak of COVID-19 in January had an unfavorable impact on some of our key manufacturing partners in China.

In addition to negatively impacting work operations for our team in Shenzhen, who are responsible for product sourcing and development among other things.

Our key manufacturing partners in China reopened on February 10, and quickly reached over 90% capacity early in March 2020. In March 2020, the COVID-19 outbreak became increasingly widespread in the U.S., and given its impact across the U.S., including the temporary closures of many businesses, shelter-in-place and other governmental regulations and despite a significant overall decrease in consumer spending, we have seen an increase in demand for our products across multiple categories of consumers are spending a much larger share of their spending online.

I would note that the longer-term impact on our revenues, profitability and financial position is uncertain at this time though the current trend seems to indicate that the shift to online spending far outweighs the overall contraction in consumer spending, and likely is a step function increase in the adoption of online shopping.

In terms of our outlook for 2020, we expect to launch approximately 10 new products during the second quarter or approximately 20 in the second half. We're slowing down our rate to launch into the data volatility we see in consumer behavior, which provides a more complex environment for our launch process, as well as our focus on reaching profitability in Q3 and Q4.

For 2020, we currently expect net revenue to be in the range of $165 million to $175 million, an increase from our previously stated guidance of $160 million to $170 million. This improved outlook is driven primarily by continued growth of our existing product portfolio and the positive contribution from new products launched in 2020.

We have incorporated the potential impacts of the COVID-19 in terms of inventory constraints for existing products, plan and delays in new product launches, consumer spending, contraction and overall shift to online commerce into our guidance.

We expect the adjusted EBITDA with respect to adjusted EBITDA, we continue to expect positive adjusted EBITDA in the third quarter of 2020 and now we expect to achieve positive adjusted EBITDA in the fourth quarter of 2020 as well, driven by further improvement in our fixed cost leverage ratio and higher revenue growth due in part to the accelerated adoption of online spending.

With that, I'll turn it back to operator for questions. Thank you.

Operator

[Operator Instructions] Our first question comes from the line of Tom Forte with D.A. Davidson.

Your line is open.

Tom Forte

Great. Thank you for taking my question. I hope everyone is doing well and stay well.

So the question I had is I wanted to address what I think is the biggest misunderstanding when it comes to your story in investors and it's the role of Amazon.

So in particular, when Amazon leaned into essentials, what challenges did that create for Mohawk Group and what opportunities did it create for Mohawk Group?

Yaniv Sarig

Fabrice, let me take that one. Hey Tom, thanks for the question.

So as I think a lot of people on the call know, when retail obviously being closed out to consumers, Amazon has seen incredible uptake in demand to the point where their own fulfillment warehouses were literally crumbling under the load. And I think everyone has been aware that they've tried to hire another 100,000 people to work cross their warehouses and anticipated to continue. We at Mohawk of course, as Amazon is a large channel for us, some of our products that still rely on the Amazon Logistics infrastructure were impacted by this, obviously a situation that Amazon was going through. But at the same time, the investment we made on the technology side started over three years ago with building up our own software, infrastructure and retail infrastructure to do our own fulfillment. And with the fact that almost 80% of our revenue today is flowing through our fulfillment platform.

We were able to really kind of mitigate the effects on Mohawk and continue to operate pretty much completely without any interruptions on the core revenue products, right? And so that allowed us not only to just be around there for consumers and help them with the product that they need, but given that most other third-party sellers who were using Amazon Logistics saw delays in shipping, we had an advantage during this period of time as our products were still shipping within the one or two day shipping that we put on to our own platform, right?

So, here again is a great example of how on one hand being reliant on the Amazon platform has been very useful for Mohawk, but at the same time, the investment in the technology has proved to be really unique and positioning us in a unique place to not be over-dependent as well, right? And so from that perspective, we saw a significant uptake in sales and then continue to see that.

Another thing we should mention is that more coincidentally then actually in planning, right? A lot of the categories that we decided to get in because the data in the regular course of consumerism showed a significant opportunity when we saw certain items and some categories just absolutely fly off the shelves, specifically, we launched a line of freezers and chest freezer at part of our home knobs category. We saw those items really kind of fly off the shelves in the first couple of days of that started with the announcement that COVID-19 was going to cause people to have to stay at home.

So products like the freezers, products like the standing desk for home office, products like the hair trimmers, also the products that we had brought into the market due to more traditional kind of data showing us that we can take market share, so massive increase in demand and sales during the first days of the pandemic as people were looking for these type of items not knowing when they're going to be able to go back and buy them in stores.

So overall, I think that COVID-19 is still a challenging environment for every company out there. I’d say that through our investments in the technology and infrastructure, we were able to navigate the situation pretty well. But the unknown is still ahead of us and so say that cautiously.

Tom Forte

Thank you. I’m going to step back in the queue. Thanks.

Operator

Thank you. And our next question comes from the line of Brian Kinstlinger with Alliance Global Partners.

Your line is open.

Brian Kinstlinger

Great. Hi. Thanks guys.

As you expanded the protective equipment in wellness market, I'm curious, I'm trying to understand your comments, if you going to use the same guide post for example, as you make sand – sorry, hand sanitizer, where there is significant demand, are you going to look past being the top two or three sellers for example? And this is a way to be socially responsible, while also making money on those products?

Yaniv Sarig

So on these type of products, right, those two initiatives that I spoke about in the call just a few minutes ago. One is our more traditional core business model where, again the data is showing us increased demand in this case really very low supplies right now for all these type of PPE equipment. We, on the core business decided to launch a brand that's going to focus specifically on that and just in our traditional way use the software and the data to zoom in on particular needs, specifically with Holonix for example, the first product that we launched is a unique kind of set of hand sanitizers that are more portable, those are little patches that you can take with you pretty much anywhere. Those are really focused on searches by consumers that are more related to on the go and travel. And we wanted to bring a form factor to the market that was unique from that perspective and that's the first product that we decided to do.

Just again, purely based on what we typically do with the data and how we bring products to the market. And that's again, something that we will continue to do across the entire category. At the same time, as I mentioned earlier in my comments, given that we have all the moving pieces to help with – I would say more kind of like B2B type of business, where a lot of demand for PPE in the market is out there for states, government and hospitals. We decided to allocate some resources, specifically a cross functional team that would look particularly at that opportunity and have again put in place an effort to help at the same time and again a business sustainable way with this effort, given that we have all the needs that – all the moving pieces to go and do that, right, so we felt that it was a responsibility as well as an opportunity for us to do so. And we'll continue to do that as the demand increases both on the PPE B2B, but also more importantly with our core business as real Holonix brand.

Brian Kinstlinger

Great. Thanks, Yaniv. Can you – I don't know if you can give this or have an idea yet. Do you know of the 30 products that you expect to introduce in the third – second, third and fourth quarter? How many will be from this new category?

Yaniv Sarig

Yes, it’s a great question.

As Fabrice mentioned before, on one hand, we have exponentially explosive data on all the demand for PPE, right, which is quite interesting and exciting when you're able to capture that data and you have the supply chain to react quickly to it.

So there is definitely an inclination to go and try to take advantage of that momentum that's happening in the category and probably take a lot of those products will come up – other products coming in, in those 30 products that we mentioned are going to go into that category. At the same time, you know, as again, Fabrice mentioned earlier, since there's so much volatility still in the – I'd say demand for more traditional consumer goods, we want to see how things pan out in the next say quarter or so to really kind of figure out exactly how much of those products this year will go into the other category.

So the situation is quite fluid. We're looking at a lot of opportunities across the two different sides of this equation, right, both the more traditional items on the day-to-day and the PPE related items. We're convinced that, obviously with Holonix and the PPE, the demand is going to stay strong in our opinion for awhile and it does make a lot of sense to go in, and again, leverage the data and the supply chain that we have to quickly react to this and take market share where we can in the long run, not just to the crisis of course.

So again, the situation is still fluid, we're evaluating, we're always prioritizing on-the-go, based on the data. But the significant part of that allocation should probably definitely end up in the, under the Holonix brand to answer your question.

Brian Kinstlinger

Great. One last question, I'll get back in the queue for Fabrice. The inventory build was quite significant, I'm sure that used a good amount of cash. Can you talk about for the products that are driving growth in March and April? Are you easily replacing that inventory?

Fabrice Hamaide

So – yes, the fulfillment side of things from a supply chain perspective is really completely back to normal.

Now, to be honest we – as I indicated, I mean, we see growth across almost all of our products and some of them are out layers and are not growing, but exploding, right, so I can mention for example, Yaniv, I think was talking about it. And over the course of confinements, those products actually changed, it started with freezers and we ended up actually running out of freezers, because you ended up actually having a growth that was astronomical, right, as compared to a standard levels, despite our inventory loan position, we still ended up actually running our own inventory.

So then after that you've got manufacturing cycle shipping and so on and so on, which takes place and there is nothing you can do about that, right.

After that, it moved to air purifiers, and after that it moved to here trimmers, after the third week of confinement when people realized that they could not go to the barbershop, right.

So and then after the fifth week of confinements being totally bored or needing to actually get out of the house, they ended up actually jumping on everything that had gotten tools in it.

So those are out layers around exceptional basis, but for the normal massive – significant growth that we've seen across all products from that shift to online spending, thanks to our inventory loan position, we have not run out short and we are actually able to actually replenish at the normal rate without any significant disruption.

Brian Kinstlinger

Sorry, just one follow-up to that Fabrice. To that end, consumers and all people around want another freezer, another refrigerator right now to have as much food as they can. How long does it take to build inventory back up for that – a product like that or others, right that are getting completely acquired?

Fabrice Hamaide

Yes. The real issue here is you have to separate in the increase in volume, the blip from the permanent growth of e-commerce.

So a portion of the growth that you saw, for example, on e-commerce is a massive fear of food lines disruptions and food supply chain disruptions. And therefore I'm pulling up on extra food. That's a one time blip on the demand.

The second part of the increase in demand is a more permanent or – is part time or short lived, but most of it will be long lived, that is a permanent acceleration of the online, that means that the online channel will take a bigger share of the total chest freezer market sold every year.

You want to reorder for that movement, not for the blip, because the blip is not in the last forever. And then you, if you actually reorder based on the blip itself, you end up actually being inventory long for a long time, right, as the blip disappears.

So it's – the challenge on the inventory side today is to always actually parse the increase in demand from the blip factor or the one time factor versus the permanent market share gain in the overall consumer spending in chest freezers, right.

So it’s not always easy, we are making a strong focus on profitability.

So instead of carrying inventory for a long period of time, we will actually potentially on occasion be inventory short on some products if we don't parse the extra demand correctly between the blip and the permanent growth factor. But overall that's one of the advantage of being data driven that you can actually see the overall change and after that you can see afterwards that chest freezers are going back down, not to the level it was before, right, [indiscernible] right, not to the low as before, but still higher than before.

And when you see that, then you can actually assess correctly, what is the long-term market share gain of online and the overall consumer spending and that's on that basis that you actually built your inventory.

Brian Kinstlinger

Great. Thanks so much. I'll get back in the queue.

Yaniv Sarig

Yes.

Operator

Thank you.

Our next question comes from the line of Allen Klee with National Securities.

Your line is open.

Allen Klee

Yes, hi. Could you talk a little about how you think about the revenue run rate to get to, to be sustainable profitable? And perhaps if you could address this in terms of contribution margin and fixed costs, I mean, the way I look at it from what you just said now, you said a $5.7 million fixed costs this quarter, and then, I don't know if you assumed the blended contribution margin of – if I made up 8%, that would employ around $71 million of revenue, would get you there. Is that the way you think of it or is there some other way that we should be? Thank you.

Fabrice Hamaide

So, yes. Thanks Allen for the question. That's a very important question.

So remember that our blended contribution margin is actually made of – or is impacted massively by the number of parts that we launch, right. And as you saw of course in Q1, we actually launched a massive number of new products and we also had all of the ones that were launched in December, which was also – so we launched a record number of products in Q1, right, that degrades very significantly your CM.

And so by – the changes that we're doing here is, slowing down a little bit on the new launches, which will improve the overall CM. And then on the sustain CM itself, you're gaining a nail with the new warehousing platform that we implemented through our Q1.

And the new deal that we signed with UPS three weeks ago now, four weeks ago, and that is now fully operational 99.9% of our grids right now are shipped by UPS.

You’re going to see margin expansion starting to actually happen quite a bit. That was the one of the intention of moving to that new operational flow.

So that's on the CM side, so you’re going to see a CM expansion on sustain and because the proportion of sustained to the overall revenue will increase, especially with the – in Q2 and Q3 being our seasonally high numbers, you will start actually seeing a bigger CM positive CM contribution dollars.

At the same time, as I indicated, one of the benefit of the platform is, as we automate things, it allows us to then go back down on our investment in fixed costs, because we automated a new portion of the platform, for example.

So our fixed cost is actually going to go down from the $5.7 million, not so much in Q2, a little bit in Q2, but not much, but more significantly in Q3 and Q4. And it's also linked to the fact that it's all one year, so June 14 will be our one year of public company listing. And that means that there are some costs that you actually pay on the first year that are extremely high, that can go down because you're not in the same company anymore. I'm thinking of D&O insurance, for example, where your rates are extremely high on the first year and then go back down quite significantly on year two – starting on year two.

So our fixed costs will go down as well.

So you have the combination of margin expansion on the CM business, on the – margin expansion on the sustain business, higher proportion of sustain business in the total number of sales and lower fixed cost as well. And that's the way you actually get to that profitability level in Q3 and Q4.

Allen Klee

That's very helpful. Thank you. And turning to your third-party logistics opportunity to sell to others, first off, how do we think about of how big an opportunity and if you've had any traction there? And then second, just what you just said of you're going to benefit with your new deal with UPS. It's interesting because like the companies I cover that actually did a warehouse and logistics for e-commerce. And then if you just look at Amazon, their costs are going up significantly to provide because of what they have to do with social distance and safety measures. And I was just wondering is there a risk that those higher costs of them running their businesses could get passed along to you?

Fabrice Hamaide

So I'll take the cost side and Yaniv will talk to the SaaS side. That works, Yaniv?

Yaniv Sarig

Okay, perfect.

Fabrice Hamaide

Great.

So on the cost side, so the advantage of our platform is that we actually are distributed on the warehousing side, that's where you have most of that extra costs because of social distancing, having less workers in the warehouse and so on and so on. But we have the benefit of actually having out of the nine warehouses, those are actually supported by six different companies, right.

So we can always actually – and of course, the rules are actually different state-by-state. The situation of the COVID-19 is different by state-by-state. And all of those elements actually play into having a different implementation of the social distancing and needing extra workers are not right.

So the carrying on, on extra cost carried by our providers is not as significant.

The second reason is most of the revenue that we actually derived through our FBM platform on the fulfilling network are what we call oversized. They are very simple from the logistics, from the warehousing and pick and pack process. It is not a complex process where you have one person or multiple people going into multiple aisles, crossing each other and so on and so on, right.

When you buy a dehumidifier, the order is for dehumidifier. One person goes, gets the dehumidifier, puts the label on it, it's on the deck ready to be picked up by UPS. There was very little interactions with multiple people.

So we don't have actually those extra costs in social distancing because by definition, the type of products that we sell are actually already being carried by a single person in a single aisle, right.

So that's the reason why we're not suffering from that. And then finally the – in the case of UPS, of course there's one person in a truck.

So the cost of UPS in itself is actually not really going up, but UPS is very, very happy to actually pick up our increased volume, right. We shipped through FBM last year, ourselves through our own fulfillment network. Approximately 1.4 million orders, individual orders.

And we had shipped the year before, less than 600,000. Everybody wants that growth and that's the reason why we're actually having purchasing power, which would benefit from, they still make money, short of that. But less of them are they were making less margin with us than they were doing before because they have a volume gain with us. That's on the cost side. I'll let Yaniv respond on the update from a SaaS perspective.

Yaniv Sarig

Yes. Thank you, Fabrice.

So yes, in terms of offering the Platform-as-a-Service and particularly when it comes to the fulfillment, as Fabrice mentioned, the independence of the logistics platform of Amazon coupled with also the optimizations we've done around the categories that are what we call oversized is giving us a unique advantage, right.

I mean, I think we talked about it in the past, but one of the challenges that a lot of the other logistics platform and infrastructure have is when they are asked to warehouse and ship larger items, they're doing that at basically the cost of a lot of smaller items that they could potentially have in their portfolio. And therefore the price is typically for oversized item shipping through the Amazon FBA platform or other competing logistics platforms are quite high.

And so the strategy we're taking here is as you can see also from our roadmap on the products, right, we've gone to significantly higher size categories and we've optimized our fulfillment platform to be very, very cost efficient.

In fact, typically most cost efficient than other competitors when it comes to oversized product.

And so from that perspective, the strategy of going after the SaaS revenue, in this category is going to initially probably put a lot of focus on these type of categories as well.

So companies out there who are selling furniture, appliances, all sorts of other industrial items that are typically larger size.

We have a very compelling value for them just purely from a unit economics when it comes to shipping their items, right.

And so what we're doing is we're focusing on these companies first, given them not just the fulfillment, but also the other capabilities that the platform is giving, including the automation, the marketing, but with that anchor of unit economics that is quite strong and should give us a huge advantage over anyone else that we're going after, right.

So that we're competing against with the service.

And so between that, the ability to fulfill prime, we think that with this focus, we'll be able to bring in sellers and vendors on e-commerce platforms that we want to benefit from that. And what's very unique about the way the business is built is with the two legs that we have our owned and operated.

And the third-party SaaS customers, all of them flow through the same logistics infrastructure, which give us economies of scale? Because as we put in more and more revenue on the platform, whether it's own and operated or through SaaS, we're able to continue to increase the volumes and continue to keep an appetite from the different players on the logistics platform, fulfillment side to give us better and better rates, which would then should then hopefully affect both the contribution margin on our own products as well as some of our partners, right.

So it's a volume play.

I think that we are already Mohawk itself with its owned and operated businesses already a significant player in terms of the volumes and any client that we would add on the SaaS side should help us on both sides of the business, both in our owned and operated TM, but also in offering them better value as we continue to negotiate better pricing.

Allen Klee

Thank you. Very helpful. My last question is, have there been any changes in the metrics of the success rates of your launches and the average revenue per product sold?

Fabrice Hamaide

So the average revenue per product sold is actually obviously a variable to the products that we sell. I mean, we launched a line of dehumidifiers, some chest freezers products like this, which are of course a higher value or ticket items from a price perspective. When it comes to the success ratio where – when you analyze all of the products that will launch from December all the way through end of March, a significant majority of them are still actually in launch phase.

So it's too early to actually give an update on the success ratio and so on and so on.

And we'll provide a better visibility actually to the success ratio of the Q1 launches, for example, when we get to announce the Q2 numbers in late July or early August. By then either they move to sustain or they actually move to liquidate, but then we have actually completed the entire cycle by them, right.

Allen Klee

Okay. Thank you so much.

Fabrice Hamaide

Yes.

Operator

Thank you. And our next question comes from the line of Matt Koranda with Roth Capital Partners.

Your line is open.

Scott Searle

Hi, it's Scott stepping on for Matt. Congrats on the quarter.

First, so you guys raised the guide by $10 million. And we talked about April being up 75%, after March being up 62%. Kind of help us understand the building blocks to that guide, is that just partially demand falling as consumers come out of lockdown? Or is it also like how do you tie that also to like the new product launches?

Yaniv Sarig

Yes, so first, of course, as we're going to launch less products overall, right. I mean, we're on a pace to actually launch seven products – six products to seven products a month, right. And we're really taking it down for the moment until we see more stability in the data itself, right. And we don't know how long it's going to be.

So we're taking a very prudent and cautious approach from that perspective and saying we wait for the moment, for the rest of the year, we're planning on a slowdown number of new products, we may very well actually decide to or have the opportunity to accelerate, should the market conditions change, right. But of course, nobody knows how the COVID situation is going to impact us in the rest of Q2, Q3 or even Q4, right.

So we're taking a cautious approach to that.

So that's actually a negative view on the top line.

On the other side, as we said, I mean, right now we're seeing a significant acceleration in sales.

As you noted, 75% in April so if you were to take a straight line and say, those guys are growing 75%, or they're increasing only by $10 million because we don't know where they – we know that a portion of that 75% will stay.

Once the blip side of things disappears, once retail stores open, the other thing that we actually know as well is that the adoption of online spending will remain.

So as consumer spending will increase overall, they're spending, sooner or later, consumer will increase their spending. Overall a bigger share of it will stay online. How much? We don't know yet.

So there's a lot of uncertainty which we baked into that number. And came to a lot of very strong positive factors, some short-term, so long-term like the adoption of online, like our advantage on fulfillment and delivery dates for example.

And some negative with slowing down the rate of growth of new products. And that's the reason why we came to that 165 to increasing our top line guidance by $10 million. And we'll provide in due course a revisit if need be when we announced Q2 and Q3.

Scott Searle

Got it. That's fair enough. Thank you for walking us through that. And kind of just on the PPE and software like the managed SaaS and then the 3PL, are you seeing any of your customers just go straight, the ones who are using FBA just go straight to Mohawk's 3PL rather than going by managed SaaS? How do you think about that?

Yaniv Sarig

So the offering is somewhat related, right, like you – when we offer the SaaS - managed SaaS service, right. Fulfillment is either not part of it, right, when you look at smaller categories of items, for example, say a client that would be more on the makeup side, right. We would advise them to take our managed SaaS offering, but leverage the Amazon network and FBA network unless there's interruptions there because of COVID-19.

We would advise them to use our other modules, but not use the fulfillment because for these type of items, we don't necessarily yet have an advantage or will have been in a fairly short period of time on the fulfillment costs, right.

And so really it depends a lot on the nature of the managed SaaS client where in some cases, we would offer them all the modules including fulfillment.

And in some cases, it might be just for selling products.

So it's a bit of an à la carte approach. But as I mentioned before, because of the quite obvious advantage on the unit economics with the oversize, we're looking in terms of focus right now to look a little more on these type of companies. And then of course if others come in and are interested in the offering, regardless of the fulfillment, we'll look at them as well. But from an outbound perspective, our focus is more on those larger oversized categories. Does that make sense?

Scott Searle

Yes, it does. Thanks. Very helpful.

Operator

Thank you. And our next question comes from the line of Tom Forte with D.A. Davidson.

Your line is open.

Tom Forte

Hi, thanks.

So a follow-up question from me and then everyone stay well.

So on their earnings call, another innovative tech company, Shopify suggested that COVID-19 essentially moved this 10 years in the future from a technology standpoint. Would you agree? And how is that beneficial to Mohawk Group?

Fabrice Hamaide

When you say from a technology perspective, I assume you mean from a consumer perspective, right, adopting the technology of e-commerce. Is that right, Tom? Did I get that question correctly?

Tom Forte

Both from an adoption standpoint and because of the increasing importance of digital from a technological standpoint, it requires companies to be more technologically advanced.

Fabrice Hamaide

Yes. That makes sense. Yes. I mean, I would say that I agree very much with the statement.

I think we'll continue to see an acceleration of e-commerce adoption. And you're right on both sides, right, consumers who were potentially on defense previously, we'll probably again make the effort of adopting online and once that effort is achieved and the convenience of online is something that shows up at their door and they don't have to go to the stores anymore, we certainly believe that there's going to be a leap forward in that adoption of the consumer side.

When it comes to the business side, right, the companies – consumer product companies, we also see that as a quite a benefit for Mohawk as a lot of CPG companies that in the path took maybe a slower kind of like approach to digitalize themselves and become better suited for online, are going to seek to accelerate that now. A lot of them are going to look at e-commerce as a more critical path for their future that they need to adapt to.

And I think that when it comes to our managed SaaS offering, this should be an opportunity for us if we exit as well to offer them a solution that I think uniquely for us, we're positioned to really offer solutions that are kind of turnkey end-to-end as opposed to just the software. And I think that that could become an advantage as more consumer companies look to again become better at e-commerce.

So hopefully, again, all depends on our execution. But on both ends, I think that Mohawk is really at the right place at the right time when either it's only an operated business leveraging the higher demand of consumers for online products as well as on the CPG side, companies that have been doing well in retail looking to accelerate now their capabilities on online.

If you could – well, it could become significant partners on the manage SaaS side.

Tom Forte

Thanks for taking my questions.

Fabrice Hamaide

Thank you, Tom.

Operator

Thank you. And I'm not showing any further questions at this time. I'd now like to turn the call back to your speakers.

Yaniv Sarig

Thank you everyone for your time today. I appreciate the time on the call and we will look forward to speaking to you again in the next earnings call. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

You may now disconnect. Everyone have a great day.