Kate Scolnick: Yes. So the OpEx is higher in the front half and then lower in the back half, yes. That is true.
Charles Rhyee: And the change is that largely gross margin improvement then?
Kate Scolnick: No, we have decreased again sequentially in operating expense from Q4 to Q1 and then again in Q2. So we have additional tapering. We do have some expense – a little bit of expense related to clearances in Q1 and then some additional optimization that we’re doing around expenses. So we’ve had this four quarter trend of taking on expenses, and we still have identified some additional rationalization that we’re doing. So that is still around operating expense, but we are also expecting gross margin improvement. So both of the levers we’re using to get there.
Charles Rhyee: And stock-based compensation assumption, should we think about 2022 as the right amount? Or would you expect that to be more or less?
Kate Scolnick: It’s about the right amount.
Charles Rhyee: Okay. I’ll jump back in the queue. Thanks.
Operator: Thank you for your question. The next question is from the line of Allen Lutz with Bank of America. Your line is now open.
Allen Lutz: Hi, good afternoon and thanks for taking the questions. Kurt, you mentioned the cost per acquisition down 80% since the beginning of 2022, that’s clearly a really good form of operating leverage here. I guess what is that due to? And then as you think about sort of the run rate of sales and marketing spend in 4Q, just trying to understand if there’s more juice to squeeze on that line or if most of the leverage is going to come from G&A?
Kurt Workman: Yes. Great question. I would think about that in kind of two ways. First, getting the Dream Sock portfolio launched we spent aggressively to do that. So we had to reposition all of our products. We had to get our rankings online, which is a key indicator of sales and sell-through backup. We had to start moving just a lot of momentum to get back out there in the marketplace. And then there’s a lot of confusion around does Owlet sell products or not, what’s in the product. And so we did a lot of education. So I think the first half spend was heavy. But in the second half, we did find a lot of efficiencies and optimizations that areas of spend that we’ve spent for years and as we tested and optimized and turned things off, we realized they weren’t contributing and they weren’t efficient.
And I would say that the other piece of driving that efficiency is the product satisfaction improvements. We launched our CAMP 2. We launched Predictive Sleep. The second half of the year, we launched a new app submission update almost every week to improve that product experience. 53% of our purchases come from word of mouth. And so really using that word of mouth and finding other organic ways to get people to consider the product, we’re talking organic on TikTok and social to the tune of tens of millions of views and interactions that we didn’t have to pay for. So I think the team got really creative, which is the kind of the second piece to this. As we move forward, there will be a decrease Q4 to Q1 with marketing spend and where we’re at today is more efficient than we were in Q4.
And I think that will start to stabilize through 2023. I don’t know that Q1 to Q2, you’ll see a lot more efficiency decrease, but you will Q4 to Q1 from a sales and marketing perspective in terms of variable marketing expense.