Aterian, Inc. (ATER) Q1 2024 Earnings Report, Transcript and Summary

Thank you for standing by. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aterian Incorporated Q1 earnings report. [Operator Instructions] I would now like to turn the call over to Ilya Grozovsky, Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you for joining us today to discuss Aterian's First Quarter 2024 earnings results. On today's call are Joe Risiko, our co-CEO; and Arturo Rodriguez, our co-CEO and CFO. A copy of today's press release is available on the Investor Relations section of Aterion's website at aterian.io. Before we get started, I wanted to remind everyone that the remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management expectations. These may include, without limitation, predictions, expectations, targets or estimates, including regarding our anticipated financial performance, business plans and objectives, future events and developments and actual results could differ materially from those mentioned. These forward-looking statements may also involve substantial risks and uncertainties, some of which may be outside of the control and that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties, among others, are discussed in our filings with the SEC. We encourage you to review these filings for a discussion of these risks, including our annual report on Form 10-K filed on March 19, 2024, and our quarterly report on Form 10-Q when it is available on the Investor portion of our website at aterian.io. You should not place undue reliance on these forward-looking statements. These statements are made only as of today, and we undertake no obligation to update or revise them for any new information except as required by law. This call will also contain certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin which we believe are useful supplemental measures that assist in evaluating our ability to generate earnings, provide consistency and comparability with our past performance and facilitate period-to-period comparisons for our core operating results. Reconciliation of these non-GAAP measures to the most comparable GAAP measures and definitions of these indicators are included in our earnings release, which is available on the Investor portion of our website at aterian.io. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. We are unable to provide a reconciliation of non-GAAP adjusted EBITDA margin to net income margin, the most directly comparable GAAP financial measure on a forward-looking basis without unreasonable efforts because items that impact GAAP financial measures are not within the company's control and or cannot be reasonably predicted. With that, I will turn the call over to Joe.

Thank you, Ilya, and thank you, everyone, for joining us today. So I'm going to discuss our Q1 results and then I'm going to discuss the actions that we're taking to foster organic and inorganic growth for term in 2024 and beyond as we continue our efforts to focus, simplify and stabilize Aterian's core business and as we continue on our mission of achieving adjusted EBITDA profitability in the second half of 2024. Artu will then cover in more depth our financial results for the first quarter, and we'll provide our outlook for Q2. For those of you joining us for the first time, I'll start with a quick primer on the period. Aterian owns and operates its own consumer product brands. We market and sell consumer products in the following categories: home and kitchen appliance and accessories to our hOmeLabs Mueller and PureStem brands, health and wellness products, primarily through our QuadPay brand, iron ore transfer paper products through our PPD or photo paper direct brand, and essential oils products through an umbrella of brands, including Healing Solutions. Today, we sell our products primarily in the U.S., and we earn most of our revenues from the amazon.com marketplace. With respect to Q1 performance, overall, we are pleased as we are seeing results from our efforts to focus, simplify and stabilize Aterian's core business. As a quick recap, we've rationalized our SKU portfolio. We reduced our number of seller accounts. We simplified logistics and technology infrastructure. We've jettisoned noncore initiatives, and we've better organized our revenue and operational workflows. And of course, we continue to assess and to refine each of the above with a view towards optimizing for profitable growth and scale. While the macroeconomic environment remains uncertain, and we continue to experience pricing pressure in the highly competitive discretionary product categories in which we operate. In Q1, we improved gross margin to 65%, and we improved contribution margin to 16% versus Q1 of last year. I'd like to note that we expect our gross margin percentage to fluctuate quarter-to-quarter for the rest of 2024 due to pricing and product mix, but to remain strong, and we do expect our contribution margin percentage to remain primarily in line with Q1 results, both of which we believe position us well to achieve adjusted EBITDA profitability for the second half of 2024. In addition, we also have a good handle on our fixed cost structure, and we believe that this cost structure, together with our healthy balance sheet will allow us to pursue both organic and inorganic growth strategies. Overall, we remain on track to achieve our previously stated goal of adjusted EBITDA profitability, and we believe we can continue to position Aterian for scaling growth. With respect to our organic growth strategy, while we had no product launches in Q1, we continue to work hard across our portfolio with respect to each of our brands, and we expect to launch a number of products in Q2 relating to our hOmeLabs, essential oils and newer Living brands. We've been working hard to revitalize our new product development strategies, and we are seeing progress, and we are seeing opportunities to strengthen, stabilize and grow our business. From an omnichannel perspective, we continue to focus on expanding channels and geographies primarily with a focus on marketplaces. As previously disclosed, we expanded to Mercado Libre as part of our partnership with them. And while the preliminary results are not material to our financial results, we are optimistic that this partnership and channel will help us drive growth through our existing products and potentially through new product launches. We have also begun sales on Amazon, Amazon's Canada marketplace for certain of our products, and we will continue to expand our portfolio in that marketplace, and we have expanded our portfolio of products for sale on Wayfair's marketplace. We are also actively working to expand to other marketplaces, including Amazon Mexico, Walmart Mexico and Target Plus, and we will provide updates with respect to each of these initiatives in the coming quarters. And lastly, we are continuing to assess expansion to other domestic and international marketplaces. With respect to our inorganic growth strategy, in Q1, we saw an increase in higher-quality M&A opportunities. And while we remain disciplined and focused, we do believe there will be opportunities for Aterian to pursue accretive and synergistic transactions as we progress in 2024. Overall, growth from M&A remains an important part of our overall strategy, and we are excited and optimistic that we will be able to realize meaningful growth from this strategy. Lastly and importantly, I want to recognize our team. We are a lean the formidable group of people have gotten smaller, given the restructuring from earlier this year. But we do believe this team is highly capable of driving growth, and Artu and I are very proud of the work that's been done and that is being done. And now with that, I will pass it along to Artu. Thank you very much.

Thanks, Joe. Good evening, everyone. We continue to make progress on our path of focusing, simplifying and stabilizing the term. We're starting to see results from these missions as our key metrics are improving and our losses are shrinking. Our Q1 results were at the high end of our expectations. Our gross margin improved by over 10 basis points to 65%, and our overall CM is approaching 15% as we rationalized our SKU portfolio, focusing on our core SKUs and have essentially stopped selling nonprofitable SKUs. As planned, our sales have declined, but the core business metrics continue to improve. Our first quarter net loss improved by 80% year-over-year, and our adjusted EBITDA loss improved by 38.4% as we continue to make tough decisions. As previously announced in February, we have rationalized our fixed costs through our go-forward size and scale for our focused company. Finally, we continue to strengthen our balance sheet with our MidCap credit facility amendment. We still have more work to do on our path towards adjusted EBITDA profitability. However, with Q1's performance, we are confident our plan is working and that we are on the right path to deliver 2024 second half adjusted EBITDA profitability and have the balance sheet strength to deliver these results. Now moving to the Q1 detailed results. Net revenue for the first quarter of 2024 declined 42% to $20.2 million from $34.9 million in the year ago quarter. Our sustained revenue of $18.2 million decreased as expected by 36% or $10.4 million from $28.6 million, primarily as a result of our SKU rationalization efforts and continued pricing pressures and other competitive impacts. Including the impact of SKU rationalization efforts into the comparable prior year, the sustained revenue would have only decreased approximately 25%. Further, our sustained revenue represented 90% of our total revenue versus 82% in the prior comparable year period. And as such, you can see our business continuing to focus towards our best SKUs. As planned, we had no new launches in the first quarter. We do expect more launches primarily valuations in the coming quarter as we continue to be thoughtful on the timing of our product launches. Overall gross margin for the first quarter increased to 65.1% from 54.8% in the year ago quarter, an increase from 51% in Q4 2023. The improvement was driven by the positive impact of our SKU rationalization efforts, product mix and lower liquidation of high-cost inventory compared to the prior period. Our overall Q1 2024 contribution margin, as defined in our earnings release, was 14.1%, which improved compared to prior year's 5.9%, an increase compared to Q4's 2023 CM of negative 0.8%. The year-over-year increase in contribution margin was driven by the positive impact of our teratoization efforts and lower liquidation of higher cost inventory compared to the prior period, offset by competitive pricing pressures. Our Q1 2024 saw our sustained product contribution margin improved year-over-year to 16% versus 12.6% in Q1 2023. The increase in contribution margin was driven by our focus on more profitable SKUs as part of our SKU rationalization efforts, offset by continuing pricing pressures and other impacts. Including the impact of the SKU rationalization efforts into the comparable prior year, the sustained CM would still have been an improvement of approximately 1%. So that improvement will be more pronounced as we progress through 2024 as compared to the prior year. Looking deeper into contribution margin for Q1 2024, our variable sales and distribution expenses as a percentage of net revenue increased 51.1% as compared to 48.8% in the year ago quarter. This increase in sales distribution expenses is predominantly due to product mix and an increase in marketing expense. Our operating loss of $5.3 million in the first quarter improved from a loss of $25 million compared to the year ago quarter and an improvement of approximately 78.9% and primarily driven by the improvement in CM, the reduction in fixed costs, including noncash stock compensation and no impact of intangible write-offs in the current period, offset by our current period restructuring costs. Our first quarter 2024 operating loss includes $1.7 million of noncash stock compensation expense and restructuring costs of $0.6 million. While our first quarter 2023 operating loss includes $2.3 million of noncash stock compensation expense and a noncash loss of intangibles of $16.7 million. Our net loss for the quarter of $5.2 million improved from a loss of $25.8 million in the year ago quarter, an improvement of approximately 80%, primarily driven by the improvement in CM and the reduction in fixed costs and the impact of the intangible write-off in the prior year. Our adjusted EBITDA loss of $2.6 million as defined in our earnings release, improved by 38.4% from an adjusted EBITDA loss of $4.3 million in the first quarter of 2020, primarily driven by the improvement in CM and on the reduction of fixed costs. Moving on to the balance sheet. At March 31, 2024, we had cash of approximately $17.5 million compared with $20 million at the end of December 31, 2023. The decrease in cash as planned is predominantly driven by our net loss in the period and repayments on our credit facility, offset by positive cash impacts from working capital. At March 31, our inventory level was $18.5 million, down from $20.4 million at the end of the fourth quarter of 2023 and down from $40.4 million in the year ago quarter. Our credit facility balance at the end of the first quarter of 2024 was $9.4 million, down from $11.1 million at the end of the fourth quarter of 2023 and down approximately 50% from $19.1 million in the prior year period. As we look at Q2 2024, considering our strategic SKU rationalization plan and continued challenging consumer environment, we believe that net revenue will be between $20 million and $23 million. Using the middle of the range, this would be an approximately 39% decrease from last year's Q2 revenue of $35.3 million, primarily driven by our reduction in SKUs from our strategic SKU rationalization. Including the impact of SKU rationalization efforts into the comparable prior year, the revenue is expected to decrease only by 15%. And based on our current forecast, we expect to see the decrease improve in the coming quarters as we continue to see our revenue concentration increase towards our go-forward SKUs. As we have previously discussed, our decrease in net revenue versus prior year is expected as we continue to focus our go-forward business on our best brands and products. Our primary focus today continues to getting to adjust the EBITDA profitability in the second half of 2024. For Q2 2024, we expect adjusted EBITDA loss to be in the range of $1 million to $2 million. The middle of this range represents an improvement of approximately 81% compared to Q2 2023 and a 42% improvement from our sequential quarter of Q1 2024. We continue to be laser-focused on our target of turning adjusted EBITDA profitable in the second half of 2024. And with our Q2 guide, you can see we are continuing to realize the results of our hard work and addition. We also believe, based on our current forecast that we have sufficient cash above our covenant to achieve our goal of adjusted EBITDA profitability in the second half of 2024 without raising additional equity. As previously stated, if we pursue additional financing, it will be predominantly for growth through M&A. In closing, we believe with our products, our strong balance sheet, our dedicated hard-working teams across the world and with our cornerstone to focus, simplify and stabilize, we are turning the quarter and look forward with confidence as we continue on our path towards adjusting EBITDA profitability and ultimately to maximize shareholder value. With that, I'll turn it back to the operator to open the call up to questions.

[Operator Instructions] And your first question comes from the line of Brian Kintslinger with Alliance Global Partners.

The first quarter gross margin was the highest as a public company for Italian by a wide margin. Can you go into detail into the factors and talk about what a sustainable gross margin range looks like as I assume we'll have a limited contribution from liquidation going forward?

Yes, Q1 is been highest that we've seen. A lot of it is because of product mix. There's a lot of essential oils and other mix there. We've also been very focused as a team in trying to drive better pricing and better pricing models. However, I do think the biggest impact of that is mix, as I said earlier. I think as you look at the rest of the year, I think as Joe alluded a little bit to it in his comments about, yes, we do expect gross margin still be strong. I don't think it will be 65% because obviously, when you sell the humidifiers and other seasonal products, especially in Q2 and Q3, that number will probably drop a bit. But I do think because all the work we've been doing, I do think that that margin target is somewhere in the really high 50s to low 60s overall.

And maybe I just would add, Brian, just to some extent, it's some of the dynamic of being on the marketplace. And so the team works hard to manage pricing up and down as we think it's appropriate, right, depending on just the everyday dynamics that happen in the marketplace, right? And so at some point, you can raise price and take advantage of it and at other points, you've got a lower price a little bit, right, to stay competitive, right? So it will always kind of fluctuate a little bit on price. Just again, it's a marketplace dynamic, but just organically is the case for us and for those brands that operate in the marketplace.

And then you mentioned your decreasing inventory. Can you highlight your inventory plans over the next 6 months? Do you need to invest ahead of summer? Do you need to invest given your products that are around the holidays? Or are you kind of now inventory neutral? I know you've talked about long and short and things like that.

So yes, look, I know you can jump in here, we've normalized our inventory levels. And obviously, we tried very hard to manage to make sure we're not too long, not too short. And as we go into sort of, let's say, the summer season in Q2, we feel like we've got a good handle on what we need to sort of execute against plans, right?

Yes. So Brian, yes, I think always coming to the summer season, the inventory go up a little bit. But now that we're so focused on our core SKUs and our core product, it's going to be a much more natural working capital flow of up and down. Yes, [indiscernible] expensive unit, right? You bulk up a little bit to have them in the beginning season into May. So you'll see our inventory may be a little bit higher than we are right now in June. But that's kind of within the season, so that should normalize. So I do think we've done a great job here. I think what we're seeing is now more normal tuning of inventory. There's always a little bit of noise, right? Naturally, right? There's still a little bit of liquidation that we're doing, very, very tiny. It was like less than 10% as you saw in the numbers. But I do think we're in a much more stronger and normalized space with inventory.

And then lastly, as we think about the second half of the year and the projection to be profitable, is that based on higher revenue? Is it based on cost coming down? And if it's on the higher revenue, is that new SKUs? Because I would think SKUs take a while. Is it new platforms making a greater contributions? I'm just trying to understand the assumptions that get you to profitability in the second half of the year.

Yes. Maybe I'll start and then, Artu, you just jump in. It's largely driven by the core business. We're not like or to know like we don't -- we're not looking as we think about profitability and delivering on -- we're not heavily -- a lot of the work we're doing on new products and new channels, are largely positioning the company for growth to a lesser extent this year and more for post-2024 growth. So a lot of -- I mean, so what we're looking at doing for the second half is core business. But [indiscernible], maybe you want to add to that?

Yes. Brian, keep in mind, I still think even we focused on our core business, I think the seasonality splits are still very similar to prior periods. You're going to see -- with our human buyers, assuming the season hits the way we anticipate, you'll see some upticks, you see the guidance, right? The guidance take the middle range is slightly higher than what we delivered in Q1 or for Q2. And then naturally, Q3 is still our strongest quarter overall. We still expect that from a revenue perspective. I think Q4 is probably probably looking closer to our -- the second strongest quarter. So I do think some of the -- what we're seeing is a little bit of the uptick in revenue, plus as you're seeing the performance on the CN, especially on the sustained side, we're starting to get to the healthy CM that we've been on a mission to get to for a long time, and we're finally starting to see that. I think those combinations are one piece of it. This is all core business as Joe alluded to. I think the other piece is we did, we actually did a lot of fixed cost savings right in the middle of the quarter. We're strengsome of that really -- most -- a lot of that come in, in Q2, and then that's from a people perspective. But at the same time, as I look at Q3 and Q4, there's still a little bit of fixed cost work that will be done there that's predominantly vendors and renewals of insurance and other kind of annual costs that that we probably expect some savings there, too, as we enter Q3 and Q4. So I think the combination of all 3 is why we feel pretty confident that we can get to that adjusted EBITDA profitability that would be stating.

The next question comes from the line of Marvin Fong with BTIG.

Good evening, everyone, and congratulations on getting this far in a long road. So I would like to double-click on something you said already. I think you said adjusting for the SKU rationalization sales are down 16%. So I'd just like to understand a bit better what is driving that? Is it pricing? Are you seeing pricing pressure along those lines? Is it also volume? And also what kind of -- your product mix kind of varies from quarter-to-quarter, but any thoughts on how we should kind of think about that growth trajectory into the second half of the year? And then I have one other question.

So Marvin, yes, listen, I think if you look historically at 2023, the company went through a lot of impact duration and change of teams and restructuring. So I do think when you look at -- and I hinted towards it, right, when you look at the 2024 and you adjust 2023 in the future quarters, you're going to see that that gap is going to shrink. So especially as Joe and I took over in August and we started some of these initiatives, I think when you look at it that way, that is a big gap in Q1. I think Q1 was kind of the last quarter, we had some real good progress on SKUs and it kind of really started impacted later and later into Q2 and the rest of the year. But I do think, to your point, I think that gap is going to close down. I think I already hinted towards it in the Q2 guide. If you adjust that way, the difference is almost 10 points. I think top of my head, that was from like a 15% drop versus the 24% drop. So it's almost like a 10% improvement already, just 1 quarter distance. So I do think a lot of the efforts that we're doing is really about focusing that core business, so you're going to see that noise. I think if you go back to the seasonality and the products that we're talking about, we didn't move away from [doma fires], right? That's still a strong business. We did stop doing ACs because they just weren't making money. It's really ultra competitive and they're expensive. So I do think that seasonal split historically will still apply going forward for 2024. So it's just that we're at a much more concentrated number of SKUs, so the revenue is lower. But as you can see, we're anticipating it to be more profitable from a contribution margin as you saw with Q1.

I just look to some extent, and it's obviously category by category. I think we see like -- and it's hard to handicap, but to some extent, consumer demand, while resilient appears to be down, right? And so some of it could pertain to demand being down, right? So I just wanted to add that to as comment. So so back to you, Marvin

Oh, yes, no, thanks for that additional color. Yes. My other question, I observed, I guess, that you mentioned no product launches. It looks like there's no line for R&D. So just kind of comment on are you cutting back -- how much are you really cutting back on product innovation and sort of talk about your ability and expectations for product launches going forward?

Good point, Marvin. The bulk of that R&D spend historically was around any, right? And we've moved from an internally developed model to a third-party model, and it's really more of a standard tech platform than this kind of innovation platform, right? So I think from that perspective, bulk of that cost naturally after we did the restructuring, naturally just moved into G&A. I think from our product innovation and all that, we still invest heavily in that with people, right? And they're really focused on our sourcing and engineering team, which is predominantly in China. But remember it's not like we're doing things like Apple does with new iPads that they announced this morning. It's more about, hey, I'm working with my manufacturers on improving, at least for today, right, on improving the quality of our product and slight feature changes. As we become more successful in our brand strengthening over the years, yes, that becomes a different conversation. And I do think there'll be opportunity for even stronger innovation. But for now, the product innovation is driven by our engineering and sourcing team in China, and those costs were probably were never in R&D.

That concludes our Q&A session. I will now turn the conference back over to Ilya Grozovsky for closing remarks.

As part of our shareholder Perks program, which as a reminder, investors can sign up for at aterian.io/perks. Participants have the ability to ask management questions on our earnings calls. I wanted to thank all of the shareholder Perks participants for their loyalty, their participation in the program and their questions. I have picked a few of the questions of the most popular ones that have been submitted. Question is, what is Aterian's plan to diversify and segment products by channel and customer possible small retail brands for customers like Wayfair, Home Depot, Target, Walmart, et cetera, who might want a private label products and good, better, best product offerings?

Yes. I'll jump in there, and thank you, Ilya, and thanks to all the folks who are in Perks. We're grateful for the support and for all the those that follow us and that are in the different channels, and we appreciate you. I think, look, we would consider those opportunities. I would say though that Artu and I, right now, we think Aterian as the company that's going to operate its own brands. And so it's not higher on our list of priorities. When we think about launching new products, expanding the same channels. It's not something we think is the right move for Aterian today.

Great. This concludes the Q&A portion of the call. We look forward to speaking with you on future calls, and this ends our call, and you may now disconnect.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.