Aterian, Inc. (ATER) Q1 2025 Earnings Report, Transcript and Summary

Thank you for standing by, and good day everyone. My name is Arji and I'll be your conference operator today. At this time, I would like to welcome everyone to the Aterian Inc. Q1 Earnings Report. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Devin Sullivan of The Equity Group. Please go ahead.

Thank you, Arji, and thank you, everyone, for joining us today to discuss Aterian's first quarter 2025 financial results. On today's call are Arturo Rodriguez, the company’s Chief Executive Officer; and Josh Feldman, the company’s Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Aterian's website at aterian.io. Before we get started, I would like to remind everyone that the remarks on this call may contain forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995 that are based on current management expectation. These may include, without limitation, predictions, expectations, targets, or estimates, including those 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 also involve substantial risks and uncertainties, some of which may be outside of our 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 findings for a discussion of these risks, including our annual report on Form 10-K and our quarterly report on Form10-Q both of which are available on the investors portion of our company’s 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 of 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 again 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 this GAAP financial measure are not within the company's control or cannot be reasonably predicted. So with that said, I'd now like to turn the call over to Arturo Rodriguez, Aterion's Chief Executive Officer. Artie, please go ahead.

Thank you, Devin, and thank you, everyone, for joining us today. On today's call, I'll be covering one, a brief overview of our Q1 results and how they reflect continued progress from the foundational changes we made throughout 2024. Two, a summary of the actions we're taking to proactively navigate the recently announced tariff environment and its broader macroeconomic effects. And three, an update on our 2025 outlook in light of these developments. Following my remarks, our CFO, Josh will walk through our first quarter financial results in greater detail. For the first quarter of 2025, net revenue was $15.4 million compared to $20.2 million in Q1 2024. This decline primarily reflects our previously announced SKU rationalization, which prioritize our most profitable products, along with softer consumer demand and reduced Amazon traffic due to changes in its affiliate program. Adjusted EBITDA loss slightly improved to $2.5 million from $2.6 million. While we observed some softness in the consumer demand during the latter part of the quarter, we were pleased with the overall performance. Looking beyond Q1, the landscape shifted significantly following the April 2, 2025 announcement on global trade policies, particularly those impacting imports from China. While incremental tariff rates have just come down this week to 30% from their peak of 145%, they remain materially higher than historical norms, and we expect continued volatility. Our 2025 plan anticipated increased tariff exposure, but the speed and magnitude of these policy shifts both upwards and downwards, have introduced volatility, supply chain constraints and ongoing uncertainty, especially as consumer spend remains cautious. At Aterian, resilience, tenacity and agility are part of our DNA. For some time now, we have been actively strategizing around long-term growth and sourcing, consistently landing on diversified product mix and supply chain as critical to ensuring sustainable growth and profitability. While tariffs have certainly been impactful, they are ultimately accelerating the execution of this strategy to ensure we maintain the financial runway to evolve and strengthen our business. Today, we're announcing a set of decisive strategic initiatives designed to minimize the operational impacts of tariffs and broader macroeconomic pressures. While many of these were already part of our long-term road map, the current environment requires a faster pace of execution. At a high level, we are focused on four strategic moves, each within our control that we believe will position Aterian for long-term success. First is accelerating our plan of resourcing and diversifying our manufacturing; two, advancing our evolution toward a more resilient model by deepening our expansion to consumables, the majority of which will be US manufactured; three, strategically raising prices; and four, reducing fixed cost. In detail, I will add color and expand on each of these actions. The first, accelerated resourcing, which will include inventory and supply chain optimization. We are fast-tracking efforts to move production and diversify into regions with more favorable cost and tariff structures. Our new goal is to manufacture more than 30% of our goods in China by the end of 2025. Accelerating our previous target of reducing Chinese sourcing to below 40% by the second half of 2026. We've already seen some early wins. For example, we shifted certain dehumidifiers reorders from mid-summer delivery from China to Indonesia. We are partnering with our manufacturing base to identify cost-saving opportunities, renegotiate pricing and shift fulfillment to non-US geographies as part of a geo expansion when possible. This allows us to redirect certain inventory while mitigating tariff impacts. While our Chinese partners remain highly collaborative, reshoring to the US is not currently viable for our electrical products in the near term. Number two, new product launches from low tariff regions. Our Squatty Potty Flushable Wipes continue to track for late Q3 2025 launch. With that, we are doubling down on consumable products, and we will launch additional white based products in 2025. We are further expanding our consumable push and expect to announce additional US source consumable products launching in 2025, which are predominantly exempt from tariffs. We expect to announce those and specifically no later than our next earnings call. With this, we are temporarily pausing new category launches from Asia, particularly hard electronic goods, until we can resource or gain more clarity on the trade environment. Number three, strategic pricing adjustments. We are implementing pricing increases across our portfolio to recoup margin loss and moderate velocity, retiming orders to provide runway to find alternative resourcing avenues and to buy time to see how the tariff 90-day windows conclude. And finally, number four, fixed cost reduction. As part of a response to tariff announces, we launched a fixed cost reduction initiative targeting $5 million to $6 million in annualized savings. Approximately $4 million of that will come from headcount reductions, including open roles, predominantly in the US by consolidating teams under a smaller leadership structure with most of the changes taking full effect in Q3. The remaining $1 million to $2 million will be realized gradually through broader fixed cost efficiencies. We expect these saving initiatives to be fully in place by early 2026. For those employees impacted, I would like to thank them for their incredible achievement, and I am certain they will continue to prosper in their post-Aterian life. We remain committed to driving long-term growth via new product introductions, channel expansion and entering new international markets, combined with operating efficiencies and cost discipline. Supported by our strong balance sheet, and the decisive actions already underway, we are confident in our ability to navigate this period of adjustment and successfully execute our long-term strategy. We will preserve capital as part of this process and firmly believe that we can navigate these headwinds without raising equity capital in 2025. To ensure this, our Board of Directors has paused the initiation of our previously announced share repurchase program, which was scheduled to start this month in May 2025 and runs through March 2027. That said, we continue to believe that Aterian stock is significantly undervalued. And we remain committed to long-term shareholder value creation. Once the current environment stabilizes, we revisit the timing and structure of our buyback program. While these actions improve our long-term positioning, the current volatility makes forecasting difficult. As such, we're withdrawing our guidance. While our fundamentals remain strong, we are reassessing how pricing, supply chain dynamics and consumer behavior will evolve during the rest of 2025. That said, we continue to believe the actions we are taking, position Aterian to return to growth and profitability beyond 2025, even under prolonged tariff pressure. Assuming we execute as planned, we do not foresee a return to the outside losses of the past. In closing, just three months ago, we shared that Aterian was pivoting from a turnaround story to a growth story. Our recent macroeconomic shifts present new headwinds, we remain confident in our long-term trajectory. We are focused both on short-term mitigation and long-term value creation. Four key moves, all which we believe we control will help us address the short-term impacts from tariffs to strengthen and diversify Aterian over the long-term, ultimately unlocking value creation. To reconfirm, we are, one, accelerating our plan on resourcing and diversifying our manufacturing; two, advancing our evolution to a more resilient model by deepening our expansion into consumables, the majority of which will be US manufactured long-term; three, raising prices and four, reducing fixed costs. Even in the face of tariff pressures, our goal remains clear to build a growing, profitable company. The initiatives we've outlined today are not a change in direction. They represent an acceleration of the transformation we began in 2024. While the tariff landscape is more significant than we anticipated, our size and agility allows us to respond quickly and decisively. Despite today's uncertainty, we believe Aterian's future is strong, and the opportunity ahead of us are significant. Lastly, I want to thank our team and our shareholders. We've navigated significant change over the past 18 months. And with continued discipline and agility, we believe the best is yet to come for Aterian. With that, I'll turn it over to Josh.

Thanks, Artie. Good evening, everyone. As Artie mentioned, the tariff landscape shifted dramatically in early April, requiring immediate and decisive action. While our 2025 plans already contemplated heightened tariff exposure, the speed and scope of the changes went well beyond our expectations. Our response has been focused on executing what's within our power to ensure margin preservation and long-term competitiveness. In response to the recent tariff announcements, we've initiated a fixed cost reduction program aimed at generating $5 million to $6 million in annualized savings. Roughly $4 million of these savings will come from US headcount reductions, primarily achieved by consolidating teams under a leaner leadership structure with most changes taking effect by the end of Q3. The remaining $1 million to $2 million will be driven by broader fixed cost efficiencies implemented over time. We expect to fully realize the benefit of these initiatives by early 2026. Turning to Q1. While we saw some softness in consumer demand, particularly late in the quarter, we're pleased with our progress. Net revenue for the first quarter of 2025 declined 24% to $15.4 million from $20.2 million in the year ago quarter, primarily reflecting last year's SKU rationalization and changes to Amazon's affiliate marketing program. Adjusting for the SKU impact of SKU rationalization, net revenue would have only declined approximately 19%. Our launch revenue was $0.4 million during Q1 2025 and Q1 2024. As planned, we have one new product category launch in the first quarter. While we are suspending our Asian sourced product launches for 2025, we are shifting our focus to consumables sourced in the US. Overall gross margin for the first quarter decreased to 61.4% from 65.1% in the year ago quarter. The year-over-year decline was primarily related to product mix. Our overall Q1 2025 contribution margin, as defined in our earnings release, was 13.4%, a decrease from 14.1% in Q1 2024. Our contribution margin decrease primarily relates to the reduction in gross margin, partially offset by lower logistics costs as a percentage of revenue. Looking deeper into our contribution margin for Q1 2025, our variable sales and distribution expenses as a percentage of net revenue decreased to 48% as compared to 51% in the year ago quarter. This decrease in sales and distribution expenses as a percentage of revenue is primarily due to product mix and a reduction in logistics costs as a percentage of revenue. Our operating loss of $3.7 million in the first quarter of 2025 narrowed from a loss of $5.3 million in the year ago quarter, an improvement of approximately 30%, primarily driven by a reduction of fixed costs due to our cost-cutting initiatives initiated in Q1 2024. Our first quarter 2025 operating loss included $0.8 million of non-cash stock compensation expense, while our first quarter 2024 operating loss included $1.7 million of non-cash stock compensation expense and $0.6 million of restructuring costs. Our net loss for the first quarter of 2025 of $3.9 million improved by approximately 25% from a loss of $5.2 million in the year ago quarter, primarily driven by a reduction in fixed costs. Our adjusted EBITDA loss of $2.5 million as defined in our earnings release, improved compared to an adjusted EBITDA loss of $2.6 million in the first quarter of 2024, primarily due to a reduction of fixed costs. So even with our 24% sales reduction year-over-year, our loss slightly improved due to our continual focus on profitability. Moving on to the balance sheet. At March 31, 2025, we had cash of approximately $14.3 million, compared with $18 million at December 31, 2024. While we do expect to utilize cash for our cost reduction plan and general corporate purposes, cash preservation will remain top of mind as we go through the year. Borrowings on our credit facility went from $6.9 million as of the end of the fourth quarter of 2024 to $7.5 million at the end of the first quarter of 2025. The credit facility balance is down from $9.4 million in the year ago quarter end. At March 31, 2025, our inventory level was at $18.1 million, up from $13.7 million at the end of the fourth quarter of 2024 and down from $18.5 million in the year ago quarter end. Increased inventory levels in the first quarter, primarily reflect buildup in advance of anticipated demand trends for our seasonal air quality products. Given the fast-moving tariff developments and resulting uncertainty around pricing, supply chain timing and consumer response, we're withdrawing our previously issued 2025 outlook. While we remain confident in the direction of our business and the underlying improvements we've made, current volatility makes it impractical to provide reliable guidance at this time. You'll recall that on our fourth quarter call, we also provided a three-year CAGR objective of at least 10% to 12% for 2025 to 2027. We are withdrawing that as well given the current volatility. That said, we believe the actions we're taking now are setting the foundation for a return to growth and profitability beyond 2025 even if elevated tariffs remain in place. For the balance of the year, we are intentionally scaling back unit volume in Q2 and Q3, while implementing targeted price increases to better manage inventory and protect margins as best as possible. These actions, along with our cost reduction initiatives are expected to moderate our adjusted EBITDA losses, especially over the next two quarters, while allowing us to maximize revenue generation during this period of transition. We anticipate a more significant margin impact in Q4 when the full effect of the tariffs is expected to take hold, although this will be tempered by the recent announcements of reductions in China tariffs. Importantly, based on our liquidity position, the cost-saving measure is now underway and are focused on preserving cash, I will reiterate Artie's comments that we believe we are well-positioned to navigate the current environment without raising additional equity capital this year. In closing, I want to acknowledge the tremendous progress our team has made in reshaping Aterian into a more focused, more agile and more resilient business. The actions we've taken, while difficult are critical to positioning the company for sustainable growth and profitability. I especially want to thank those team members who are departing as part of our cost reduction efforts. Their dedication and contributions have helped lay the foundation for the next phase of Aterian's journey. We're deeply grateful for their impact, and we wish each of them continued success. Looking ahead, I'm confident that the steps we're taking today will strengthen our position for the future. With a streamlined operation, our continued discipline on margins and a strong balance sheet, we are well-equipped to manage near-term volatility and deliver long-term value for our shareholders. With that, I'll turn it back to the operator for Q&A.

[Operator Instructions] Your question comes from the line of Brian Kinstlinger from Alliance Global Partners. Please go ahead.

Hi. Thank you. This is Kevin for Brian. Just for the first question, with China tariffs at 30%, can you talk a little bit more about your inventory plans in the near term and then in the medium term?

Yes. I'll grab that, Kevin. How are you doing? So listen, this whipsaw has been a little bit -- it's been keeping us on our toes for sure. What we've done is two things, right? We have -- fortunately, we had a lot of manufacturing that was ongoing as the tariff announcement on April 2 was evolving, we parked those in China, and we didn't bring them in right away to see if there was other opportunities to either ship them to other regions -- and -- or potentially navigate other opportunities to bring them in while the tariff numbers solidified. At the same time, as we said in our prepared remarks, we've been raising prices to slow the velocity down. We've been starting to do that in April up until the recent announcement this week. So we still feel that we're well positioned, at least from an inventory and supply perspective with our manufacturers, to produce the products we need for 2025. That said, I think where we have a little bit of concern is a little bit on the containers because as we expect, and it's been in the news, everyone's now rushing to bring products in. So fortunately for us, a lot of our products have been manufactured. So it's just about getting the boats in. We have a less of a time line to manufacture goods, so since a lot of them have been manufactured. I think I'll add to that is the good news is our supply chain is somewhat diversified already on containers. We use Amazon as a big partner. We use a couple of other steamship lines. And of course, we use some of the spot rates through Flexport. So we feel comfortable that we have the opportunities to secure the boats we need to get our goods in. But certainly, we are still revisiting what else should we do in the next 90 days to advance order, just to make sure we have a stable tariff environment, and we know that the numbers right now, so we take advantage of that. But certainly, we don't see any immediate stock outs. But certainly, as it evolves, we'll continue to monitor that.

Great. Thank you. And -- sorry.

Please go ahead.

And kind of off what you were talking about with the pricing strategy, could you talk a little bit more about that? And how have you seen consumers react? Have you seen any consumers react to the changes you've already made?

Yes. So, sure. I mean, listen, the Amazon -- where we sell in Amazon and mostly a lot of e-commerce, I would say, it's very price sensitive, right? And so it's not just a factor when you deal wholesale and retail, right? You agree with Walmart to raised the price and is what it is, right? They're still going to buy wholesale. This is a direct impact to the consumer. So if you raise prices, you may see our velocity go down. We've seen a mixed results. We've seen some velocity go down as we raise prices. Again, it's unclear to determine if that's softness or if that's just people not willing to buy price cost -- a product that costs X or Y. And so -- and especially because we're so diversified in our product mix, it's been mixed results, some positives and negatives to be very frank. I think right now, we still feel very well positioned across our core products. We haven't really lost ranking or positioning. Most of our products still are in the top 5 or top 3 or at least certainly on the first page, even with these pricing increases. So it's a little bit hard to sort of break that out and really detail what is actually related to consumer softness versus an impact on pricing. But certainly, we feel pretty good that we have pricing flexibility certainly to move up on the 30%. I think at the 145%, there was a lot more difficult, frankly, but it's a 30% still more than we anticipated, and it's not linear, right? Certain -- if you got to move up 30% on -- and really half because your costs are of roughly half, let's say, just keep massive, you're really moving up 15% on your pricing. Some products work, some products don't. And so it is kind of a mixed bag to figure out which we're really doing well, which is really impacted. But certainly, it's a very fluid situation. We are taking wins where we can and where we're seeing not the same success we expect, we are revisiting the pricing strategy.

Thank you. And last one, given how everything will play out with tariffs is uncertain. Is there any way to speed up your diversification strategy in terms of manufacturing?

We're going to go as fast as we can, right? I think the one thing I'll caveat is, we want to go as fast as we can. At the same time, we still want to produce quality products, right? We believe we have good line of sight to move a lot of our products and diversify them as we see best. At the same time, we are doubling down as consumables products, as we said in the prepared remarks, right? So I think the combination of both of those will really help us diversify and I think puts us in a really good spot for 2026 certainly. But yes, we're going to go as fast as humanly possible.

Thank you very much.

That ends our Q&A session, and we appreciate your participation. I will now turn the call over to Devin Sullivan of the Equity Group. Please go ahead.

Thank you, Arji. As part of Aterian's Shareholder Perks Program, which as a reminder, investors can sign up for at aterian.io/perks. Participants have the ability to ask management questions during our earnings calls. So we want to thank all of our shareholder perks for their participation, for their loyalty and their program and for their questions. We picked two of the most popular questions that have been submitted by our shareholders, and I'll read them now for Artie and Josh to respond. So the first question, will the company be paying any dividends in the future?

Thanks, Devin, I'll take that one. So as we noted in our release and in our remarks, our restructuring plans are going to require about $2.3 million of cash. So between that and the current macro inventory environment and the uncertainty around tariffs, we feel prudent to conserve our cash at this point. But more broadly, we're very much focused on long-term growth and reinvesting profits back into the company, and that's really our priority right now. And also, we mentioned we paused our share buyback program, but we do expect to execute on this once the macro environment has stabilized.

All right, Josh. The second question. Would management consider revising its policy of granting employee stock options given the impact of those options on the company's P&L statement?

I can take that one, Josh.

Yes.

All right. Thanks, Devin. Look, like most companies, we award shares to our executives, it's a way to incentivize their performance and align -- we believe it aligns the interest of all tiering shareholders. Our long-term incentive grants typically vest over 3 years. If the stock does well, they benefit just like our shareholders. We understand it has a P&L impact. It does allow us to manage cash because you mind, it's about a total comp, right? If you can give more shares is less cash comp versus regular base comp salary. And ultimately, that extra cash we do invest into the business for long-term growth. Listen, our team thinks the stock is considerably undervalued. So, for us, as a small company, it's a great tool to attract and retain a high level of talent. And if this team is successful like we expect to be, everyone is going to win in this. So, sure, as we evolve, we'll always revisit our policy. But for now, it's a great tool for us to bring in and retain talent.

Great. Thank you, Arty. So, with those two questions answered, we will wrap-up today's call. We want to thank everyone for their participation today. We look forward to speaking with you on our next earnings call. And that will end everything for today. Thanks again for your participation. And Arji, you may -- everyone -- Arji and everyone, you may disconnect.