Aterian, Inc. (NASDAQ:ATER) Q1 2024 Earnings Call Transcript May 7, 2024

Aterian, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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 Earnings Report. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Ilya Grozovsky, Vice President, Investor Relations and Corporate Development. Please go ahead.

Ilya Grozovsky: Thank you for joining us today to discuss Aterian's first quarter 2024 earnings results. On today's call are Joe Risico, 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 Aterian'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 discussions 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 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.

Joseph Risico: Thank you, Ilya and thank you, everyone, for joining us today. Today, 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 Aterian 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. Arty will then cover in more depth our financial results for the first quarter and will provide our outlook for Q2. For those of you joining us for the first time, I'll start with a quick primer on Aterian. Aterian owns and operates its own consumer products brands. We market and sell consumer products in the following categories: home and kitchen appliance and accessories through our Home Labs Mueller and Pursteam brands, health and wellness products, primarily through our Squatty Potty brand, iron on 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've reduced our number of seller accounts, we've simplified our logistics and technology infrastructure, we've jettisoned non-core 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 scale and 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 Home Labs, Essential Oils and Mueller 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 omni-channel 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's Canada marketplace for certain of our products and we will continue to expand our portfolio on 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, a formidable group of people. We've gotten smaller given the restructuring from earlier this year, but we do believe this team is highly capable of driving growth and that Arty 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 Arty. Thank you very much.

Arturo Rodriguez: Thanks, Joe. Good evening, everyone. We continue to make progress on our path of focusing, simplifying and stabilizing Aterian. 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 rationalize our SKU portfolio focusing on our core SKUs and have essentially stopped selling non-profitable 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 mid cap credit facility amendment. 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're on a right path to deliver 2024 second half adjusted EBITDA profitability and have the balance sheet strength to deliver these results. Now moving to Q1 detailed results. Net revenue for the first quarter 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 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 variations in the coming quarter as we continue to be thoughtful on the timing of our product launch. Overall gross margin for the first quarter increased to 65.1% from 54.8% in the year ago quarter and increased 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 SKU rationalization efforts and lower liquidation of higher cost inventory compared to the prior period offset by competitive pricing pressures. Our Q1 2024 saw our sustained products 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%, though 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 and 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, an improvement of approximately 78.9%, primarily driven by the improvement in CM, the reduction in fixed costs including non-cash 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 non-cash stock compensation expense and restructuring cost of $0.6 million, while our first quarter 2023 operating loss includes $2.3 million of non-cash stock compensation expense and a non-cash 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 offs 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 2023, 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 SKU 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 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 16%. And based on our current forecast, we expect to see this 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 get into adjusted 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 initiatives. We also believe based on our current forecast that we have sufficient cash above our covenants 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 hardworking teams across the world and with our cornerstones of 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.

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