Aterian Inc

NASDAQ:ATER

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. My name is Kathy and I will be your conference operator today. At this time, I would like to welcome everyone to the Aterian, Inc. Second Quarter Earnings Report. [Operator Instructions]

I would now like to turn the call over to Ilya Grozovsky, Vice President, Investor Relations and Corporate Development. Thank you. Please go ahead.

[Ilya Grozovsky, executive]

Thank you for joining us today to discuss Aterian's second quarter 2024 earnings results. On today's call are Arturo Rodriguez, our CEO; and Josh Feldman, our 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 want 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, preconditions, 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 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 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 Investors 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 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 is available on the Investors 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 Arty.

[Arturo Rodriguez, executive]

Thank you, Ilya, and thank you, everyone, for joining us today. Just 1 year ago, I spoke to you as your CFO and co-CEO and now I speak to you as Aterian's CEO. I'm very honored and humbled to have the opportunity to continue to lead Aterian into its future. I want to thank our Board of Directors and the Aterian team for their trust and confidence as we embark on this chapter together. Today, I'm going to discuss one, our Q2 results and the actions that led us to our successful results; and two, an initial discussion for growth for Aterian beyond 2024. Josh, our new CFO, will then cover in depth our financial results for the second quarter and will provide our outlook for Q3. For those of you joining us for the first time, I'll start with a quick introduction to Aterian. Aterian owns and operates its own brands, marketing and selling consumer products across multiple categories primarily on e-commerce marketplaces.

We sell our products primarily in the U.S. and today, we derive most of our revenues from amazon.com. Since 2014, we have either organically launched or purchased brands and today, our focus is on operating 6 amazing brands. They are hOmeLabs, which currently focuses on humidification and refrigeration, a best-selling leader in humidifiers on Amazon. Pursteam, another best-selling brand on Amazon, which leverages the natural power of steam to clean your home with its steam mops or reduce wrinkles in your clothes with steam irons. Healing Solutions, our collection of the central oil brands continues to have momentum with some of the recent rebrandings and continues to provide consumers a great essential oil experience. Photo Paper Direct or DIY or do-it-yourself iron-on transfer paper provides joy and fulfillment to all consumers who love making their own T-shirts, arts and crafts.

Mueller Living, which focuses on innovative quality products for your kitchen, has multiple top-selling products on Amazon. And finally, Squatty Potty, the original toilet stool and the leader in the category. Squatty continues to help people daily around the world poop easier and better. With these 6 foundational brands, Aterian is well positioned to grow over time and consistently deliver high quality affordable products to consumers. Now to our Q2 performance. We delivered on our Q2 2024 net revenue and adjusted EBITDA goals beating our June 2024 guidance. This performance was driven by a combination of our success in dehumidifiers during the period and the impact of cost cutting measures that we implemented previously in Q1 of 2024. We delivered adjusted EBITDA profitability for the first time in 10 quarters since Q3 of 2021.

When compared to the same period last year, our adjusted EBITDA performance for Q2 is an improvement of over 100% on even lower revenue. First and foremost, I want to congratulate our hardworking people worldwide for their continued dedication and belief in what we are doing to make Aterian a profitable consumer products company. This is another indicator that we continue to execute on our mission to focus, simplify and stabilize Aterian. Specifically to our net revenue performance, the weather always plays in seasonal product performance. However, our improved sales performance started in early May and even though we believe we benefited from June's hot and humid weather, we do believe that our primary driver of our success was driven by our focus and simplification mission and our [ rebranding ] approach.

With the simplification across our business such as selling within a reduced seller account footprint, this is allowing us to simplify how we go to market and naturally now is our daily focus. With our shift to third-party best-in-class software, not only are we seeing improvements on direct marketplace performance, but we're also more nimble allowing us to keep up with ever-changing rules and tactics on Amazon. For example, we are seeing better than expected results in driving outside traffic to Amazon via various marketing initiatives, which benefits our product listing rankings. Now as we look at Q3 and Q4 2024, we are still confident that we are tracking towards our second half adjusted EBITDA profitability goals. For Q3 and Q4 2024, we expect our gross margin to remain strong due to pricing and product mix. We do expect our overall contribution margin percentage to remain primarily in line with year-to-date results.

And in combination with our continued expected realization of our fixed cost savings, we believe we are well positioned to achieve adjusted EBITDA profitability for the second half of 2024. However, delivering results is never easy. It requires a lot of work and effort, which I'm very confident our team will continue to deliver on. We continue to see consumer spaced volatile and that consumers continue to be very wise with their spending especially with the current inflationary environment. We expect container cost to be higher when compared to last year for the rest of 2024 and we are always watching Amazon and their requirements. The recent seller fulfilled Prime program changes continue to be burdensome considering the reliance on last mile providers and volatile summer weather impacting on-time delivery. We have also sold out on a few of our dehumidifier SKUs at the beginning of July, but expect to be fully in stock again by mid-August.

Even with those challenges, we still feel confident that we are tracking on our goal of second half adjusted EBITDA profitability. Looking beyond 2024, as we anticipate delivering second half adjusted EBITDA profitability, part of the mission will move from stabilization to growth. Growth will become 1 of our primary goals in 2025, which will allow us to drive over time a more robust adjusted EBITDA profitability. As we previously said, we still believe growth will be coming from 2 key pillars. One is omnichannel expansion, including continued improvements of our existing listings to bring them in best-in-class levels. We've already launched our Mercado Libre, Squatty Potty in Walmart retail store continues to do well and we continue to plan on our expansion into other channels. Target Plus is our next in our road map and we hope to have that channel live before Black Friday this year. Organic product launches will also play.

We feel really bullish that we can very opportunistically continue to launch new variations to grow our business, but also launch new products in both existing and new categories. We still believe M&A can have an impact on Aterian's growth. As we've stated previously, we'll continue to look at M&A opportunistically. However, we believe it will not be the primary driver of our growth strategy. Today, we believe organic will be the primary driver of Aterian's future growth. We expect to discuss more of our growth strategies when we deliver our Q4 results. In closing, before I hand it off to Josh, just about a year ago we set on a mission to focus, stabilize and simplify Aterian in order to drive it to adjusted EBITDA profitability and to deliver long-term shareholder value. Back in late 2023, we announced key initiatives to drive towards profitability and we believe we have delivered on all of them.

First was to rationalize SKU portfolio, which allowed us to focus on our best and most profitable brands and SKUs. [ Allocation ] on our Amazon account structure allowing us to increase our focus and simplify how we go to market. The shift towards best-in-class third-party tools allowing us to be more nimble in upgrading many of our marketing strategies. An outside thinking approach, which challenged our previous ideology and allowed us to execute on new initiatives in line with today's marketplace tactics and fixed cost rationalization and always a tough decision to align our fixed cost to our expected revenue, but we delivered those. And today, we announced through these initiatives, our first adjusted EBITDA profitable quarter earlier than we had promised. We believe this is just another indicator of our continued focus on delivering our stated goals.

I want to again recognize and congratulate our team on their continued dedication, excitement and hard work and our shareholders for their patience and continued support. But we are not done. We have high expectations and exciting beliefs on what Aterian can do and become, ultimately driving profitable growth and maximizing shareholder value. Thank you for your time and unwavering support.

Now I'll pass it along to Josh.

[Joshua Feldman, executive]

Thanks, Arty. Good evening, everyone. We continued to make progress on our path of focusing, simplifying and stabilizing Aterian. We are starting to see results from these efforts as our key metrics are improving and we've reported adjusted EBITDA profitability for the second quarter. Our Q2 results were well above our original revenue and profitability guidance and even exceeded our updated sales guidance range of $23 million to $26 million and adjusted EBITDA loss of negative $1 million to breakeven. Our gross margin improved year-over-year by over 18 basis points to 60.4% and our overall CM exceeded 17%, primarily as a result of our SKU rationalization. Although the SKU rationalization impacted our top line revenue, it significantly improved our core business metrics. Our second quarter net loss improved by 89.6% year-over-year and after 10 consecutive quarters of adjusted EBITDA losses, we posted an adjusted EBITDA gain.

While we still have work to do, I would like to echo Arty's sentiment and acknowledge the whole Aterian team on this impressive effort in achieving this milestone. Now moving on to the detailed results for the quarter. Net revenue for the second quarter of 2024 declined 20.6% to $28 million from $35.3 million in the year-ago quarter. Including the impact of the SKU rationalization efforts into the comparable prior year, net revenue would have been essentially flat. Our sustained net revenue of $26.3 million decreased as expected by 15.2% or $4.7 million from $31 million primarily as a result of our SKU rationalization efforts. Our launch revenue was $0.5 million during Q2 2024 compared to $42,000 in Q2 2023. As planned, we had no new product category launches in the second quarter. However, we did launch variations of existing products in our Healing Solutions and Squatty Potty brands.

We expect to continue with launching predominantly variations in the second half of the year. As we strive to stay focused, we continue to be thoughtful on the timing of our product launches. Overall gross margin for the second quarter increased to 60.4% from 42.2% in the year-ago quarter, but decreased from 65.1% in Q1 2024. The year-over-year improvement was driven by the positive impact of our SKU rationalization efforts, product mix and less liquidation of high cost inventory compared to the prior period. Our overall Q2 2024 contribution margin, as defined in our earnings release, was 17.4%, which improved compared to the prior year's negative 3.6%, an increase compared to Q1 2024 CM of 14.1%. The year-over-year increase in contribution margin was driven by the positive impact of our SKU rationalization efforts and less liquidation of higher cost inventory compared to the prior period.

Q2 2024 saw our sustained products contribution margin improve year-over-year to 19.8% versus 2.1% in Q2 2023. The increase in contribution margin was driven by our focus on more profitable SKUs as part of our SKU rationalization efforts. Looking deeper into our contribution margin for Q2 2024. Our variable sales and distribution expenses as a percentage of net revenue decreased to 43% as compared to 45.8% in the year-ago quarter. This decrease in sales and distribution expenses as a percentage of revenue is primarily due to product mix with a higher proportion of dehumidifier sales during the 3 months ended June 30, 2024 compared to the year-ago quarter. These products incurred lower last mile cost as a percentage of revenue.

Our operating loss of negative $3.2 million in the second quarter of 2024 improved from a loss of negative $36.4 million in the year-ago quarter, an improvement of approximately 91.2% primarily driven by the improvement in CM, the reduction of fixed costs due to our cost cutting initiatives and no impact of intangible writeoffs in the current period. Our second quarter 2024 operating loss includes $2.9 million of noncash stock compensation expense while our second quarter 2023 operating loss included $3.2 million of noncash stock compensation, a noncash loss on impairment of intangibles of $22.8 million and restructuring costs of $1.2 million. Our net loss for the second quarter 2024 of $3.6 million improved from a loss of $34.8 million in the year-ago quarter, an improvement of approximately 89.6% primarily driven by the improvement in CM and the reduction of fixed costs and the impact of intangible writeoffs in the prior year.

Our adjusted EBITDA gain of $0.2 million as defined in our earnings release improved by 102% from an adjusted EBITDA loss of $8 million in the second quarter of 2023 primarily driven by the improvement in CM and the reduction of fixed costs. Moving on to the balance sheet. At June 30, 2024 we had cash of approximately $20.3 million compared with $17.5 million at March 31, 2024. The increase in cash is predominantly driven by positive impacts of working capital partially offset by our net loss in the period and repayments on our credit facility. At June 30, our inventory level was at $18.4 million, down from $18.5 million at the end of the first quarter of 2024 and down from $36.7 million in the year-ago quarter-end. Our credit facility balance at the end of the second quarter 2024 was $9.6 million, up from $9.4 million at the end of the first quarter of 2024 and down from $11.1 million in the prior year period.

As we look at Q3 2024, considering our strategic SKU rationalization and the continued challenging consumer environment, we believe that net revenue will be between $25 million and $27 million. Using the middle of the range, this would be an approximately 35% decrease from last year's Q3 revenue of $39.7 million primarily driven by our reduction in SKUs from our strategic SKU rationalization. Including the impact of the SKU rationalization efforts into the comparable prior year, the revenue is expected to decrease only by 12%. 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 be consistent adjusted EBITDA profitability. For Q3 2024, we expect adjusted EBITDA loss to be in the range of breakeven to $0.6 million.

The middle of this range represents a significant improvement compared to Q3 2023 loss of $4.4 million. We also believe, based on our current forecast, that we have sufficient cash above our covenant to achieve our goal of consistent adjusted EBITDA profitability without raising additional equity. As previously stated, if we pursue additional financing, it will be predominantly for accretive M&A. In closing, we are confident that with our products, strong balance sheet, dedicated and hardworking teams and our principles of focus, simplification and stabilization; we are turning the corner. We look forward with optimism as we continue our journey towards consistent adjusted EBITDA profitability and ultimate aim to maximize long-term shareholder value.

With that, I'll turn it back to the operator to open up the call for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Brian Kinstlinger with AGP.

[Brian Kinstlinger, analyst]

Can you quantify how many new SKUs were introduced during the first half of the year? And then what are your plans for the next 6 to 12 months?

[Joshua Feldman, executive]

Brian, it's Josh. So for the first half of the year, we really didn't introduce any new product categories. There's only variations of existing categories. So it was probably about 20 in total including mostly our Healing Solutions business and our Squatty Potty brand.

[Brian Kinstlinger, analyst]

Great. And then how should we think about seasonality for the second half of the year?

[Arturo Rodriguez, executive]

So as already said in the prepared remarks, we expect gross margin and contribution margin to be consistent going forward. From a sales perspective, I think historically Q3 has been a higher sales quarter than Q4 and we think that will be reflective for the second half of this year.

[Operator]

And your next question comes from the line of Alex Furman with Craig Hallum Capital Group.

[Alex Fuhrman, analyst]

Congratulations on achieving EBITDA profitability sooner than expected. Arty, you mentioned that at some point, it sounds like over the next couple of quarters, you'd like to be pivoting from stabilizing the business to trying to get back to growth. I'm curious of the 6 brands that are really now the cornerstone of your portfolio, which of those brands would you say really have the most potential for growth over the next couple of years? And to what extent will M&A be a part of your growth strategy?

[Arturo Rodriguez, executive]

Alex, good question. Not to sound like a father with his kids, I think all the brands can really perform well. I think the road maps we're considering really have a lot of potential especially if we think about how we're rounding our variation strategy on some of our existing listings. At the same time, I think we feel very bullish that there's a lot of opportunities across multiple categories, new categories, let's say, across multiple brands and even as that also includes some thoughts about potentially even revitalizing some previously rationalized SKUs. And so I think they all can. Now they're all different in fairness, right? Like launching new paper products is probably a lot more around variation where I would say there's a lot more opportunities in new categories when you think about both Pursteam, hOmeLabs and even Mueller Living and even Squatty Potty to some extent.

So I do think that it's really all the brands can definitely all grow. We're very confident with the GM that we have in place and the brand management team that we have placed under them and I think there's going to be a lot of opportunities across all brands. I think we got a strong enough base of people to really be looking at each of them and growing them each though we'll be very cautious on how we launch products and very patient. I want to make sure that people understand the 6 brands we chose to stay with after rationalization do really have the potential to grow. As to M&A, which was your second part of the question, I think in my prepared remarks I covered that. Listen, we think M&A can play. We're going to be very opportunistic about it. But at the same time, I really want to emphasize that I don't think it's our primary driver for growth.

I think there's a lot more opportunities especially in organic growth, which requires less investment. It takes a little bit more time, but it requires less investment and I think we're very bullish about that. At the same time, us looking at M&A, I think again I'll mention opportunistic, but I'll just say we're being very thoughtful, strategic and patient. And I think in this current environment, it's a very strong trait to be.

[Alex Fuhrman, analyst]

Okay. Thanks Arty. That's really helpful. And congratulations again on the strong quarter.

[Operator]

Thank you. And there are no questions. I will now turn the conference back over to Ilya Grozovsky, Vice President, Investor Relations and Corporate Development, for closing remarks.

[Ilya Grozovsky, executive]

Thanks. As part of our shareholder Perks program, which as a reminder investors can sign up for at atarian.il/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 and their participation in the program and for their questions. I've picked a few of the most popular questions that have been submitted. Our first question is does Aterian have the capability to reenter product lines that were exited or rationalized if the dynamic in the category change?

[Arturo Rodriguez, executive]

I always love these questions. Yes, we're very excited about the growth plan for Aterian. We hope to provide more color. As we said in the prepared remarks, we're going to provide more color towards the end of the year. But yes, ultimately as far as those plans, we are looking at rationalized SKUs where we think there's opportunities to relaunch especially when they can be meaningful. So we're definitely looking at it.

[Ilya Grozovsky, executive]

Great. Next question. What role does AI play in the Aterian of today and in the Aterian of the future?

[Arturo Rodriguez, executive]

Another great question. Look, I believe our teams are doing a great job exploring all the new wonderful tools out there and also we find more tools every month that we keep looking. We are using various tools today. I think Josh and I laugh a lot, we use ChatGPT a lot. Almost every day we're in there asking it questions and learning from it. And so I think we're currently using a lot of that to support and be efficient in our day-to-day lives. Our view today is that AI tools are going to be providing scalability for our future growth and not replacing our people. We believe we are at the base headcount to operate. And as part of that, where we spend a lot of time today with the team is looking at a lot of these tools that are out there that's very focused on content generation side, which should be a supplemental to our creative team and some of the product initiatives that we're working on. I think as we look in the future, if I think about next year and maybe beyond, there are a lot of AI tools that are coming out there that really could help us with product research, customer service and customer insights, which I think will be really helpful as we kind of reignite the organic launch strategy.

[Ilya Grozovsky, executive]

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

[Operator]

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