Aterian Inc

NASDAQ:ATER

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Ilya Grozovsky, executive]

Thank you for joining us today to discuss Aterian's Third Quarter 2023 Earnings Results. On today's call are Joe Risico and Arturo Rodriguez, our co-CEOs. A copy of today's press release is available on the Investor Relations section of Aterian's website at iterian.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 the 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 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 16, 2023, and our quarterly report on Form 10-Q when it is available on the Investor portion of our website at iterian.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 indications 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 of items that impact this GAAP financial measure are not within the company's control and/or cannot be reasonably predicted. With that, I will turn the call over to Joe.

[Joe Risico, executive]

Thank you, Ilya, and thank you, everyone, for joining us today. Today, I'm going to cover our Q3 results. The progress on our previously announced SKU rationalization program, other efforts we are making to focus, simplify and stabilize our business and an update on our omnichannel expansion efforts to position Aterian for growth, all as we continue working towards our previously stated goal of achieving adjusted EBITDA profitability in the summer of 2024. Arty will then cover in more depth our financial results for the third quarter and we'll provide our outlook for Q4. Our third quarter results continue to reflect significant pricing and other pressures in order to remain competitive on Amazon, which is where we earn most of our revenues. While we also continue to see reduced consumer discretionary spending for the product categories we operate in, in certain of our key categories, such as in our dehumidifiers business, we have lost market share. These factors taken together have had a material impact on our results, and we expect these pressures to continue through the rest of the fourth quarter. Having said that, we have set in motion a number of other efforts to regain market share and to optimize our core brands and the SKUs that will remain part of Aterian's go-forward business. As a reminder, last quarter, we outlined our near-term strategy to focus, simplify and stabilize how we operate in order to not only position Aterian for adjusted EBITDA profitability, but also to position ourselves for long-term growth. The first step in that process was to focus our business by reducing the number of SKUs across our portfolio. I'm pleased to report that we have made significant progress. We have substantially completed our review, and we expect our go-forward business to consist of approximately 1,700 SKUs and approximately 50% reduction in our overall SKU count. We reviewed each of our SKUs based on a number of criteria with historical and expected profitability being the main decision drivers. We are discontinuing SKUs across all of our brands with the lion's share of reductions coming from our essential oils business, where we are standardizing our sense, sizes and formulations to simplify our supply chain while still remaining focused on the consumer. Going forward, Aterian will be focused on the following brands: Squatty Potty, our market-leading toilet stool business, Mueller Living, our kitchen appliance and accessories business, PurSteam, our steam-related appliance business, hOmeLabs, our larger home appliance business, Photo Paper Direct, our iron ore and apparel transfer business and the various brands that comprise our essential oils business. In the coming months, we will continue to assess the performance of our go-forward SKUs and brands, driving focus on their profitability and competitive positioning to ensure stable performance and to reposition them for growth. As a result of the SKU rationalization process, however, we do expect further liquidations in Q4, which Arty will address in his remarks. Post SKU rationalization, we have a number of other ongoing initiatives to focus, simplify and stabilize our business as we continue to ensure that how we operate is best optimized to support the go-forward business. One initiative I'd like to highlight today and that we believe drive synergies for us is our project to greatly reduce the number of Amazon accounts we use to market and sell our products from 31 accounts to 8 accounts, essentially one account per brand.Executing on this will reduce complexity and will make us more agile from a revenue, technology, planning and operations perspective. We have also taken actions to strengthen our relationship with Amazon, and we believe that deepening this relationship will create further cost savings and efficiencies in our business. Lastly, in the fourth quarter, we will continue to assess cost-saving opportunities across the business. Collectively, we believe these and other initiatives will position Aterian well as we enter 2024. From an omnichannel perspective, we have also made progress. We have recently launched 2 of our foldable Squatty Potty stools in Walmart. While it's still early, we are optimistic about the performance of these SKUs, and we will be launching in the fourth quarter a national advertising campaign to support Squatty. In addition, we also have recently launched our TikTok shop for Squatty Potty. We also expect to have many of Aterian's other SKUs available for sale on TikTok shop during the fourth quarter. While TikTok shop itself is a relatively new e-commerce platform, we are optimistic about its potential to drive incremental growth across Aterian's product portfolio as we endeavor to meet consumers everywhere they shop. The TikTok model means heavily into social commerce, relying on user-generated content and consumer discovery versus Amazon, which relies primarily on search, and we believe this shift in consumer behavior will be important as e-commerce continues to evolve. We also continue to explore other channels that we believe can drive profitable revenues for our existing product portfolio, and we hope to provide further updates with respect to these efforts in the coming quarters. Lastly, we continue to launch new products, and I'd like to highlight that we plan in the fourth quarter to strategically expand our essential oils portfolio to address consumer needs for healthier chemical-free products. Regarding M&A, it remains an area of focus, and we remain patient and disciplined with respect to these opportunities. Today, we are working through a significant transition of our business, and we remain laser-focused on those efforts, but we are still forward-looking, planting seeds for growth, and we believe these combined efforts will yield significant benefits for Aterian in 2024 and beyond. Overall, we are excited about the progress that we have made to focus, simplify and stabilize the hearing's business, and we remain optimistic that with this narrower focus on our core SKUs and brands and by pursuing our omnichannel strategy, we will be able to achieve adjusted EBITDA profitability in the summer of 2024. With that, I'll pass it on to Arty. Thank you.

[Arturo Rodriguez, executive]

Thanks, Joe. Good evening, everyone. In Q3, we saw our revenue continue to be impacted by reduced consumer discretionary spending and competitive pricing pressures. However, the hard decisions in Q2 of this year to adjust our fixed cost is putting us on our path towards profitability. This is evident as we reduced the year-over-year Q3 adjusted EBITDA loss by 51%, and our net loss improved by over 94%. Further, we continue to strengthen our balance sheet, reducing our cash burn, normalizing our inventory and reducing the balance of our credit facility. We still have a lot of work in front of us. Joe and I and the rest of the team at Aterian are very motivated to take that on. We're also very pleased with our progress on focusing, simplifying and stabilizing Aterian, and we continue to be optimistic on our goals of achieving adjusted EBITDA profitability in the summer of 2024. Now moving on to revenue details for the third quarter of 2023. Net revenue declined 40.2% to $39.7 million from $66.3 million in the year ago quarter, primarily due to reduced consumer discretionary spending and competitive pricing pressures across our portfolio. Our $39.7 million third quarter net revenue by phase, as defined in our press release, broke down as follows: $32.3 million in sustain, $0.4 million in launch and $7.0 million in liquidate and inventory normalization. The year ago quarter net revenues of $66.3 million by phase broke down as follows: $54.2 million is sustained, $1.6 million in launch and $10.5 million in liquidate and inventory normalization. Our sustained net revenue decrease of $21.9 million is from reduced consumer discretionary spending and competitive pressures across the portfolio, but in particular, our deminifier air conditioning product line. Our liquidation net revenue decreased by $3.5 million as we continue to sell off higher-priced inventory to normalized inventory levels, but reduced volumes in last year as we enter, but we hope are the final phases of this strategic initiative. 6 variations were launched late in the third quarter. We are continuing to be thoughtful on the timing of our new product launches. Overall gross margin for the third quarter increased to 49.4% from 45.5% in the year ago quarter and increased from 42.2% in Q2 of 2023. The improvement was driven by product mix and better pricing on liquidation sales. Our overall Q3 2023 contribution margin, as defined in our earnings release, was 3%, which increased compared to prior year's 1.1%, an increase compared to second quarter's 2023 CM of negative 3.6%. The increase in contribution margin was driven by product mix, improved pricing on inventory liquidation, offset by competitive pricing pressures on our core business. Q3 2023 saw our sustained product contribution margin declined slightly year-over-year to 9% versus 10% in Q3 2022. The decrease in contribution margin was driven by competitive pricing pressures and product mix and certain initiatives to normalize end of the season inventory. Looking deeper into our contribution margin for Q3 of 2023, our variable sales and distribution expenses as a percentage of net revenue increased to 46.3% as compared to 44.4% in the year ago quarter. This increase in sales and distribution expense is predominantly due to product mix and an increase in online advertising costs. Our operating loss of $6.5 million in the third quarter improved from $108.9 million compared to the year ago quarter and an improvement of approximately 94%, driven by the normalization and improvement of our balance sheet and the reduction of fixed costs, offset by our continued strategic initiatives to sell off higher-priced inventory. Our third quarter 2023 operating loss includes $1.2 million of noncash stock compensation expense and restructuring costs of $0.4 million. While our third quarter 2022 operating loss included a gain of $0.8 million from the change in fair value of earnout liabilities, a noncash loss of $90.9 million from the impairment owned goodwill, a noncash loss of $3.1 million on the impairment of intangibles and $2.9 million of noncash stock compensation. Our net loss for the quarter of $6.3 million improved from a loss of $116.9 million in the year-ago quarter, an improvement of approximately 95%, driven by the normalization and improvement of our balance sheet and the reduction of fixed costs, offset by our continued strategic initiative to sell off higher-priced inventory. Our third quarter 2023 net loss includes the impact of our operating losses described earlier, plus a change in fair value of warrant liability of $0.6 million, while our third quarter 2022 net loss includes the impacts of our operating losses described earlier, plus a gain of $5.5 million in net charges from the change in fair value of warrants and a loss of $12.8 million from derivative related to the offering common stock made in 2022. Our adjusted EBITDA loss of $4.4 million as defined in our earnings release, improved by 51% from a loss of $9.1 million in the third quarter of 2022. Now going to the balance sheet. At September 30, we had cash of approximately $28 million compared with $28.9 million at the end of June 30, 2023. The decrease in cash, as expected, is predominantly driven by our net loss in the period and the repayments of approximately $1.7 million on a credit facility, offset by $5.2 million of net inflows from working capital. At September 30, our inventory level was at $31.5 million, down from $36.7 million at the end of the second quarter of 2023 and down from $60.5 million in the year ago quarter. We continue to make strong progress in normalizing the high-cost noncore inventory, but given the weakness in considered demand has taken us longer than originally anticipated. However, we do believe, based on our current forecast, we expect to be substantially completed by the end of the fourth quarter of 2023. Further, we've elected to purchase inventory in advance for the 2024 season to avoid expected tariff impact in early 2024, primarily around our beverage cooler products, which will lead to higher inventory balance than normal through Q2 of 2024. Our credit facility at the end of the third quarter of 2023 was $14.2 million, down from $15.7 million at the end of the second quarter of 2023. As we close 2023, we do expect our cash balance at the end of the fourth quarter will decrease to the low to mid-$20 million range as we are paying for inventory purchases and receiving goods in advance in order to ensure the avoidance of expected tariff impact in early 2024. As we look at Q4 2023, considering the impact of inflation and reduction in consumer spend, we believe that net revenues will be between $28 million and $32 million. This represents a decrease from the same quarter last year of approximately 45% using the middle of the range. For Q4 2023, we expect adjusted EBITDA loss to be in the range of $6.5 million to $7.5 million. The middle of this range represents an improvement of approximately 44% compared to last year's fourth quarter. As compared to the third quarter 2023, this includes an estimated incremental $2 million negative impact from anticipated fourth quarter pricing initiatives for higher-priced inventory in relation to Black Friday and Cyber Monday sales program. We continue to be optimistic on our goal and continue to target adjusted EBITDA profitability in the summer of 2024. We also believe, based on our current forecast, we have sufficient cash above our covenant to achieve this goal without raising additional equity. As we previously stated, if we pursue additional equity or financing, it will be predominantly for growth through M&A. In closing, our shared vision of focusing, simplifying and stabilizing Aterian towards profitability continues to be priority number one. We continue to make progress on this goal, but it will take time and tremendous effort, which continues to excite and motivate us and our dedicated workforce across the globe. We believe our solid balance sheet, led by our cash balance, normalizing inventory levels and continued access to our credit facility with MidCap will allow us to be laser-focused on driving our core business towards adjusted EBITDA profitability. With that, I'll turn it back to the operator to open the call up to questions.

[Operator]

The floor is now open for your questions. [Operator Instructions] Your first question comes from the line of Matt Koranda with ROTH MKM.

[Michael Zabran, analyst]

Hey guys. It's Mike Zabran on for Matt. Maybe just starting on the 2024 adjusted EBITDA profitability target. Just help us understand to what degree the new target relies on a more optimized inventory balance versus maybe overall demand normalization versus new product growth driving demand?

[Joe Risico, executive]

Arty, you want to take that one?

[Arturo Rodriguez, executive]

Yes. I'll grab that, Joe. So listen, I think we believe by focusing our portfolio, this is going to lock a lot of efficiencies across the board and lead the recovery of our CM, especially as we move away from less profitable products. We think that CM getting back to like [ 13% ] plus. And eventually, when we eventually to our target of [ 15% ] is really going to unlock that goal of adjusted EBITDA profitability. Some of the things that we're working on, we mentioned, we do believe that a lot of the inventory will be back to normal pricing as we kind of get into early 2024, especially now that containers are back to 2019 pricing. Further, we're working on a lot of FOB initiatives, particularly in the oil that will help us improve our CM by the time we get to summer 2024. Plus, I think, as Joe mentioned, we focused on the portfolio, we're going to be hyper focused on these core SKUs, which will drive a lot more effective initiative across the listings and resulting in what we believe will be improved CM. And also, we got a bunch of other initiatives that we'll talk at a later date about, but that should improve a lot of the efficiencies across product development and supply chain. We think we got a good line of sight. We got a lot of work to do, but certainly, we feel very optimistic that the goal that we set off by -- in August that we're still heading in the right direction for that.

[Joe Risico, executive]

Arty, if it's okay to add, Matt, obviously, I agree with everything I already said. And we're just looking at the core Aterian business when we think about profitability next year.

[Michael Zabran, analyst]

Got it. That makes sense. And maybe on the initiative of moving from 31 to Amazon accounts, maybe just can you provide us a little bit more color on what does this process consists of? Are we incurring any onetime cost as a result? How long will it take? And then where should we look to in the coming quarters to start to see the benefits of this initiative.

[Joe Risico, executive]

Arty? You can take that one, Arty.

[Arturo Rodriguez, executive]

Yes. Okay. So a lot of it, to Joe's earlier point, listen, in the past, historically, the way a lot of the Amazon business is run, they were run across multiple accounts, especially considering how much power Amazon has to a particular business, right? If your one account and Amazon shut you down, it creates a lot of impact. That said, as that platform in the marketplace has matured, it's a lot more acceptable to have multiple accounts. I think where we're thinking and what we think efficiencies will happen that will lead to improved profitability is about getting down from one account per brand. So not only the team can be very hyper-focused on that one account for that brand and all the products of that brand. It does take away a lot of repetitive natures that we might have had when we were closer to 30 accounts. So I think this is more of a efficiency's not going to directly result immediately just by going to 8 accounts it's a better CM. It's going to just lead to a lot of more of that hyperfocus and efficiency across the organization that should unlock the path towards improved CM and improved marketing programs and improved other initiatives that you would do on any particular account. It's kind of hard to quantify exactly, but it just -- it's part and parcel of the plan to get to profitability overall.

[Joe Risico, executive]

Yes, I would just add that it's -- the way to think about it, it's even though you're selling on one platform, it's almost like you're selling on different platforms when you're operating out of different seller accounts, the way you look at data, just even a basic example from a planning perspective, when you have inventory, now you don't just send it to Amazon. Now you're shipping it into almost like 4 different channels, 1 account, 2 account, 30 accounts, right? It just -- there's so much efficiencies that come from narrowing down the accounts, right? So it's a powerful move for us, even though, as Arty pointed out, it's not something that's immediately quantifiable. So hopefully, that helps.

[Michael Zabran, analyst]

Yes. Okay. So it's providing more of operational line of sight versus quantifiable impact. Is that the right way to think about it?

[Joe Risico, executive]

Correct. Correct. I would say for the most part, that's true.

[Michael Zabran, analyst]

Okay. Got it. Okay. Last one for me. Maybe just speak to the overall demand environment that we're seeing. Are there certain product categories that's -- that are requiring deeper discounting than others or certain products showing strength? Maybe just elaborate on any new or persistent trends we're seeing from that consumer?

[Joe Risico, executive]

Yes. I'll take this one, Arty, and you could jump in. So I would say, overall, what we're seeing, right, and the way we use it, the way we think about it is through search on platforms, right? We see that overall, it's down across the categories that we operate in, right? Having said that, the demand environment is still there. They're buying in the categories that we're in. So the demand is down, but it's still there. I would say we have -- again, as I pointed out, we struggled a little bit in the home appliance space, humidifiers had pressure. Air conditioners had a lot of pressure. Certain of our kitchen appliances had pressure, probably the area that had the least pressure is Squatty Potty? It's a very strong brand. I think we've gained share in our oil business, right, there's demand there. And that category for us has started to improve. But that's sort of the analysis from a demand perspective across our business.

[Michael Zabran, analyst]

Got it. Makes sense. That's it for me.

[Joe Risico, executive]

Welcome.

[Operator]

Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners.

[Brian Kinstlinger, analyst]

You talked about losing some share just now in your response as well as your prepared remarks. I'm wondering, is there anything change in a product reviews that impacted it? Or is it maybe [ Amy ] is proving not to be as effective in a shrinking demand environment? I mean there are several categories you just mentioned. So I'm just trying to understand what you think is driving that? Is it increased competition?

[Joe Risico, executive]

Yes, yes, no worries. So Brian, it's -- like when -- just looking at the dehumidifiers and I talked about this on the last earnings call, right? I think there's -- we were the best-selling dehumidifier for quite some time. And then we lost the best seller tag. And that like when you lose that best seller tag, it has an immediate impact on demand, right? And now we think we can get that back, but that has an immediate impact. It's not really an Amy thing. It's simply competition on marketplaces is extremely intense. So even if you have a best-selling product in a category, you kind of have a bull's eye on your back and people are coming for you. Like I think today, even in the toilet stool category, I searched for a toilet stool, and I think there were thousands of results that came back for that product category. So the competition is extremely intense, and it's every day, right? You have new entrants, people making aggressive pricing decisions, et cetera. It's just a very -- it's a very competitive environment. And then I think from a social proof perspective, there are some areas where I think we can do better in making sure we get good social proof. There are some products that I think need improvements or refreshments, and we're working on that. And that's part of our strategy to continue to launch products, better ones to replace ones that are out there today and to launch more sort of the variation type of strategy where we have good, better, best products to sort of address a wide variety of consumer needs. So it's challenging, but I think manageable for us.

[Brian Kinstlinger, analyst]

So is that dehumidifier best-selling tag lost representative of several categories? And is it because of increased competition, but also because maybe you lack the volume and inventory to meet demand. And so that's the result. I'm just trying to think is that a broader picture of what's going on in lots of different SKUs?

[Joe Risico, executive]

I would say that it's -- the dehumidifier is not the only category where we compete for the best seller tag. It's in other -- we have that issue in a couple of other categories. And I'm sorry, I missed the rest of the question, sorry. That's it basically.

[Arturo Rodriguez, executive]

Yes. Sorry, yes, I was going to add to that, Joe. Yes. Thank you. yes, I don't think it's because of lack of inventory or anything like that. I think we've always been conservative when it comes to inventory. I know in the past, we used to disclose inventory shorts, but obviously, with the [indiscernible] inventory would be normalizing. So it's an inventory. I think it's particularly right to what Joe's point is, it's more the competitive pressures that you're seeing is why we lost a ton and inventory-related thing in general.

[Brian Kinstlinger, analyst]

Great. And the last question I have, as we look to 2024, I know you're not giving guidance nor do I pretend to think you will. But with the inventory that was high price that you had discount, is that challenge is behind you for the most part, I think, are we thinking that you hope to be profitable on less revenue because of less SKUs? Or can you -- do you believe with your existing SKUs that you'll go forward with, you can offset the lost revenue from SKUs you plan to discontinue.

[Joe Risico, executive]

Arty, why don't you take that one?

[Arturo Rodriguez, executive]

Yes. Brian, yes, I think we do expect with the improvement in CM that we anticipate by being very focused and some of the initiatives that Joe has highlighted that on lower revenue, we can get to profitability. But we were still working through and obviously, we'll probably be able to report more details when we go to Q4 because we're still kind of highlighting a lot of the efforts that Joe talked about. But yes, theoretically, even though it will be a little bit lower revenue, we do anticipate that the increased CM should still get us to profit.

[Brian Kinstlinger, analyst]

Okay.

[Operator]

Again, if you would like to ask a question press star then the #1 on your telephone keypad. There are no further questions at this time. Mr. Grozovsky, I'll turn the call back over to you.

[Ilya Grozovsky, executive]

Thank you. 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 and their participation in the program and their questions. I picked a few of the most popular questions that they have submitted. First question is, would Aterian consider adding any subscription-based products.

[Joe Risico, executive]

Thank you, Ilya. Just before I answer that, that's a great question. I just want to say we're grateful for the retail crowd. Apologies, we've got some sirens going by. We're grateful for the retail crowd. We do follow. We can't comment on it, but we do follow the different groups. And so we appreciate the support. Regarding subscription-based products, and we do have our essential oils business that we do think of as something that has the potential for subscription based. That's probably the only category today that really has legs for that kind of a model. And then obviously, we do think about either acquiring businesses or launching products that could have a model like that. But that's how we think about subscription-based products.

[Ilya Grozovsky, executive]

Thanks Joe. The next question is, does Aterian plan to expand to any additional platforms?

[Joe Risico, executive]

The answer there is, yes. We talked a little bit about it. We're opening up TikTok shop. We're very excited about that. We are looking at other platforms where it makes sense for Aterian's product portfolio to perform. So hopefully, we'll have more updates on that in the future. But that's all for now. Thank you.

[Ilya Grozovsky, executive]

Great. This concludes the Q&A portion of the call. In terms of the upcoming calendar, Aterian management will be participating in the Craig-Hallum 14th Annual Alpha Select Conference on November 16th in New York. We look forward to speaking with you on future calls. This ends our call. You may now disconnect. Thank you.