Aterian, Inc. Q1 FY2024 earnings call

Aterian focused on streamlining its business by rationalizing the SKU portfolio, simplifying logistics and technology infrastructure, and eliminating non-core initiatives. On the organic growth front, the company plans to launch several products in Q2 across brands like hOmeLabs, essential oils, and newer Living brands. It has expanded to marketplaces such as Mercado Libre, Amazon Canada, and Wayfair, and is actively working to expand to other marketplaces including Amazon Mexico, Walmart Mexico, and Target Plus. Inorganic growth saw an increase in higher-quality M&A opportunities. The team, though lean, is capable and the company is working towards achieving adjusted EBITDA profitability in the second half of 2024.

Net revenue for the first quarter of 2024 decreased by 42% to $20.2 million from $34.9 million in the same period last year. Overall gross margin increased to 65.1% from 54.8% in the year-ago quarter. The Q1 2024 contribution margin was 14.1% compared to 5.9% in the prior year. The sustained product contribution margin improved to 16% in Q1 2024 from 12.6% in Q1 2023. Variable sales and distribution expenses as a percentage of net revenue increased due to product mix and higher marketing expenses.

For Q2 2024, net revenue is expected to be between $20 million and $23 million. The adjusted EBITDA loss is projected to be in the range of $1 million to $2 million. The company aims to achieve adjusted EBITDA profitability in the second half of 2024.

There are uncertainties in the macroeconomic environment, pricing pressure in highly competitive discretionary product categories, and non-GAAP financial measures may differ from similarly titled metrics presented by other companies.

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

A: Q1's gross margin was the highest we've seen. Much of it is due to product mix, including a lot of essential oils. We've also focused on better pricing models. However, I think the biggest impact is mix. I don't think it will be 65% going forward as seasonal products like humidifiers will cause the margin to fluctuate, but we expect it to remain in the high 50s to low 60s overall.

Q: And your first question comes from the line of Brian Kintslinger with Alliance Global Partners. And then you mentioned your decreasing inventory. Can you highlight your inventory plans over the next 6 months? Do you need to invest ahead of summer? Do you need to invest given your products that are around the holidays? Or are you kind of now inventory neutral? I know you've talked about long and short and things like that?

A: We've normalized inventory levels and worked to ensure we're not too long or too short. As we enter the summer season in Q2, we have a good handle on what we need to execute. Inventory may increase a bit for the summer season but will normalize. We're in a much stronger and normalized inventory space with only very tiny liquidation going on now.

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

A: It's largely driven by the core business. A lot of the work on new products and channels is for post-2024 growth. For the second half, it's about the core business. Seasonality still plays a role with expected upticks in revenue. We also made significant fixed cost savings in the quarter, with more to come in Q3 and Q4 from vendor renewals and other annual costs, which contributes to our confidence in achieving adjusted EBITDA profitability.

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

A: In 2023, the company went through team changes and restructuring, which created a gap. As we implemented initiatives starting in August, the gap is closing. The efforts are focused on the core business, so revenue is lower due to fewer SKUs, but contribution margin is improving. Consumer demand, while resilient, appears to be down, which also contributes to the sales situation.

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

A: Historically, most R&D spend was on internal development, but we've shifted to a third-party model using a standard tech platform. Product innovation is still invested in with our sourcing and engineering team in China, focusing on improving product quality and making slight feature changes. As we strengthen our brand, there will be opportunities for stronger innovation in the future, but currently, innovation is driven by our China-based team.

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

A: We would consider those opportunities. However, currently, we view Aterian as a company that will operate its own brands, so expanding into private label for other retail brands isn't a high priority right now. When considering new product launches and channel expansions, focusing on our own brands is our current focus.