Earnings Transcript for ATER - Q3 Fiscal Year 2024

Operator: Thank you for standing by. My name is Bella and I will be your conference operator today. At this time, I would like to welcome everyone to the Aterian, Inc Q3 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] Thank you. I would now like to turn the call over to Ilya Grozovsky, Vice President Investor Relations Corporate Development. Please go ahead.

Ilya Grozovsky : Thank you. Thank you for joining us today to discuss Aterian's Third Quarter 2024 Earnings Results. On today's call are Arturo Rodriguez, our CEO; Josh Feldman, our CFO. Copy of today's press release is available on the Investor Relations section of Aterian's website, aterian.io. Before we get started, I want to remind everyone the remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 are based on current management expectations. These may include limitations, 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 also involve substantial risks and uncertainties, some of which may be outside of our control and could cause actual results to differ materially those expressed or implied by such statements. These risks and uncertainties amongst others discussed in our filings with the SEC, encourage you to review these filings for a discussion of these risks including our Annual Report on Form 10-K filed on March 19th, 2024 and our Quarterly Report on Form 10-Q when it is available on the investor portion of our website at aterian.io. You should not place due 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, adjusted EBITDA margin. 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 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, a forward-looking basis without reasonable efforts because items that impact this GAAP financial measure are not within the company's control and or not be reasonably predicted. With that, I will turn the call over to Arty.

Arturo Rodriguez : Thank you, Ilya, and thank you everyone for joining us today. As Today is Veterans Day, we would like to take a moment to honor and express our deepest gratitude to all the veterans and active service members who have dedicated themselves to protecting our freedom. Now over to the Aterian business. Our mission to focus, simplify, and stabilize Aterian in 2024 continues to show results. We are happy to report another successful quarter as Aterian continues to progress on its journey to being a profitable consumer goods company. Today, I'm going to one

Josh Feldman : Thanks, Arty. Good evening, everyone. We are pleased to report that our ongoing efforts to focus, simplify, and stabilize our business have produced positive results. These initiatives have led us to improve key metrics and we're proud to report adjusted EBITDA profitability for the second consecutive quarter. Now let's take a closer look at our overall third quarter performance. Net revenue for the third quarter of 2024 declined 34% to $26.2 million from $39.7 million in the year-ago quarter. Adjusting for the impact of SKU rationalization, net revenue would have only declined approximately 15%. This decline was primarily driven by dehumidifier stockouts and seasonal weather patterns, as well as softness in our kitchen appliance products. Looking at the summer season as a whole, however, dehumidifier sales adjusted for the SKU rationalization still increased by approximately 10% compared to the same period last year. Our launch revenue was $0.6 million during Q3 2024 compared to $0.4 million in Q3 2023. As planned, we have one new product category and four product variations launched in the third quarter. We expect to continue launching predominantly variations in the fourth quarter. Overall, gross margin for the third quarter increased to 60.3% from 49.4% in the year ago quarter and was essentially flat with Q2 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 Q3 2024 contribution margin, as defined in our earnings release was 17%, which improved compared to the prior year's 3%, so decreased slightly compared to 17.4% in Q2 2024. 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. Looking deeper into our contribution margin for Q3 2024, our variable sales and distribution expenses, as a percentage of net revenue decreased to 43.3% as compared to 46.3% 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 last mile costs, as a percentage of revenue. Our operating loss of $1.7 million in the third quarter of 2024 improved from a loss of $6.5 million in the year-ago quarter, an improvement of approximately 73.4%, primarily driven by the improvement in CM and the reduction of fixed costs due to our cost-cutting initiatives. Our third quarter 2024 operating loss includes $1.8 million of non-cash stock compensation expense, while our third quarter 2023 operating loss included $1.2 million of non-cash stock compensation expense and restructuring costs of $0.4 million. Our net loss for the third quarter of 2024 of $1.8 million improved from a loss of $6.3 million in the year-ago quarter, an improvement of approximately 71.7%, primarily driven by the improvement in CM and reduction in fixed costs. Our adjusted EBITDA gain $0.5 million, as defined in our earnings release, improved by 111% from an adjusted EBITDA loss of $4.4 million in the third quarter of 2023, primarily driven by the improvement in CM and the reduction of fixed costs. Moving on to the balance sheet. At September 30th, 2024, we had cash of approximately $16.1 million compared with $20.3 million at June 30th, 2024. The decrease in cash is predominantly driven by payments on our credit facility of $2.9 million as the balance on our credit facility went from $9.6 million as of the end of the second quarter of 2024 to $6.7 million at the end of the third quarter of 2024. The credit facility balance is also down from $14.2 million in the prior year period. The remaining reduction in cash from Q2 2024 is negative impacts of working capital. At September 30th, our inventory level was $16.6 million, down from $18.4 million at the end of the second quarter of 2024, and down from $31.5 million in the year-ago quarter end. As we look at Q4 2024, considering our strategic SKU rationalization, we believe that net revenue will be between $22.5 million and $25.5 million. Using the middle of the range, this would be an approximately 27% decrease from last year's Q4 revenue of $32.8 million, primarily driven by a reduction in SKUs from our Strategic SKU Rationalization. Adjusting for the SKU Rationalization in the prior year, revenue is expected to decline by only 4% compared to last year. As we have previously discussed, our decrease in net revenue versus the prior years expected as we continue to focus on our go-forward business, on our best brands and products. Our primary focus today continues to be consistent adjusted EBITDA profitability. For Q4 2024, we expect adjusted EBITDA to be approximately breakeven. Achieving breakeven in adjusted EBITDA will represent 100% improvement from the $5.6 million adjusted EBITDA loss in Q4 2023. We also continue to believe, based on our current forecast, that we have sufficient cash above our covenants 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 material M&A. In closing, I am very proud of our team's efforts resulting in our second consecutive quarter of adjusted EBITDA profitability. We are confident with our products, strong balance sheet, and our principles of focus, simplification, and stabilization, we have turned the corner as a company. I look forward with optimism, as we continue our journey towards revenue growth, gain-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] Your first question comes from the line of Brian Kinstlinger of Alliance Global Partners. Your line is open, please go ahead.

Brian Kinstlinger: Great, thanks so much. It's great to see the business stabilizing. So I think in your prepared comments you said you expect to be active and live on target ahead of Black Friday, which is only two weeks away. So how confident are you? What are the obstacles still to get live there? And how many SKUs do you expect to be listed during the holiday period?

Arturo Rodriguez: Hey, Brian, Arty here. I'll grab that one. Obstacles? I don't think there's much. I mean, really, we're very clear. We're actually live testing some things as of today. So I do think there's very little obstacles for us in front of us. There are some marketing campaigns and marketing tools that are a little bit different than the Amazon tools. But I don't expect that to be real friction based. As the number of SKUs, there's still a little bit of a moving target there. But my gut tells me at least six SKUs, hopefully, will be the goal. But certainly, I don't see any real friction for us at this point, right? Things happen. But at this point, I don't see anything really preventing us from hitting that.

Brian Kinstlinger: Great. And then how do you see the time-line over the next 12 months to 18 months of additional SKUs on say, Target and Walmart? And what's the limiting factor that gives you caution to not list a lot more product, not the majority of your top-sellers. Is there a cost to it? What's the cautionary reason to only have a handful of SKUs?

Josh Feldman: Brian, it's Josh. So it's a good question, Brian. Listen, I believe that focus is a very important thing in everything we do. And though, over time, I do see us expanding our portfolio and our product listings on each of these channels. I do want to start smaller rather than larger just to make sure the team learns how to market on Target Plus, and I'm just going to use Target Plus as an example, because it is a bit different. The consumers are a bit different. There's a lot more consumers on Target Plus that are focused on the Target Plus credit card and that benefit as opposed to it to prime. And so I do think we have a little bit of learning to do, so we want to start cautiously. But yes, certainly, as we gain momentum and we gain experience on selling on these other channels. We will go with a broader portfolio. But at the same time, we know that a marquee SKU concept, taking our best PurSteam products, our best hOmeLabs product maybe a handful of our best oils is probably the right approach to gain traction and success. I don't think we necessarily need to put every single one of our SKUs. But certainly, if the marquee SKUs are succeeding, we can definitely expand to that number of SKUs easily over time.

Brian Kinstlinger: Great. And then you mentioned most of your launches were variations like the first half of the year, I think there was one that wasn't. Why are you not getting a little bit more aggressive on new products? And you mentioned next year, a handful of new products, which doesn't sound like a lot. So are you waiting for the stronger consumer because your balance sheet seems to be positioned for investment?

Arturo Rodriguez: Thank you for the comment on the balance sheet, Brian. I think Josh and team have done a great job strengthening the balance sheet. It has, it has. I think the team deserves the credit there. Listen, I'm going to say this in a way where not to go back too far in history, but I think, again, less focused, good quality products in the right category that's properly research is a lot stronger from a long-term building success or building long-term building a foundation for success as opposed to like, hey, let's launch as many widgets as possible, stick as many on the walls and see what sticks. I don't think that's the right approach. I think we are being very cautious because we are being very, very thoughtful in where we're going to launch, what categories we're going after. And I'd rather start slower and smaller to make sure we're not making a tremendous amount of missteps over ordering, missing the mark in some aspects. So I do believe that approach is a lot more sound for Aterian. Somewhat conservative, I would debate that because I think in some aspects, some of the history that you're familiar with will probably be -- I think a lot of people think we're a little bit too ambitious at the time. So I think in some aspects, we are looking at a little bit of a slower start here but that's not to say as we gain more momentum and gain more profitability with the incremental revenue that we'll add, we wouldn't get more aggressive. I just think we want to be very thoughtful because we ratified a really good aimed bullet as opposed to throwing a bunch of spaghetti in the wall and see which sticks.

Brian Kinstlinger: Great. I’ve got a few more but I will jump back in the queue, and let some others ask some questions.

Arturo Rodriguez: All right. Thanks Brian.

Operator: Your next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Your line is now open. Please go ahead.

Alex Furman: Hi guys. Thanks for taking my question and congratulations on another quarter of being EBITDA positive here. Now that you have the product portfolio down to a half dozen core brands, can you talk about your outlook for next year? Which of these brands do you think really have the most potential to drive growth for you as you start pivoting to growth next year?

Arturo Rodriguez: Alex, how are you doing? It's Arty. Josh, I'll grab that one. Listen, I'm very happy with all our brands. I think the rationalization and the work we did over the last year, we went from like 14 or 15 brands down six. So I think we stuck with these six, very purposely because we thought all of them had great potential to grow. In particular, hOmeLabs continues to perform well. It had a great season, as we mentioned in our prepared remarks. And there's a tremendous amount of opportunity still in the environmental space between dehumidification, perhaps air conditioning, perhaps air purification but I still think there's a ton of opportunities for hOmeLabs to continue growing to. Similar to Pursteam, as I mentioned, we're rounding out our steam mop scrubber, our most advanced steam mop yet. And I think there's still more opportunities on the steam irons that you'll see in the coming months. So I think that's just two examples. I can go here and we can spend the whole time the next hour talking about all the products and ideas here. But I do think everything in one of our brands has the potential to grow. And I don't want to weigh into which is better or worse. I think they all have their unique opportunities and their unique impact to the consumer. And so I'm very happy with where they are and they got a lot of work to do, and we've got a lot of things to show the world. But certainly, I wouldn't rank them in the sense of which has the best opportunity right now. I think they all have equally have an opportunity to grow.

Alex Furman: Okay. That's really good to hear. Thanks Arty. And then you mentioned likely launching new products as a way that you really get to more meaningful growth next year. Are there any particular categories that you're focused on as you think about new product development or any of your existing brands that you see as brands that you might want to launch new products under that umbrella?

Arturo Rodriguez: I think the answer is yes. I think there is still tremendous amount of opportunity to launch products on our existing brands, as you say across Amazon and other channels, especially as we grow the omni. I think there's great opportunities for certain brands to be stronger in certain channels versus Amazon. We are really, really working on this road map, Alex and I hate to say like we'll probably -- we'll give a lot more details about what products and what categories we're going after in 2025. But we need a little bit more time because again, I want to make sure that what we put out there is stuff that we feel confident in being delivered in 2025. But I do see that there'll be some new categories and potentially some old categories that we used to play in that perhaps we can revise. And so I think it is going to be a combination of us going into new categories that people have not seen us be in before, but it also relaunches. So I do think they are both going to -- both of those kind of sub-topics, I think will be evident in the 2025 road map when we do discuss it more in Q4.

Alex Furman: Okay, that’s really, helpful. Thanks Arty.

Operator: Your next question comes from the line of Marvin Fong of BTIG. Please go ahead.

Marvin Fong: Hi great. Good evening, thanks for taking my questions everyone. And let me also add my congrats on all the heavy lifting and execution to you guys at this point. Yes. Just maybe several questions on 2025, maybe you could just kind of think more near-term about the guidance for the fourth quarter. We are already almost halfway through November, and I know still a lot of holiday shopping to be done here, but we do have a shorter holiday period and some Black Friday sales already happening or have been happening for a while. So I just would love your take on sort of what you've seen so far in terms of how the consumer has kind of been developing and just what else we should be looking for, for the rest of the season in terms of sort of like how much of the shopping season you guys still need to realize yet?

Arturo Rodriguez: Hi, Marvin, thanks for the kind words. Yes, it's a little compact. I mean, Thanksgiving is at the end of November, so right to 28 or right? And so usually, sometimes you get Thanksgiving gives you like an extra week before the holiday. So it is a little compact. I mean, listen, Amazon did in earlier Prime Day, so that was pretty successful. We'll talk about that when we announce Q4. But certainly, we saw so far sales activity being robust in October, which is kind of a little bit different than the past. I think to your point, there's been a lot more sales. I think price sensitivity always been helpful for consumers. If they see good deals going on, they'll start purchasing early. But usually, this is not uncommon, right? The slowdown before Turkey 5 or Turkey 10, however people quantify it, we're still very confident that the guidance that Josh put out there is what we're tracking towards. We don't see any bumps in the road at this point. So we feel pretty happy though, but we are excited for Black Friday and Cyber Monday. We got a lot of great deals and great opportunities for consumers to experience our product at a good price without necessarily tremendously impacting or sacrificing margins, right? So I'm kind of excited to see how the team performs this year, as a much more focused organization on our core SKUs. So I am looking forward to it. But so far, everything is working and working to our expectations.

Marvin Fong: Got it. Great. And then you called out container shipping rates a couple for this quarter, and I think that we just reported quarter and ended this upcoming quarter. Considering, I think rates have kind of come down post-election, I think there's a view that trade will kind of decelerate under the new administration. So should we just sort of think about the container rate pressures kind of isolated to those quarters is kind of a lagging impact especially considering sort of the comparison in last year? And maybe in the back half of 2025, it actually could become a tailwind or at least won't be a headwind?

Arturo Rodriguez: Yes. No, it's a good question, Marvin. Yes. I think in our prepared remarks, we think consumer -- sorry, we think container costs will continue to be -- again, when we say higher, keep in mind for 2023 right, and for the first half of 2024, container costs were actually kind of back to normal. And so this kind of rise in container cost that happened, I would say, kind of in the -- I would say, probably in the April-ish May timeframe of 2024 was probably mostly due to some geopolitical issues and some other weather-related issues in China and then I think a lot of uncertainty with some of the dock strikes that happened, obviously, in the Southern US. So right now, we think that containers will probably even though they come down a little bit, they'll probably still stay off that -- they'll still be higher than those periods when you do the comparison. And we hope they come eventually down, yes, that would be great because you're right. And then we would benefit in the second half of 2025. They came down as you think of the comparison. But certainly, sometimes it's hard to predict. There's been a lot of changes and a lot of changes are expected to happen, especially with the new administration. So we'll see how that impacts it. I think the main thing is that our multi-supplier approach has benefited us, and we'll continue to leverage that and be as nimble as possible when it comes to containers. But we expect them still to be off that kind of call it, 1,500 to 2,000 container normalized price that it is still going to run much higher than that, I think, through the beginning of 2025.

Marvin Fong: Got it. And then last question, I think you mentioned maybe some cost savings are still in the pipeline. Could you give us an idea of what's a good sort of fixed cost structure once you guys have fully realized your cost efficiency, right? I would love to get some more color on that. Thanks.

Josh Feldman: Hi, Marvin, it's Josh. So we did our restructuring in the first quarter of this year. So obviously, we'll get next year in 2025, the full annual impact of that restructuring. We've also -- as we previously announced, we switched auditors and we have a lower cost auditor now. And also our insurance renewals had come up in the summer-time, and we got a reduction in premiums on a renewal. So if you put that all together, we do expect our run rate of fixed cost to decrease next year.

Marvin Fong: Okay. Awesome thanks Josh, that sounds great. Appreciate it.

Operator: Your next question comes from the line of Brian Kinstlinger of Alliance Global Partners. Please go ahead.

Brian Kinstlinger: Great. Josh, I'm going to ask a follow-up to that question on overhead. If you look at the third quarter, your G&A was significantly down to the June quarter and even much lower than the March quarter. Is this the full effect of cost cutting? Or is there anything else contemplated in there that may be non-recurring?

Josh Feldman: We did have some insurance refunds that came in the third quarter. I think our G&A is not exactly equal quarter-to-quarter. In the first quarter, now we have higher audit accounting fees. So I would say our run rate is probably a little bit higher than our actual Q3 results.

Brian Kinstlinger: Great. That's helpful. And then my other question you've got $16 million of cash. You're basically breakeven to generating modest cash flow looking at the queue. How is management and the Board thinking about using their excess capital to improve your returns. You mentioned M&A. Is this a really high priority? And if you are thinking M&A, is it technology? Is it brands and products you're looking to buy? Is it relationships with some of these platforms? Just maybe help us understand what your priorities are.

Arturo Rodriguez: Brian, I mean, I can answer that, Josh. I think as it comes to M&A, Brian, M&A for us is something that would help our product portfolio right, either our brand portfolio, strengthen our brand portfolio. But again, it's going to be very strategic. We don't believe running 14 or 20 or 30 brands or 100 brands like some of these aggregators tried to do is a good model, just to create enough leverage or efficiencies on your marketing or your operating costs. So if we do M&A, it's because we're adding a brand or a product that we think has a long-term strategic value to us over time. I think the other side, if you look at our cash balance, is next year, we are going to -- we're seeing our mission is to grow. And so I think as you think about that, we need some of that cash for working capital as we build up inventory and especially as we think of marketing some of our new products. So I think if you look at how we're going to deploy that cash, it's really in those areas, right? Don't need [condiment] (ph) for omnichannel expansion to your earlier comments, right? There's less friction now that we're kind of in a third-party model. But earlier, as you're growing, you have to buy that inventory, so we get the impact and the benefit of the ABL, I do think that's where the cash is going to be deployed over the coming months, we don't think it drags that much because of the ABL is where we want to sort of leverage it to grow is really through that product launches. And if we find something, M&A.

Brian Kinstlinger: And then what are valuations looking like these days? Maybe EBITDA kind of multiple that you hope to achieve?

Arturo Rodriguez: I still -- they're a little over the place. I still they're a little over the place. I still think there's a lot of sellers that have unrealistic expectations. But we've seen some interesting stuff still in the 3 to 4 range. We've seen some a little bit lower than 3 at time. But I still think -- I think it's somewhat showed up with the right thing at somewhere between 3 or 4 multiple. I think that's a good deal.

Brian Kinstlinger: Great. Thanks so much for answering all my questions.

Arturo Rodriguez: Yeah, of course.

Operator: [Operator Instructions] I will now turn the call back over to Mr. Grozovsky, Vice President, Investor Relations, Corporate Development for closing remarks.

Ilya Grozovsky: Thank you. As part of our Shareholder Perks program, as a reminder, investors can sign up for 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 for questions. A few of the most popular questions that they have submitted. Question number one, shareholder perks discount e-mails been discontinued.

Arturo Rodriguez: I'll grab that one, Josh. And Ilya, I think you broke up there for a second. So I just want to make sure you're asking the right question. Was it discontinued with the question, sorry?

Ilya Grozovsky: The question is have shareholder perks discount e-mails been discontinued?

Arturo Rodriguez: Okay. Yes, got it. Absolutely not. No way. We love giving our shareholders an opportunity to share on our products at a discount. We're really proud of our products. We have great brands and products. And it's awesome that we give the Perks members an opportunity to buy those at a discount. I think what we did was we changed the Perks programs on a weekly e-mail to a monthly. And I think by giving the Perk members a monthly e-mail, it's a little bit better. It gives them a lot more flexibility by the product. I think the previous one is you had to buy within a week. Now you're getting a monthly e-mail with multiple discounts and you have the whole month to participate or purchase it, which I think just gives them the members a lot more flexibility. But certainly not. We love the Perks program and we're very happy to see people participate in it.

Ilya Grozovsky: Thank you. Next question is, are you interested in re-entering product categories in product lines that you have discontinued as part of your SKU rationalization?

Arturo Rodriguez: So I think we touched on it a little bit with one of the questions, I think it was my in Alex. But yes, certainly, we are working very hard right now to finalize our 2025 road map. And as part of that, we are considering a few discontinued SKUs. If there is an opportunity to re-enter a program -- I mean, sorry, a category that we were previously in, especially if it fits the brand vision, we're very open to it and considering it. It is great about some of these discontinued SKUs if it's in the right quality and same features, there is an opportunity to reuse the ratings and reviews of that listing previously. So they're still there, we can take advantage of if we think we need it. So certainly, it's a great opportunity for us to minimize the risk of launches if we find the right opportunity.

Ilya Grozovsky: This concludes the Q&A portion of the call. In terms of the upcoming calendar, Aterian management will be participating in the 15th Annual Craig-Hallum Alpha Select Conference in New York City on November 19, 2024. We look forward to speaking with you on future calls. This ends our call, and you may now disconnect.

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