Aterian, Inc. (NASDAQ:ATER) Q4 2023 Earnings Call Transcript March 12, 2024
Aterian, Inc. reports earnings inline with expectations. Reported EPS is $-0.1 EPS, expectations were $-0.1. Aterian, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. I would like to welcome you to the Aterian, Inc. Q4 Earnings Report. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Ilya Grozovsky, Vice President, Investor Relations and Corporate Development. You may begin your conference.
Ilya Grozovsky: Thank you. Thank you for joining us today to discuss Aterian's fourth 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 aterian.io. Before we get started, I want to remind everyone that the remarks on the call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management expectations. These may include, without limitation, predictions, expectations, targets or estimates, including regarding our anticipated financial performance, business plans and objectives, future events and developments and actual results could differ materially from those mentioned.
These forward-looking statements 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 Form 10-K filed on March 16, 2023, and our quarterly report on Form 10-Q filed on November 8, 2023, and our upcoming annual report on Form 10-K when it is available on the investor 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 investor portion of our website at aterian.io. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. We are unable to provide a reconciliation of non-GAAP adjusted EBITDA margin to net income margin, the most directly comparable GAAP financial measure on a forward-looking basis without unreasonable efforts because items that impact 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: Thank you, Ilya, and thank you, everyone, for joining us today. Today, I'm going to touch on our 2023 year, including our fourth quarter financial results. And I will also discuss the actions we are taking to foster growth for Aterian in 2024 and beyond as we remain focused both on achieving adjusted EBITDA profitability in the second-half of 2024 and on positioning Aterian for substantial growth beyond 2024. Arty will then cover in more depth our financial results for the fourth quarter and we'll provide our outlook for Q1. For those of you joining for the first time today, a quick primer on Aterian. Aterian owns and operates its own brand, marketing and selling consumer products in the following categories: home and kitchen appliances and accessories to our hOmeLabs, Mueller, Pure Steam brands, health and wellness, primarily through our Squatty Potty brand iron on transfer paper through our PPD or Photo Paper Direct brand and essential oils through an umbrella of brands, including healing solutions.
We sell our products primarily in the U.S., and we derive most of our revenues from the amazon.com marketplace. 2023 was a year of change for Aterian, with Arty and I taking the co-CEO role last July. Arty and I have a strong partnership, and it's been a pleasure to be sharing the role with him. We set out on a mission to focus, simplify and stabilize Aterian. And together with our team, we have accomplished quite a bit to reposition the company for success and growth, and we are excited about the value we believe we can deliver for shareholders. Some of the things we have accomplished thus far include refocusing Aterian as a consumer products company by eliminating noncore initiatives that don't serve our products business. Shifting away from internal only developed software to a more agile and efficient third-party model, eliminating a significant number of noncore SKUs. Further strengthening of our balance sheet through the amendment of our credit facility with our lender, restructuring our people and vendor costs to better align with our newly focused core business, reducing the number of seller accounts from 31 accounts to approximately 8, further streamlining our fulfillment operations and further optimization of the marketing and performance aspects of our core SKUs. We are pleased with the results of these actions thus far, and we look forward to growing Aterian from this baseline.
With respect to the fourth quarter, we are pleased with the trend in our operating results, and in particular, the progress that we have made thus far to stabilize our business. Out withstanding pricing pressure across a number of highly competitive categories and a challenging discretionary spending environment. Our fourth quarter results also reflect the completion of our previously announced SKU liquidation program, which we believe has well positioned us for success in 2024 and beyond. We also continued efforts to optimize the marketing and performance of core SKUs. And while this work is never ending, we made progress on that front across each of our categories, and we are seeing early results from these efforts in Q1 of this year. In 2024, we will continue our strategy to focus and simplify and to a lesser extent, given the work we've done this far stabilize how we operate, in order to not only position Aterian for adjusted EBITDA profitability, but also drive top profitable top line growth.
We will be focused on product development, omnichannel expansion and inorganic growth in new and existing categories. With respect to new products in 2024, we will largely be focused on our existing portfolio, refreshing a number of existing products and also launching new products that are variations in our existing portfolio that we believe will provide value to a meaningful segment of consumers. For example, as previously announced, we expanded our essential oils portfolio to address consumer needs for healthier chemical-free products, and we have seen promising early results this front. We intend to continue to expand this offering throughout the rest of our oils brands. In addition, we are working hard on our Squatty Potty brand with a view towards further expansion for its flagship toilet stool product.
and also expanding the product categories under the brand. We will continue to focus on our omnichannel strategy, primarily through expansion to new marketplaces that we believe can drive profitable revenues for our existing product portfolio. For example, as previously disclosed, to be launched on TikTok with most of our SKUs, results to date have not been material. We intend to continue to invest in that platform and to evolve alongside that platform. Also in the near-term, we will be launching a number of our products for sale on Mercado Libre in their Mexico-based marketplace, one of the leading marketplaces in Latin America. We will also be expanding to Amazon Canada in the near-term. And further, we are actively exploring a number of other marketplaces as we endeavor to position our products everywhere consumers are shopping.
Regarding our inorganic strategy, M&A remains an area of focus. We recently completed a small investment in 4th & Heart, leading gee-butter brand in the United States. We believe investment in new high-growth brands have the opportunity to help drive significant value for Aterian, as well as open up new categories. We intend to continue to explore investing in earlier stage brands. We believe Aterian can be a valuable partner. Before I pass it along to Arty, a few words on the Aterian’s NASDAQ compliance with the $1 minimum bid rule. We expect free gain compliance prior to April -- to the April 22 deadline set out by the NASDAQ through a reverse split. And while today, we are not providing specifics on the reverse split ratio or timing, what I can say is that we are excited to regain compliance, given that we believe we have addressed the most significant underlying operating and other issues that have been affecting our stocks under performance over these last years.
And with that, I'll pass it on to Arty. Thank you.
An executive presenting a business proposal in a modern open office space, surrounded by data analytics displays.
Arturo Rodriguez: Thanks, Joe. It's great to partner with you, too. Good evening, everyone. We continue to make progress on our path of focusing, simplifying and stabilizing Aterian. We continue to see certain results from these missions, especially on our balance sheet as it continues to get stronger. With inventory almost at normalized levels, a great accomplishment considering the levels we were just a year ago. Although our Q4 results are better than anticipated, we still have a long way to go on our path towards adjusted EBITDA profitability. With some more recent moves, such as aligning our fixed cost to our go-forward size and scale of our focused company and our extension and increased flexibility of our credit facility has further strengthened our balance sheet.
We continue to grow more confident that we are on the right path to deliver 2024 second-half adjusted EBITDA profitability, and we have a balance sheet strength to deliver these results. Now moving to the Q4 results overall. As expected, we saw our revenue decline primarily due to our strategy of discontinuing sales of noncore SKUs, coupled with challenging consumer discretionary spending and competitive pricing pressures across our portfolio. Coupled with our previously action fixed cost savings, we believe we are starting to see our adjusted EBITDA losses narrowing. Now moving on to the details of the fourth quarter 2023 net revenue. Net revenue declined 40.3% to $32.8 million from $54.9 million in the year ago quarter. $32.8 million fourth quarter net revenue by phase as defined in our press release, broke down as follows: $25.2 million sustain, $0.4 million in launch and $7.2 million in liquidated inventory normalization.
The year ago quarter net revenue of $54.9 million by phase broke down as follows: $40.8 million sustained, $1.0 million in launch and $13.1 million in liquidating inventory normalization. Our sustained net revenue decrease of $15.6 million is primarily as a result of our SKU rationalization efforts, which has discontinued poorly performing SKUs, coupled with reduced consumer discretionary spending and competitive pricing pressures. Our liquidation net revenue decreased by $5.9 million as the efforts of liquidating high-cost inventory has essentially reached its conclusion. A variations were launched late in the fourth quarter, and we are continuing to be thoughtful on the timing of our new product launches through 2024. Overall gross margin for the fourth quarter increased to 51.0% from 37.1% in the year ago quarter, an increase from 49.4% in Q3 2023.
The improvement was driven by product mix and lower liquidation of higher cost inventory compared to the prior period. Our overall Q4 2023 contribution margin, as defined in our earnings release was negative 0.8%, which improved compared to a prior year's negative of 11.5% and decrease compared to a third quarter 2023 CM of 3%. The year-over-year increase in contribution margin was driven by product mix and the level of liquidation revenue of higher cost inventory, compared to the prior period offset by competitive pricing pressures on our core business. Q4 2023 saw our sustained product contribution margin declined slightly year-over-year to 6.9% versus 8.3% in Q4 of 2022. The decrease in contribution margin was driven by competitive pricing pressures and product mix and the completion of moving certain higher cost inventory.
Looking deeper into our contribution margin for Q4 2023, our variable sales and distribution expenses as a percentage of net revenue increased to 52.8% as compared to 51.6% in the year ago quarter. The increase in sales and distribution expenses is predominantly due to product mix and an increase in fulfillment costs. Our operating losses of $8.2 million in the fourth quarter improved from a loss of $22.8 million compared to the year ago quarter, an improvement of approximately 63.8%, primarily driven by the improvement in CM and the reduction of fixed costs. Our fourth quarter 2023 operating loss includes $1.6 million of noncash stock compensation expense, a reserve for barter credits of $0.3 million and a noncash loss on impairment of intangible of $0.3 million.
While our fourth quarter 2022 operating loss includes $2.7 million of noncash stock compensation expense, a reserve for barter credits of $1.6 million and a noncash loss on impairment of goodwill of $0.5 million. Our net loss for the quarter of $7.7 million improved from a loss of $20.3 million in the year ago quarter, an improvement of approximately 62%, primarily driven by the improvement in CM and the reduction of fixed costs. Our fourth quarter 2023 net loss includes $1.6 million in noncash stock compensation expenses, non-cash loss and impairment of intangible of $0.3 million and a reserve barter credit of $0.3 million, while our fourth quarter 2022 net loss includes $2.7 million of noncash stock compensation expenses, a reserve for barter credit of $1.6 million, non-cash loss and impairment of goodwill of $0.5 million and a gain on fair value of warrant liability of $2.8 million.
Our adjusted EBITDA loss of $5.6 million as defined in our earnings release, improved by 65.4% from a loss of $16.2 million in the fourth quarter of 2022, primarily driven by the improvement in CM and the reduction of fixed costs. Moving on to the balance sheet. At December 31, 2023, we had cash of approximately $20 million compared with $28 million at the end of September 30, 2023. The decrease in cash as expected is primarily driven by our net loss in the period and our decision to build up inventory in advance of the 2024 season to avoid tariff impacts, specifically for our beverage cooler. This higher inventory balance should remain through Q3 of 2024. At December 31, our inventory level was at $20.4 million, down from $31.5 million at the end of the third quarter of 2023 and down from $43.7 million in the year ago quarter.
We are happy to report that we believe that our current inventory of $20 million is almost at the appropriate levels and the high cost inventory normalization that we have been working on for many quarters is now behind us. As we mentioned, our inventory includes an additional $3 million of beverage coolers purchased in advance to mitigate tariff risks. Our credit facility balance at the end of the fourth quarter of 2023 was $11.1 million, down from $14.2 million at the end of the third quarter of 2023 and down almost 50% from $21.1 million in the comparable prior year period. We recently rightsized and extended our credit facility by two years to December 2026. Aterian now has access to 17 million in current commitments, which can be increased to 30 million, allowing sufficient flexibility for growth when needed.
Also, the credit facility extension reduces the minimum liquidity financial covenant from a peak of $50 million down to $6.8 million of cash on hand and/or availability, providing further flexibility as the company focuses on adjusted EBITDA profitability and eventual growth. We believe today, based on our current forecast, our extended credit facility, coupled with our existing cash has further strengthened our balance sheet as we continue on our path towards adjusted EBITDA profitability in the second half of 2024. As we look at Q1 2024, considering the continued challenges in the consumer environment, we believe that net revenue will be between $18 million and $21 million. Using the middle of the range, this would be an approximately 45% decrease from last year's Q1, primarily driven from a reduction in SKUs from our strategic SKU rationalization and certain competitive pressures, and a 40% decrease from our sequential quarter of Q4 2023, primarily from our seasonality and our strategic SKU rationalization.
As a reminder, our first quarter is our lowest quarter and we expect that Q1 will drive slightly lower seasonal split than previous years. As we have previously discussed, our decrease in net revenue is expected as we continue to focus on our go-forward business on our best brands and products. Our primary focus today continues to be getting to adjusted EBITDA profitability in the second half of 2024. For Q1 2024, we expect adjusted EBITDA loss to be in the range of $2.5 million to $3.5 million. The middle of this range represents an improvement of approximately 30% compared to Q1 2023 and a 48% improvement from a sequential quarter of Q4 2023. Again, we continue to be laser-focused on our target of turning adjusted EBITDA profitability in the second half of 2024.
And with our Q1 guide, you can see we're starting to realize some of the results of all our hard work and initiatives. We also believe, based on our forecast, we have sufficient cash above our covenants to achieve our goal without raising additional equity. As previously stated, if we pursue additional financing, it will be predominantly for growth through M&A. We do expect a few housekeeping items in the coming weeks. We do expect to refile our S3 shelf to allow us to opportunistically raise capital as part of our M&A strategy over the coming year or two, if we decide to do so and if we decide to acquire any brand. We believe this is good corporate governance. Finally, as we do annually, we expect to file our SA shortly after the 10-K. In closing, we believe our products, our strong balance sheet, and with our cornerstone to focus, simplify and stabilized, we are turning the quarter and look forward with confidence as we continue on our path towards adjusted EBITDA profitability and ultimately to maximize shareholder value.
With that, I'll turn it back to the operator to open the call to questions.
