Q1 2024 Aterian Inc Earnings Call

Participants

lya Grozovsky; Vice President, Investor Relations & Corporate Development; Aterian Inc

Joseph Risico; Co-Chief Executive Officer; Aterian Inc

Arturo Rodriguez; Co-Chief Executive Officer and Chief Financial Officer; Aterian Inc

Brian Kinstlinger; Analyst; Alliance Global Partners

Marvin Fong; Analyst; BTIG

Presentation

Operator

Thank you for standing by. My name is Alex, and I will be your conference operator today. (Operator Instructions) Again, I would now like to turn the call over to Ilya Grozovsky, Vice President, Investor Relations and Corporate Development. Please go ahead.

lya Grozovsky

Thank you for joining us today to discuss Materials First Quarter 2024 earnings results on today's call are Joe Driscoll, our co-CEO and Arturo Rodriguez, our Co-CEO and CFO. copy of today's press release is available on the Investor Relations section of Atlassian's website at Teradata dot i. l.
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 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 may also involve substantial risks and uncertainties, some of which may be outside of the 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 investor portion of our website at materion dot i. l., 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 comparative comparability with our past performance and facilitate period-to-period comparisons for 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 Teradyne dot i. l.
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 Joe course.

Joseph Risico

Thank you, and thank you, everyone, for joining us today. I'm going to discuss our Q1 results and then I'm going to discuss the actions we're taking to foster organic and inorganic growth for Perion in 2024 and beyond. As we continue our efforts to focus, simplify and stabilize it here in the core business. And as we continue on our mission of achieving adjusted EBITDA profitability in the second half of 2024 already will then cover in more depth.
Our financial results for the first quarter and will provide our outlook for Q2 for those of you for those of you joining us for the first time, I'll start with a quick primer on period. Materion owns and operates its own consumer products brands. We market and sell consumer products in the following categories, home and kitchen appliance and accessory to our home labs, Mueller interesting brand health and wellness products, primarily to our squad party brand, IONA and transfer paper products to our PPT or photo paper, direct brand and essential oils products through an umbrella of brands, including Healing Solutions. Today, we sell our products primarily in the US and we earn most of our revenues from the Amazon.com marketplace.
With respect to Q1 performance, overall, we are pleased as we are seeing results from our efforts to focus, simplify and stabilize materials' core business. As a quick recap, we've rationalized our SKU portfolio. We've reduced our number of seller accounts. We simplified our simplified logistics and technology infrastructure. We've jettisoned non-core initiatives, and we've better organized our revenue and operational workflows. And of course, we continue to assess and to refine each of the above with a view towards optimizing for profitable growth and scale. While macro economic environment remains uncertain and we continue to experience pricing pressure in the highly competitive discretionary product categories in which we operate.
In Q1, we improved gross margins to 65% and we improved contribution margin to 16% versus Q1 of last year. I'd like to note that we expect our gross margin percentage to fluctuate quarter to quarter for the rest of 2024 due to pricing and product mix, but to remain strong and we do expect our contribution margin percentage to remain primarily in line with Q1 results, both of which we believe position us well to achieve adjusted EBITDA profitability for the second half of 2024.
In addition, we also have a good handle on our fixed cost structure, and we believe that this cost structure, together with our healthy balance sheet will allow us to pursue both organic and inorganic growth strategies. Overall, we remain on track to achieve our previously-stated goal of adjusted EBITDA profitability, and we believe we can continue to position Materion for scale growth.
With respect to our organic growth strategy, while we had no product launches in Q1, we continue to work hard across our portfolio with respect to each of our brands, and we expect to launch a number of products in Q2 relating to our home labs, essential oils and Mueller leading brands. We've been working hard to revitalize our new product development strategies, and we are seeing progress and we are seeing opportunities to strengthen, stabilize and grow our business.
From an omnichannel perspective, we continue to focus on expanding channels and geographies, primarily with a focus on marketplaces. As previously disclosed, we expanded to Mercado Libre as part of our partnership with them. And while the preliminary results are not material to our financial results. We are optimistic that this partnership and channel will help us drive growth through our existing products and potentially through new product launches. We have also begun sales on Amazon, Amazon Canada marketplace for certain of our products. And we will continue to expand our portfolio in that marketplace. And we have expanded our portfolio of products for sale on Wayfair's marketplace. We are also actively working to expand to other marketplaces, including Amazon, Mexico, Walmart, Mexico and Target Plus. And we will provide updates with respect to each of these initiatives in the coming quarters. And lastly, we are continuing to assess expansion to other domestic and international marketplaces.
With respect to our inorganic growth strategy, in Q1, we saw an increase in higher quality M&A opportunities. And while we remain disciplined and focused, we do believe there will be opportunities for T-Ridge, pursue accretive and synergistic transactions as we progress in 2024 overall growth from M&A remains an important part of our overall strategy, and we are excited enough and optimistic that we will be able to realize meaningful growth from this strategy.
Lastly, and importantly, I want to recognize our team. We are a lean, but formidable group of people have gotten smaller given the restructuring from earlier this year, but we do believe this team is highly capable of driving growth. And Artie and I are very proud of the work that's been done and that is being done.
And now with that, I will pass along to our. Thank you very much.

Arturo Rodriguez

Thanks, Joe. Good evening, everyone. We continue to make progress on our path of focusing simplifying and stabilizing materials. We're starting to see results from these missions as our key metrics are improving and our losses are shrinking. Our Q1 results were at the high end of our expectations. Our gross margin improved by over 10 basis points to 65%. And our overall CEM is approaching 15% as we rationalize our SKU portfolio, focusing on our core skews and has essentially stopped selling nonprofitable SKUs as planned, our sales have declined, but the core business metrics continue to improve.
Our first quarter net loss improved by 80% year-over-year, and our adjusted EBITDA loss improved by 38.4% as we continue to make tough decisions. As previously announced in February, we have rationalized our fixed cost to our go forward size and scale for our focused company.
Finally, we continue to strengthen our balance sheet with our MidCap credit facility. Imminent still have more work to do on our path towards adjusted EBITDA profitability. However, with Q1's performance. We are confident our plan is working and we are on the right path to deliver 2024 second half adjusted EBITDA profitability and have the balance sheet strength to deliver these results.
Now moving to Q1 detailed results. Net revenue for the first quarter of 2024 declined 42% to $20.2 million from $34.9 million in the year ago quarter. Our sustained revenue of $18.2 million decreased as expected by 36% or $10.4 million from $28.6 million, primarily as a result of our SKU rationalization efforts and continued pricing pressures and other competitive impacts, including the impact of SKU rationalization efforts into the comparable prior year the sustained revenue would have only decreased approximately 25%. Further, our sustained revenue represented 90% of our total revenue versus 82% in the prior comparable year period. And as such, you can see our business continuing to focus towards our best use as planned. We had no new launches in the first quarter. We do expect more launches, primarily valuations coming in coming in the coming quarter as we continue to be thoughtful in the timing of our product launch.
Overall, gross margin for the first quarter increased to 65.1% from 54.8% in the year ago quarter and increased from 51% in Q4 '2023. The improvement was driven by the positive impact of our SKU rationalization efforts, product mix and lower liquidation of high cost inventory compared to the prior period. Our overall Q1 '2024 contribution margin as defined in our earnings release was 14.1%, which improved compared to prior year's 5.9%, an increase compared to Q4 '2023 bcm of negative 0.8% the year over year. Increase in contribution margin was driven by the positive impact of our rationalization efforts and lower liquidation of higher-cost inventory compared to the prior period, offset by competitive pricing pressures our Q1 2024, Forestar sustain products contribution margin improved year over year to 16% versus 12.6% in Q1 2023. The increase in contribution margins driven by our focus and more on more profitable SKUs as part of our SKU rationalization efforts, offset by continued pricing pressures and other impacts, including the impact of the SKU rationalization efforts into the comparable prior year, sustained CM would still have been an improvement of approximately 1%. So that improvement will be more pronounced as we progress through 2024 as compared to the prior year.
Looking deeper into contribution margin for Q1 2024 our variable sales and distribution expenses as a percentage of net revenue increased 51.1% as compared to 48.8% in the year ago quarter. This increase in sales and distribution expenses is predominantly due to product mix and an increase in marketing our operating loss of $5.3 million in the first quarter improved from a loss of $25 million compared to the year ago quarter, an improvement of approximately 78.9%, primarily driven by the improvement in CM, the reduction in fixed costs, including noncash stock compensation and no impact of intangible write-offs in the current period, offset by our current period restructuring costs, our first quarter 2024 operating loss includes $1.7 million in non-cash stock compensation expense and restructuring costs of $0.6 million. While our first quarter 2023 operating loss includes $2.3 million of non-cash stock compensation expense and a non-cash loss of intangibles of $16.7 million. Our net loss for the quarter of $5.2 million improved from a loss of $25.8 million in the year ago quarter, an improvement of approximately 80%, primarily driven by the improvement in CM and the reduction of fixed costs and the impact of the intangible write-off in the prior year.
Our adjusted EBITDA loss of $2.6 million as defined in our earnings release improved by 38.4% from an adjusted EBITDA loss of $4.3 million in the first quarter of 2023, primarily driven by the improvement in CM and the reduction of fixed costs.
Moving onto the balance sheet. At March 31, 2024, we had cash of approximately $17.5 million compared with $20 million at the end of December 31st, 2023. The decrease in cash as planned is predominately driven by our net loss in the period and repayments on our credit facility, offset by positive cash impacts from working capital. At March 31 our inventory level was $18.5 million, down from $20.4 million at the end of the fourth quarter of 2023 and down from $40.4 million in the year ago quarter. Our credit facility balance at the end of the first quarter of 2024 was $9.4 million, down from $11.1 million at the end of the fourth quarter of 2023 and down approximately 50% from $19.1 million in the prior year period.
As we look at Q2 2024 considering our strategic skew rationalization plan and continued challenging consumer environment, we believe that net revenue will be between $20 million $23 million dollars using the middle of the range. This would be an approximate 39% decrease from last year. Q2 revenue of $35.3 million, primarily driven by our reduction in SKUs from our strategic SKU rationalization, including the impact of SKU rationalization efforts into the comparable prior year, the revenue is expected to decrease only by 16%.
And based on our current forecast, we expect to see this decrease improve in the coming quarters as we continue to see our revenue concentration increased towards our go-forward skews. As we have previously discussed, our decrease in net revenue versus prior year is expected as we continue to focus our go-forward business, our best brands and products. Our primary focus today continues to getting to adjusted EBITDA profitability in the second half of 2024. For Q2 '2024, we expect adjusted EBITDA loss to be in the range of $1 million to $2 million. The middle of this range represents an improvement of approximately 81% compared to Q2 '2023 and a 42% improvement from our sequential quarter of Q1 '2024. We continue to be laser focused on our target of turning adjusted EBITDA profitable in the second half of 2024.
And with our Q2 guide, you can see we are continuing to realize the result of our hard work. In addition, we also believe based on our current forecast that we have sufficient cash above our covenants to achieve our goal of adjusted EBITDA profitability in the second half of 2024 without raising additional equity as previously stated, if we pursue additional financing, it will be predominately for growth through M&A.
In closing, we believe with our products, our strong balance sheet, our dedicated hard-working teams across the world. And with our cornerstones of Focus, Simplify and stabilize, 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 up to questions.

Question and Answer Session

Operator

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again, if you are called upon to ask your question and are listening via loudspeakers in your device, please be comprehensive and ensure that your phone is not on mute. When asking your question again, press star one to join the queue. Then your first question comes from the line of Brian Kinstlinger with Alliance Global Partners.
Please go ahead.

Brian Kinstlinger

Great, thank you. The first quarter gross margin was the highest as a public company for Rytary and 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 limited contribution from liquidation going forward on.

Joseph Risico

Thank you, Brian, and thanks for being on RD, um, um, you do you take this on?

Arturo Rodriguez

Yes, Greg, I think thanks, Jim O'Brien. So yes, Q1, it's been the highest that we've seen a lot of. It's because of product mix. And there's a lot of essential oils and other other mix there. And we've also been very focused as a team and trying to drive better pricing and better pricing models. However, I do think the biggest impact of that is mix. As I said earlier, I think as you look at the rest of the year, I think Joe alluded a little bit to it in his comments about.
Yes, we do expect gross margin still be strong.
I don't think it will be 65% because obviously, when we installed humidifiers and other seasonal products, especially in Q2 and Q3. That number will probably drop a bit. But I do think because of all the work we've been doing, I do think that the margin target is somewhere in the really high 50s to low 60s overall here.

Joseph Risico

And maybe I just would add, Glenn, so just to some extent, what are some of the dynamic of being on a marketplace. And so, you know, the team worked hard to manage pricing up and down as we think it's appropriate, right, depending on just the everyday dynamics that happened in the marketplace.
Right? And so at some point, you can you can raise price and take advantage of it. And in other points, you've got a lower price, a little bit right to one to stay competitive. And so it will always kind of fluctuate a little bit on price. Just again, it's a marketplace dynamic that just organically is the case for us, no, for us and for most brands that operate on marketplace.

Brian Kinstlinger

Great. And then you mentioned your current year decreasing inventory. Can you highlight your inventory plans over the next six months, you need to invest ahead of some emerging new debt 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 beyond.

Arturo Rodriguez

Yes, I think, Joe, you want to grab that?

Joseph Risico

Yes, those plant at a time until, yes. Look, I think it's you know, I think we're, you know, I think on Nordic and can jump in here. We would normalize our inventory levels and obviously we're going to leave things we own. We tried very hard to manage to make sure we're not too long to short. And as we go into sort of, let's say, the summer season in Q2, we feel we feel like we've got a good on. We've got a good handle on what we need to sort of execute against plans that's on.

Arturo Rodriguez

Yes. And then I'm going to add to that, Joe, sorry?
Yes. So Brian, yes, I think always And coming to the summer season, you'll see inventory go up a little bit. But now that we're so focused on our core SKUs and our core product, it's going to be much more natural, no working capital flow of up and down the gap, even Pfizer expensive units.
Right? You broke up a little bit to have them and seeking and seizing to May. So you'll see our inventory maybe a little bit higher than we are right now in June. But that gap that's kind of within the season.
So that should normalize. So I do think we've done a great job here. I think what we're seeing is now more normal trending of inventory. There's always a little bit of noise, right?
And that's naturally, right. There's still a little bit of liquidation that we're doing very, very tiny. That's like less than 10% as you saw in the numbers, but I do think we're in a much more stronger and normalized space with inventory.

Brian Kinstlinger

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 EBITDA on higher revenue? Is that new skews today, which I would think should take a while, is it new platforms making a greater contribution? I'm just trying to understand the assumption is that gets you to profitability in the second half of the year?

Joseph Risico

Yes. I'll maybe I'll start and then I'll just jump in on. It's largely driven by the core the core business on. So we're not like we were Telecom. We don't we don't without looking on sale as we think about profitability and delivering on it, we're not heavily a lot of the work we're doing on new products and new channels. Apologies for any background noise largely largely positioning the Company for growth too, to a lesser extent this year and more for post 2024 growth to a lot of a lot of I mean for what we're looking at doing for the second half is just core is core business mind, but are you want maybe you want to add to that?

Arturo Rodriguez

Yes. And thanks for that, Joe and Brian, and keep in mind that I still think given we focused on our core business, I think the seasonality splits of still very similar to prior periods Tom, you're going to see with our humidifiers, assuming the season hits the way we anticipate that you'll see some upticks. You see the guidance raised the guidance, take the middle range or slightly higher than what we delivered in Q1 for Q2. And then naturally, Q3 still our strongest quarter overall, we still expect that from revenue perspective, Q4 is probably now probably looking closer to our second strongest quarter. So I do think some of what we're seeing and there is a little bit of the uptick in revenue plus as you're seeing the performance on the CM, especially on sustained side. We're starting to get through the healthy TAM that we've been. We've been on a mission to get to for a long time on filing certainty that I think those combinations are one piece of it. And this is all core business, as Joe alluded to. I think the other piece is we did we actioned a lot of fixed cost savings, right, right.
In the middle of the quarter. We're cycling some of that really almost a lot of that come in in Q2 and then and that's from a people perspective. But at the same time, as I look at Q3 and Q4, there's still a little bit of fixed cost work will be done there. That's predominately vendors and renewals of insurance and other other kind of annual costs that will probably expect some savings there too as we enter Q3 and Q4. So I think the combination of all three is why we feel pretty confident that we can get to that adjusted EBITDA profitability that we've been stating.

Brian Kinstlinger

Great. Thank you so much.

Operator

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

Marvin Fong

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

Arturo Rodriguez

Yes, Joe, I'll grab that from the guys who are good.
Thanks, Joe. Okay. So Marvin? Yes, listen, I think I think if you look historically at 2023, the Company went through a lot of a lot of impacts gyrations and change of teams and restructuring. So I do think when you look at my hinted towards it, right, when you look at the 2024 and you adjust 2023 in the future quarters, you're going to see that that that gap is going to shrink. So especially as Joe and I took over in August and we started some of these initiatives. I think I think when you look at it that way that that is a big gap in Q1. I think Q1 was kind of last quarter.
We had some some real good progress on certain SKUs and then kind of really started impacted later and later and into Q2 and the rest of the year. But I do think to your point, I think that capital is going to close down I think I already hinted towards it in the Q2 guide. If you adjust that way, the difference is almost 10 points. I think of my head is there was from like a 16% drop versus the 24% drop. So it's almost like a 10% improvement already, just one quarter difference. So I do think a lot of the efforts that we're doing is really about focusing on our core business.
And so you're going to see that noise. I think if you go back to the seasonality and the products that we're talking about, we didn't move away from dehumidifiers, right? That's still a strong business. We did stop doing EC.s because they just weren't making money. It's really ultra-competitive and their expenses. So I do think the seasonal splits historically will still apply going forward for 2024. So it's just that we're at a much, much more concentrated number of SKUs and the revenue is lower. But as you can see that we're anticipating it to be more profitable from a contribution margin, which you saw in Q1.

Joseph Risico

So yes, and yes, they will only as of the younger hedgeable adjusted term. But to some extent, it is obviously category by category. I think we see Leica and it's hard to handicap, but to some extent consumer demand on while resilient arm appears to be down, Brett. And so some of it on could pertain just could pertain to demand being down so much and just wanted to add that it's gone. So tie that back to you, Martin.

Marvin Fong

Yes, no, thanks for the additional color of some of my other question. I observed. I guess that down you mentioned no product launches and it looks like there's no line for R&D arm. So just kind of comment on them. You know, you're cutting back how much you are you really cutting back on product innovation and sort of talk about your ability and expectations for product launches going forward?

Joseph Risico

Yes, from our activities, whether to go ahead and our Rudy, I'll add on.

Arturo Rodriguez

Yes.
Thanks. Show us a good point. Marvin, the bulk of that R&D spend historically was running, right, and we've moved from to from an internally developed model to a third party model, and it's really more of a standard tech platform than this kind of innovation platform, right? So I think from that perspective, bulk of that cost naturally after we did the restructuring naturally just moved into into G&A.
I think from from our from our product innovation and all that, we still invest heavily in that with people based and they're really focused on our sourcing and engineering team, which is predominately in China on February.
It's not like we're doing things like Apple does with no new iPad has announced this morning. It's more about, hey, I'm working with my manufacturers on improving at least for today, right on improving the quality of our products and slight feature changes as we become more successful in our brand strengthen over over the years. Yes, that becomes a different conversation. And I do think there will be opportunity for even stronger innovation. But for now, the product innovation is driven by our engineering and sourcing team in China and those costs cost problem whenever in the R&D.

Marvin Fong

Got you. Okay. That makes sense. And thanks for clarifying that. That's all I had.
Thanks.

Operator

That concludes our Q&A session.

lya Grozovsky

I will now turn the conference back over to Ilya Grozovsky for closing remarks and as part of our shareholder Perks program, which as a reminder, investors can sign up for at a Turion data yield forward slash perks participants have the ability to ask management questions on our earnings calls. I wanted to thank all of the shareholder Parkes participants for their loyalty, their participation in the program and their questions. I have picked a few of the questions of the most popular ones that have been submitted and the question is, what is the current plan to diversify and segment products by channel and customer possible small retail brands for customers like Wayfair, Home Depot target, et cetera, who might want a private label product and good, better best product offerings.

Joseph Risico

Yes, I'll just I'll jump in there and take.
Thank you, Tom, and thanks to all the folks who are Kirk's of We're grateful for the support and and for all of the follow-up and out that are in the different channels. And I'm done, we'll see you on I think, net income, what we would consider and we will consider those opportunities.
I would say, though, for RESI right now, where, again, we think of the tiering of the company that owns and operates its own brands. And so it's not it's not higher analysis of our priorities. When we think about launching new products on expanding can expand channels. It's not done. It's not something we think is the right move for a period today.
Thank you,

lya Grozovsky

On the This concludes the Q&A portion of the call, and 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.