Q1 2025 Aterian Inc Earnings Call
Speaker Change: [music].
Thank you for standing by and good day, everyone. My name is Ivy and that will be a conference operator today at this time I would like to welcome everyone to that Peoria and Inc. Q1s earnings report all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and.
Speaker Change: Is there such that if you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star. One again. Thank you I would now like to turn the call over to Devin Sullivan of the equity group. Please go ahead.
Devin Sullivan: Thank you Archie and thank you everyone for joining us today to discuss <unk> first Corp. First quarter 2025 financial results on today's call are Arturo Rodriguez, the Companys, Chief Executive Officer, and Josh Feldman.
Devin Sullivan: The company's Chief Financial Officer, a copy of today's press release is available on the Investor Relations section of <unk> website at <unk> Dot I O.
Devin Sullivan: Before we get started I want I would like 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.
Devin Sullivan: They include without limitation predictions expectations targets or estimates, including those regarding our anticipated financial performance business plans and objectives future events and developments.
Devin Sullivan: And those actual results could differ materially from those mentioned.
Devin Sullivan: These forward looking statements also involve substantial risks and uncertainties some of which may be outside of our control 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.
Devin Sullivan: We encourage you to review these filings for a discussion of these risks, including our annual report on Form 10-K, and our quarterly report on Form 10-Q.
Devin Sullivan: Both of which are available on the investors section of our company's website at <unk> Dot I O.
Devin Sullivan: 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.
Devin Sullivan: 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 comparison of our core operating results.
A conciliation of these non-GAAP measures to the most comparable GAAP measures and the definition of these indicators are included in our earnings release, which again is available on the investor portion of our website at <unk> Dot Io. Please note that our definition of these measures may differ from similarly, titled metrics presented by other companies.
Devin Sullivan: 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 impacted GAAP. This GAAP financial measure are not within the company's control or cannot be reasonably predicted.
Arturo Rodriguez: So with that said I'd now like to turn the call over to Arturo Rodriguez <unk> Chief Executive Officer Artie. Please go ahead.
Arturo Rodriguez: Thank you Devin and thank you everyone for joining us today on.
Arturo Rodriguez: Today's call I'll be covering one.
Arturo Rodriguez: A brief overview of our Q1 results and how they reflect continued progress from the foundational changes we made throughout 2024 to <unk>.
Arturo Rodriguez: A summary of the actions, we're taking to proactively navigate the recently announced tariff environment and its broader macroeconomic effects.
Arturo Rodriguez: And three an update on our 2025 outlook in light of these developments.
Arturo Rodriguez: Following my remarks, our CFO, Josh will walk through our first quarter financial results in greater detail.
Arturo Rodriguez: For the first quarter of 2025 net revenue was $15 4 million compared to $20 2 million in Q1 of 2024 <unk>.
Arturo Rodriguez: This decline primarily reflects our previously announced SKU rationalization, which prioritize our most profitable products.
Arturo Rodriguez: Along with superb softer consumer demand and reduced Amazon traffic due to changes in its affiliate programs.
Arturo Rodriguez: Adjusted EBITDA loss improved to $2 5 million from $2 6 million.
Arturo Rodriguez: While we observed some softness in the consumer demand during the latter part of the quarter. We were pleased with the overall performance.
Arturo Rodriguez: Looking beyond Q1, the landscape shifted significantly following the April 2nd 2025 announcement on global trade policies, particularly those impacting imports from China.
Arturo Rodriguez: While incremental tariff rates have come down this week to 30% from their peak of 145% then we.
Arturo Rodriguez: Remain materially higher than historical norms, and we expect continued volatility.
Our 2025 plan anticipated increased tariff exposure.
Arturo Rodriguez: But the speed and magnitude of these policy shifts both upwards and downwards have introduced volatility supply chain constraints and ongoing uncertainty, especially as consumer spend remains cautious.
Speaker Change: How deteriorate resilience tenacity and agility are part of our DNA.
Speaker Change: For some time now we have been actively strategizing around long term growth in sourcing.
Speaker Change: Consistently landing on diversified product mix and supply chain is critical to ensuring sustainable growth and profitability.
Speaker Change: While tariffs have certainly been impactful.
Speaker Change: There are ultimately accelerating the execution of this strategy to ensure we maintain the financial runway to evolve and strengthen our business.
Speaker Change: Today.
Speaker Change: We're announcing a set of decisive strategic initiatives designed to minimize the operational impacts of tariffs and broader macroeconomic pressures.
Speaker Change: Many of these were already part of our long term roadmap the current environment acquires a faster pace of execution.
Speaker Change: At a high level, we are focused on four strategic moves each within our control that.
Speaker Change: That we believe will position <unk> for long term success.
Speaker Change: First.
Speaker Change: Is accelerating our plan of Resourcing and diversifying our manufacturing.
Speaker Change: Two <unk>.
Speaker Change: Advancing our evolution toward a more resilient model by deepening our expansion to consumables, the majority of which will be U S manufactured.
Speaker Change: Three strategically raising prices and.
Speaker Change: And for reducing fixed costs.
Speaker Change: In detail I'll add color and expand on each of these actions.
Speaker Change: The first accelerated Resourcing, which will include inventory and supply chain optimization.
Speaker Change: We are fast tracking efforts to move production and diversify into regions with more favorable cost and tower structures.
Speaker Change: Our new goal is the manufacturer no more than 30% of our goods in China by the end of 2025 accelerating our previous target of reducing Chinese sourcing to below 40% by the second half of 2026.
We are already seeing some early wins.
Speaker Change: For example, we shifted certain humidifier reorders for mid summer delivery from China to Indonesia.
Speaker Change: We are partnering with our manufacturing base to identify cost saving opportunities renegotiate pricing and ship fulfillment to non U S geographies as part of a geo expansion when possible.
Speaker Change: This allows us to redirect certain inventory, while mitigating tariff impacts.
Speaker Change: While our Chinese partners remain highly collaborative reassuring to the U S is not currently viable for electrical products in the near term.
Speaker Change: Number two new product launches from low tariff regions. Our squad party flexible wipes continue to track for late Q3, 2025 launch with that we are doubling down on consumable products and we will launch additional white based products in 2025, we.
Speaker Change: We are further expanding our consumable push and expect to announce additional U S source consumer products launching in 2025, which are predominantly exempt from tariffs.
Speaker Change: We expect to announce those I and specifically no later than our next earnings call.
Speaker Change: This we are temporarily pausing new category launches from Asia, particularly hard electronic goods.
Speaker Change: Until we can resource or gained more clarity on the trade environment.
Speaker Change: Number three strategic pricing adjustments.
Speaker Change: We are implementing pricing increasing increases across our portfolio to recoup margin loss in Monterey velocity re timing orders to provide runway to find alternative resourcing avenues and to buy time to see how the night the tariff 90 day Windows conclude.
Speaker Change: And finally number four fixed cost reduction.
Speaker Change: As part of our response to the tariff announcements, we launched the fixed cost reduction initiative targeting $5 million to $6 million annualized savings proxy.
Speaker Change: Proximately 4 million of that will come from head count reductions, including open roles predominantly in the U S by consulting teams under a smaller leadership structure with most of the changes taking full effect in Q3.
The remaining one 2 million will be realized gradually through broader fixed cost efficiencies.
Speaker Change: We expect these saving initiatives to be fully in place by early 2026.
Speaker Change: For those employees impacted I would like to thank them for their incredible achievements and.
Speaker Change: And I am certain they will continue to prosper in the post to Terry and lives.
Speaker Change: We remain committed to driving long term growth via new product introductions channel expansions and entering new international markets combined with operating efficiencies and cost discipline.
Speaker Change: Supported by a strong balance sheet and the decisive actions already underway. We are confident in our ability to navigate this period of adjustment and successfully execute our long term strategy.
Speaker Change: We will preserve capital as part of this process and firmly believe that we can navigate these headwinds without raising equity capital in 2025.
To ensure this our board of directors has paused initiation of our previously announced share repurchase program, which was scheduled to start this month in May 2025 and runs through March 2027.
Speaker Change: That said, we continue to believe a tiered stock is significantly undervalued and we remain committed to long term shareholder value creation.
Speaker Change: Once the current environment stabilizes, we will revisit the timing and structure of our buyback program.
Speaker Change: While these actions improve our long term positioning the current volatility makes forecasting difficult as such we're withdrawing our guidance.
Speaker Change: While our fundamentals remained strong we are reassessing, how pricing supply chain dynamics and consumer behavior will evolve during the rest of 2025.
Speaker Change: That said.
Speaker Change: We continue to believe the actions we are taking positions here and to return to growth and profitability beyond 2025, even under prolonged tariff pressure.
Speaker Change: Assuming we execute as planned we do not foresee a return to the outside losses of the past.
Speaker Change: In closing just three months ago, we shared that Terry was pivoting from a turnaround story to a growth story.
Speaker Change: Our recent macroeconomic shifts present, new headwinds, we remain confident in our long term trajectory.
Speaker Change: We are focused both on short term mitigation and long term value creation.
Speaker Change: Four key moves all which we believe will control will help us address the short term impacts from Paris to strengthen and diversify <unk>.
Speaker Change: Over the long term ultimately unlocking value creation.
Speaker Change: To reconfirm, where one.
Speaker Change: Accelerating our plan of Resourcing and diversifying our manufacturing to.
Speaker Change: Eventing, our evolution to a more resilient model by deepening our expansion into consumables, the majority of which will be U S manufactured long term.
Speaker Change: Three raising prices.
Speaker Change: And for reducing fixed cost.
Speaker Change: Even in the face of tariff pressures our goal remains clear to build a growing profitable company.
Speaker Change: The initiatives, we've outlined today are not a change in direction. They represent an acceleration of the transformation we began in 2024 while.
Speaker Change: While the tariff landscape is more significant than we anticipated our size and agility allows us to respond quickly and decisively.
Speaker Change: Despite today's uncertainty we believe a curious future strong and the opportunities ahead of us are significant.
Speaker Change: Lastly, I want to thank our team and our shareholders, we navigated through significant change over the past 18 months.
Speaker Change: And with continued discipline and agility, we believe the best is yet to come for a period.
Speaker Change: With that I'll turn it over to Josh.
Josh: Thanks, Arnie good evening everyone.
Josh: As already mentioned the tariff landscape shifted dramatically in early April requiring immediate and decisive action, while our 2025 plans already contemplated heightened tariff exposure the speed and scope of the changes went well beyond our expectations. Our response has been focused on executing what's within our power to ensure margin preservation.
Josh: And long term competitiveness.
Josh: In response to the recent tariff announcements, we've initiated a fixed cost reduction program aimed at generating $5 million to $6 million in annualized savings roughly $4 million of these savings will come from U S head count reductions primarily achieved by consolidating teams under a leaner leadership structure with most changes taking effect.
Josh: By the end of Q3.
Josh: The remaining one to 2 million will be driven by broader fixed cost efficiencies implemented over time, we expect to fully realize the benefit of these initiatives by early 2026.
Josh: Turning to Q1, while we saw some softness in consumer demand, particularly late in the quarter, we're pleased with our progress.
Josh: Net revenue for the first quarter of 2025 declined 24% to $15 4 million from $20 2 million in the year ago quarter, primarily reflecting last year's SKU rationalization and changes to Amazon's affiliate marketing program adjusting for the SKU impact of SKU rationalization net revenue would.
Josh: Have only declined approximately 19%.
Our launch revenue was <unk> 4 million during Q1, 2025, and Q1 2024.
Josh: As planned we have one new product category launch in the first quarter, while we are suspending our Asian source product launches for 2025, we are shifting our focus to consumable sourced in the U S.
Overall gross margin for the first quarter decreased to 61, 4% from 65, 1% in the year ago quarter.
Josh: Year over year decline was primarily related to product mix.
Josh: Our overall Q1 2025 contribution margin as defined in our earnings release was 13, 4% a decrease from 14, 1% in Q1 2024, our contribution margin decrease primarily relates to the reduction in gross margin, partially offset by lower logistics costs as a percentage of <unk>.
Josh: Yes.
Josh: Looking deeper into our contribution margin for Q1 2025, our variable sales and distribution expenses as a percentage of net revenue decreased to 48% as compared to 51% and year ago quarter. This decrease in sales and distribution expenses as a percentage of revenue is primarily due to product mix and a rich.
Josh: Duction and logistics costs as a percentage of revenue.
Josh: Our operating loss of $3 7 million in the first quarter of 2025 narrowed from a loss of $5 3 million in the year ago quarter, an improvement of approximately 30% primarily driven by a reduction of fixed costs due to our cost cutting initiatives initiated in Q1 2024.
Josh: Our first quarter 2025 operating loss included <unk> 8 million of noncash stock compensation expense, while our first quarter of 2020 for operating loss included $1 7 million of noncash stock compensation expense and $6 million of restructuring costs.
Josh: Net loss for the first quarter of 2025 or $3 9 million improved by approximately 25% from a loss of $5 2 million in the year ago quarter, primarily driven by reduction in fixed costs.
Josh: Our adjusted EBITDA loss of $2 5 million as defined in our earnings release improved compared to an adjusted EBITDA loss of $2 6 million in the first quarter of 2024, primarily due to reduction of fixed costs. So even with our 24% sales reduction year over year, our loss slightly improved due to our continual focus on.
Josh: Profitability.
Josh: Moving onto the balance sheet.
Josh: At March 31, 2025, we had cash of approximately $14 3 million compared with $18 million at December 31, 2024, while we do not expect to utilize cash for our cost while we do expect to utilize cash for a cost reduction plan and general corporate purposes cash preservation will remain top of mind as we go.
Josh: Through the year.
Josh: Borrowings on our credit facility went from $6 9 million as we ended the fourth quarter of 2024 to $7 5 million at the end of the first quarter of 2025.
Josh: Credit facility balances down from $9 4 million in the year ago quarter and.
Josh: At March 31, 2025, our inventory level was at $18 1 million up from $13 7 million at the end of the fourth quarter of 2024 and down from $18 5 million in the year ago quarter and <unk>.
Josh: Increased inventory levels in the first quarter, primarily reflect buildup in advance of anticipated demand trends for our seasonal air quality products.
Josh: Given the fast moving tariff developments, and resulting uncertainty around pricing supply chain timing and consumer response, we're withdrawing our previously issued 2025 outlook, while we remain confident in the direction of our business and the underlying improvements. We've made current volatility makes it impractical to provide.
<unk> guidance at this time, you will recall that on our fourth quarter call. We also provided a three year CAGR objective of at least 10% to 12% for 25 to 22 2025 to 2027, we are withdrawing that as well given the current volatility.
Josh: That said, we believe the actions we're taking now are setting the foundation for a return to growth and profitability beyond 2025, even if elevated tariffs remain in place.
Josh: For the balance of the year, we are intentionally scaling back unit volume in Q2, and Q3, while implementing targeted price increases to better manage inventory and protect margins as best as possible. These actions along with our cost reduction initiatives are expected to moderate our adjusted EBITDA losses.
Josh: Especially over the next two quarters, while allowing us to maximize revenue generation during this period of transition the.
Josh: We anticipate a more significant margin impact in Q4, when the effect the full effect of the tariffs is expected to take hold although this will be tempered by the recent announcements of reductions in China tariffs.
Josh: Importantly, based on our liquidity position the cost saving measures now underway and our focus on preserving cash I will reiterate <unk> comments that we believe we are well positioned to navigate the current environment without raising additional equity capital this year.
Josh: In closing I want to acknowledge the tremendous progress our team has made in reshaping material into a more focused more agile and more resilient business. The actions we've taken while difficult are critical to positioning the company for sustainable growth and profitability.
Josh: I, especially want to thank those team members, who are departing as part of our cost reduction efforts their dedication and contributions have helped lay the foundation for the next phase of experienced journey, we're deeply grateful for their impact and we wish each of them continued success.
Josh: Looking ahead I'm confident.
Josh: That the steps, we're taking today will strengthen our position for the future with the streamline operation our continued discipline on margins and a strong balance sheet. We are well equipped to manage near term volatility and deliver long term value for our shareholders with that I'll turn it back to the operator for Q&A.
Speaker Change: At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we will pause for just a moment to compile the Q&A roster.
Brian Singer: Your question comes from the line of Brian singer.
Brian Singer: From Alliance Global Partners. Please go ahead.
Kevin: Hi, Thank you this is Kevin for Brian.
Speaker Change: Just for our first question.
Speaker Change: With China tariffs at 30% can you talk a little bit more about your inventory plans in the near term and the medium term.
Speaker Change: Yeah.
Speaker Change: With that Kevin how are you doing.
Speaker Change: So listen this this this whipsaw has been a little bit it's keeping us on our toes for sure.
Speaker Change: What we've done is two things right.
Speaker Change: We have.
Speaker Change: Fortunately, we had a lot of manufacturing it was ongoing as the tariff.
Speaker Change: Announcement on April segments evolving we park those in China, and we didn't bring them in right away to see if there was other opportunities to either.
Speaker Change: To other regions and or potentially navigate other opportunities to bring them in.
Speaker Change: While the tariff numbers solidified at the same time as we said in our prepared remarks, we've been raising prices to slow the velocity down.
Speaker Change: We've been starting to do that in April up until the announced the recent announcements. This week. So we still feel that we're well positioned at least from an inventory.
Speaker Change: Pi perspective, with our manufacturers to produce the products we need for 2025 that said I think we're we have a little bit of concern.
Speaker Change: It's a little bit on on the containers, because as we expect and it has been in the news.
Speaker Change: Everyone's now rushing to bring products and so fortunately for US a lot of our products have been manufactured so it's just about getting the boats and we have a less of a timeline to manufactured goods. So since a lot of them have been manufacturers.
Speaker Change: I think I'll add to that is the good news is our supply chain is somewhat diversified already on containers. We use Amazon is a big partner, we use a couple of other steam ship lines and and of course, we use some of the spot rates through flex port. So we feel comfortable that we have the opportunities to secure the boats, we need to get our goods in.
Speaker Change: But certainly we are still revisiting.
Speaker Change: What else should we do in the next 90 days to advance order just to make sure we have a stable tariff environment and we know that the numbers right. Now. So we can take advantage of that but certainly we don't see any immediate.
Speaker Change: Stock outs, but certainly as it evolves, we will continue to monitor that.
Speaker Change: Great. Thank you.
Speaker Change: Oh, sorry.
Speaker Change: Please go ahead.
Speaker Change: And kind of what you were talking about the pricing strategy could you talk a little bit more about that.
Speaker Change: And how have you seen.
Speaker Change: Consumers react have you seen any consumers react to the changes you've already made.
Speaker Change:
Speaker Change: Yeah. So.
Speaker Change: Sure I mean listen the Amazon, where we sell on Amazon and mostly a lot of E. Commerce I would say, it's very price sensitive right and so.
Speaker Change: It's not just a factor when you do a wholesale and retail are you agree with Walmart that raised the price and it is what it is right that theres still going by wholesale. This is the direct impact of the consumers have you raised prices you may see your velocity go down.
Speaker Change: We've seen a mix mixed results, we have seen some velocity go down as we've raised prices.
Speaker Change: We again, it's unclear to determine if thats.
Speaker Change: Softness or if thats just people not willing to buy price cost a product it costs X or y.
Speaker Change: And so, especially because we are so diversified in our product mix. It's been mixed results. Some positive some negatives to be very Frank I.
Speaker Change: <unk>.
Speaker Change: I think right now, we still feel very well positioned across our core products. You know, we haven't really lost ranking or positioning most of our products still are in the top five or top three or at least certainly on the first page even with these pricing increases. So it so it's a little bit hard to sort of break that out and really detail what is actually related to consumer softness versus <unk>.
Speaker Change: Impact on pricing, but certainly we feel pretty good that we have pricing flexibility certainly to move up on the 30% I think at the $1, 45%. There was a lot more difficult frankly, but it's a 30% still more than we anticipated and.
Speaker Change: And it's not and it's not linear rights certain if you've got them over a 30%, 30% and really half does your cost of roughly half, let's say just keep massively youre really moving up 15% on your pricing. Some products work comprises don't and so it is kind of a mixed bag to figure out what you're really doing well, which has really impacted but certainly it's a very fluid situation, we are taking wins.
Speaker Change: We can and where we're seeing not the same success. We expect we are revisiting the pricing strategy.
Speaker Change: Thank you and last one.
Speaker Change: Given how everything will play out with tariffs is uncertain.
Speaker Change: Is there any way to speed up your diversification strategy in terms of manufacturing.
Speaker Change: We're going to go as fast as we can right I think I think the one the one thing I'll caveat is we want to go as fast as we can at same time, we still want to produce quality products right. We believe we have good line of sight to move a lot of our products and diversify them.
Speaker Change: If we see fast at the same time, we are doubling down as consumables products as we said in the prepared remarks right. So I think the combination of both of those will really help us diversified I think puts us in a really good spot for 2026 certainly.
Speaker Change: But yes, we're going to go as fast as.
Speaker Change: As humanly possible.
Okay.
Speaker Change: Thank you very much.
Devin Sullivan: That ends our Q&A session and we appreciate your participation I will now turn the call over to Devin Sullivan of the equity group. Please go ahead.
Speaker Change: Thank you Archie.
Speaker Change: Of the <unk> shareholder Perks program, which as a reminder, investors can sign up for at <unk> Dot Io Slash perks.
Speaker Change: Participants have the ability to ask management questions. During our earnings calls so we want to thank all of our shareholder perks.
Speaker Change: For their participation.
Speaker Change: Their loyalty and their program and for their questions. We took two of the most popular questions that have been submitted by our shareholders and I'll read them now for Rd, and Josh to respond so the first question.
Speaker Change: Will the company be paying any dividends in the future.
Speaker Change: Thanks, Kevin I'll take that one so as we noted on our release and in our remarks, our restructuring plans are going to require about $2 $3 million of cash so between that and the current macroeconomic environment and the uncertainty around tariffs, we feel prudent to conserve our cash at this point.
Speaker Change: But more broadly we're very much focused on our long term growth and reinvesting profits back into the company and that's really our priority right now and also we mentioned, we paused our share buyback program, but.
Speaker Change: But we do expect to execute on this once once the macro environment has stabilized.
Josh: Alright, Thanks, Josh the second question.
Would management consider revising its policy of granting employee stock options given.
Josh: The impact of those options on the company's P&L.
P&L statement.
Josh: I've got that one Josh yes, alright, thanks, Kevin.
Josh: Like most companies we award share store executive it's a way to incentivize their performance aligns we believe it aligns the interest of altering shareholders.
Our long term incentive grants typically vest over three years.
Josh: If the stock does well.
Josh: Benefits just like our shareholders, we understand it has a P&L impact.
Josh: It does allow us to manage cash because you're minus spud a total comp price you can get more shares as the less cash comp versus regular base salary.
Josh: And ultimately that extra cash we do invest into the business.
Josh: For long term growth.
Josh: With our team thinks the stock is considerably undervalued. So so for us as a small company, it's a great tool to attract and retain high level of talent.
Josh: And if this team is successful like we expect to be everyone's going to win in this so sure as we evolve we will always revisit our policy, but for now it's a great tool for us to bring in and retain talent.
Speaker Change: Great. Thank you already.
Speaker Change: So with those two questions answered we will wrap up today's call we want to thank everyone for their participation today, we look forward to speaking with you on our next earnings call and that ends.
Speaker Change: That will end everything for today. Thanks again for your participation and RG you may everyone RG and everyone. You may disconnect.
Speaker Change: Okay.
Speaker Change: Right.
Speaker Change: [music].
Speaker Change: Sure.