Prepared remarks
Thank you for joining us today. My name is Arji and I will be your conference operator. I would like to welcome everyone to the Aterian Inc. Q1 Earnings Report. All lines have been muted to minimize background noise. After the speaker's remarks, we will have a question-and-answer session. I would now like to turn the call over to Devin Sullivan of The Equity Group. Please proceed.
Thank you, Arji, and thank you, everyone, for joining us today to discuss Aterian's first quarter 2025 financial results. On today's call are Arturo Rodriguez, the company’s Chief Executive Officer; and Josh Feldman, the company’s Chief Financial Officer. 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 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. These may include, without limitation, predictions, expectations, targets, or estimates, including those 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 findings for a discussion of these risks, including our annual report on Form 10-K and our quarterly report on Form 10-Q both of which are available on the investors portion of our company’s 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 again 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 or cannot be reasonably predicted. So with that said, I'd now like to turn the call over to Arturo Rodriguez, Aterian's Chief Executive Officer. Artie, please go ahead.
Thank you, Devin, and thank you, everyone, for joining us today. On today's call, I'll be covering one, a brief overview of our Q1 results and how they reflect continued progress from the foundational changes we made throughout 2024. Two, a summary of the actions we're taking to proactively navigate the recently announced tariff environment and its broader macroeconomic effects. And three, an update on our 2025 outlook in light of these developments. Following my remarks, our CFO, Josh will walk through our first quarter financial results in greater detail. For the first quarter of 2025, net revenue was $15.4 million compared to $20.2 million in Q1 2024. This decline primarily reflects our previously announced SKU rationalization, which prioritized our most profitable products, along with softer consumer demand and reduced Amazon traffic due to changes in its affiliate program. Adjusted EBITDA loss slightly improved to $2.5 million from $2.6 million. While we observed some softness in consumer demand during the latter part of the quarter, we were pleased with the overall performance. Looking beyond Q1, the landscape shifted significantly following the April 2, 2025 announcement on global trade policies, particularly those impacting imports from China. While incremental tariff rates have just come down this week to 30% from their peak of 145%, they remain materially higher than historical norms, and we expect continued volatility. Our 2025 plan anticipated increased tariff exposure, 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 spending remains cautious. At Aterian, resilience, tenacity, and agility are part of our DNA. For some time now, we have been actively strategizing around long-term growth and sourcing, consistently landing on diversified product mix and supply chain as critical to ensuring sustainable growth and profitability. While tariffs have certainly been impactful, they are ultimately accelerating the execution of this strategy to ensure we maintain the financial runway to evolve and strengthen our business. Today, we're announcing a set of decisive strategic initiatives designed to minimize the operational impacts of tariffs and broader macroeconomic pressures. While many of these were already part of our long-term roadmap, the current environment requires a faster pace of execution. At a high level, we are focused on four strategic moves, each within our control that we believe will position Aterian for long-term success. First is accelerating our plan of resourcing and diversifying our manufacturing; two, advancing our evolution toward a more resilient model by deepening our expansion into consumables, the majority of which will be US manufactured; three, strategically raising prices; and four, reducing fixed costs. In detail, I will add color and expand on each of these actions. The first, accelerated resourcing, which will include inventory and supply chain optimization. We are fast-tracking efforts to move production and diversify into regions with more favorable cost and tariff structures. Our new goal is to manufacture 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've already seen some early wins. For example, we shifted certain dehumidifier reorders from mid-summer delivery from China to Indonesia. We are partnering with our manufacturing base to identify cost-saving opportunities, renegotiate pricing, and shift fulfillment to non-US geographies as part of a geo expansion when possible. This allows us to redirect certain inventory while mitigating tariff impacts. While our Chinese partners remain highly collaborative, reshoring to the US is not currently viable for our electrical products in the near term. Number two, new product launches from low tariff regions. Our Squatty Potty Flushable Wipes continue to track for a late Q3 2025 launch. With that, we are doubling down on consumable products and will launch additional white-based products in 2025. We are further expanding our consumable push and expect to announce additional US sourced consumable products launching in 2025, which are predominantly exempt from tariffs. We expect to announce those by no later than our next earnings call. With this, we are temporarily pausing new category launches from Asia, particularly hard electronic goods, until we can resource or gain more clarity on the trade environment. Number three, strategic pricing adjustments. We are implementing pricing increases across our portfolio to recoup margin loss and moderate velocity, retiming orders to provide runway to find alternative resourcing avenues and to buy time to see how the tariff 90-day windows conclude. And finally, number four, fixed cost reduction. As part of our response to tariff announcements, we launched a fixed cost reduction initiative targeting $5 million to $6 million in annualized savings. Approximately $4 million of that will come from headcount reductions, including open roles, predominantly in the US by consolidating teams under a smaller leadership structure with most of the changes taking full effect in Q3. The remaining $1 million to $2 million will be realized gradually through broader fixed cost efficiencies. We expect these saving initiatives to be fully in place by early 2026. For those employees impacted, I would like to thank them for their incredible achievement, and I am certain they will continue to prosper in their post-Aterian life. We remain committed to driving long-term growth via new product introductions, channel expansion and entering new international markets, combined with operating efficiencies and cost discipline. Supported by our 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. 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 the initiation of our previously announced share repurchase program, which was scheduled to start this month in May 2025 and run through March 2027. That said, we continue to believe that Aterian stock is significantly undervalued. We remain committed to long-term shareholder value creation. Once the current environment stabilizes, we will revisit the timing and structure of our buyback program. While these actions improve our long-term positioning, the current volatility makes forecasting difficult. As such, we're withdrawing our guidance. While our fundamentals remain strong, we are reassessing how pricing, supply chain dynamics, and consumer behavior will evolve during the rest of 2025. That said, we continue to believe the actions we are taking position Aterian to return to growth and profitability beyond 2025, even under prolonged tariff pressure. Assuming we execute as planned, we do not foresee a return to the outside losses of the past. In closing, just three months ago, we shared that Aterian was pivoting from a turnaround story to a growth story. Our recent macroeconomic shifts present new headwinds, but we remain confident in our long-term trajectory. We are focused both on short-term mitigation and long-term value creation. Four key moves, all of which we believe we control, will help us address the short-term impacts from tariffs to strengthen and diversify Aterian over the long term, ultimately unlocking value creation. To reconfirm, we are, one, accelerating our plan on resourcing and diversifying our manufacturing; two, advancing our evolution to a more resilient model by deepening our expansion into consumables, the majority of which will be US manufactured long-term; three, raising prices; and four, reducing fixed costs. Even in the face of tariff pressures, our goal remains clear: to build a growing, profitable company. The initiatives we've outlined today are not a change in direction. They represent an acceleration of the transformation we began in 2024. While the tariff landscape is more significant than we anticipated, our size and agility allow us to respond quickly and decisively. Despite today's uncertainty, we believe Aterian's future is strong, and the opportunities ahead of us are significant. Lastly, I want to thank our team and our shareholders. We've navigated significant change over the past 18 months. And with continued discipline and agility, we believe the best is yet to come for Aterian. With that, I'll turn it over to Josh.
Thanks, Artie. Good evening, everyone. As Artie 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 and long-term competitiveness. 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 US headcount reductions, primarily achieved by consolidating teams under a leaner leadership structure with most changes taking effect by the end of Q3. The remaining $1 million 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. Turning to Q1. While we saw some softness in consumer demand, particularly late in the quarter, we're pleased with our progress. 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 impact of SKU rationalization, net revenue would have only declined approximately 19%. Our launch revenue was $0.4 million during Q1 2025 and Q1 2024. As planned, we have one new product category launch in the first quarter. While we are suspending our Asian-sourced product launches for 2025, we are shifting our focus to consumables sourced in the US. Overall gross margin for the first quarter decreased to 61.4% from 65.1% in the year-ago quarter. The year-over-year decline was primarily related to product mix. 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 revenue. 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% 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 logistics costs as a percentage of revenue. 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. Our first quarter 2025 operating loss included $0.8 million of non-cash stock compensation expense, while our first quarter 2024 operating loss included $1.7 million of non-cash stock compensation expense and $0.6 million of restructuring costs. Our net loss for the first quarter of 2025 of $3.9 million improved by approximately 25% from a loss of $5.2 million in the year-ago quarter, primarily driven by a reduction in fixed costs. 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 a reduction of fixed costs. So even with our 24% sales reduction year-over-year, our loss slightly improved due to our continual focus on profitability. Moving on to the balance sheet. At March 31, 2025, we had cash of approximately $14.3 million, compared with $18 million at December 31, 2024. While we do expect to utilize cash for our cost reduction plan and general corporate purposes, cash preservation will remain top of mind as we go through the year. Borrowings on our credit facility went from $6.9 million as of the end of the fourth quarter of 2024 to $7.5 million at the end of the first quarter of 2025. The credit facility balance is down from $9.4 million in the year-ago quarter end. 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 end. Increased inventory levels in the first quarter primarily reflect a buildup in advance of anticipated demand trends for our seasonal air quality products. 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 reliable guidance at this time. You'll recall that on our fourth quarter call, we also provided a three-year CAGR objective of at least 10% to 12% for 2025 to 2027. We are withdrawing that as well given the current volatility. 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. 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, especially over the next two quarters, while allowing us to maximize revenue generation during this period of transition. We anticipate a more significant margin impact in Q4 when 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. Importantly, based on our liquidity position, the cost-saving measures underway, and our focus on preserving cash, I will reiterate Artie's comments that we believe we are well-positioned to navigate the current environment without raising additional equity capital this year. In closing, I want to acknowledge the tremendous progress our team has made in reshaping Aterian 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. 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 Aterian's journey. We're deeply grateful for their impact, and we wish each of them continued success. Looking ahead, I'm confident that the steps we're taking today will strengthen our position for the future. With a streamlined 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.
Questions and answers
Your question comes from the line of Brian Kinstlinger from Alliance Global Partners. Please go ahead.
Hi. Thank you. This is Kevin for Brian. Just for the first question, with China tariffs at 30%, can you talk a little bit more about your inventory plans in the near term and then in the medium term?
Sure, I'll take that, Kevin. We've been navigating some challenges recently. We've been proactive in our approach by continuing to manufacture despite the announcement of tariffs on April 2. We chose to temporarily hold our products in China instead of shipping them immediately, which allowed us to explore alternative shipping options as the tariff situation became clearer. Additionally, we've been increasing our prices to manage demand, starting in April and continuing through this week's updates. We believe we are in a strong position regarding inventory and supply, enabling us to meet our production needs for 2025. However, we are a bit concerned about container availability since many are now trying to import goods swiftly. Fortunately, the majority of our products are already manufactured, so we just need to secure shipping. We have a diversified supply chain for containers, working with Amazon and other shipping lines, along with some spot rates through Flexport, which gives us confidence in our ability to arrange necessary shipments. We are also assessing our orders for the next 90 days to ensure stability in the tariff landscape and optimize our situation. While we don't anticipate immediate stock shortages, we will keep a close watch on the developments.
Great. Thank you. I apologize. And kind of off what you were talking about with the pricing strategy, could you talk a little bit more about that? And how have you seen consumers react? Have you seen any consumers react to the changes you've already made?
Yes, absolutely. The Amazon platform and much of e-commerce are highly price sensitive. This is different from wholesale and retail agreements where prices can be raised, and purchases remain unaffected. When we raise prices, we may observe a decline in our sales velocity. We have experienced mixed outcomes; some velocity decreases align with price increases. It's challenging to determine if this is due to softness in demand or simply consumer resistance to higher prices. Our diverse product mix shows both positive and negative results. Overall, we believe we are well-positioned with our core products, maintaining strong rankings, with most still appearing in the top 3 or top page despite price hikes. Analyzing the impact of consumer demand versus pricing is complex. However, we feel confident in our ability to adjust pricing, especially with a 30% increase being manageable. A more significant raise, like 145%, presents more challenges. Certain products respond positively to price adjustments while others do not, making it a mixed situation. We are actively refining our strategy where necessary, based on ongoing successes and challenges.
Thank you. And last one, given how everything will play out with tariffs is uncertain. Is there any way to speed up your diversification strategy in terms of manufacturing?
We're going to go as fast as we can, right? I think the one thing I'll caveat is we want to go as fast as we can. At the 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 as we see best. At the same time, we are doubling down on consumables products, as we said in the prepared remarks, right? So I think the combination of both of those will really help us diversify and I think puts us in a really good spot for 2026 certainly. But yes, we're going to go as fast as humanly possible.
Thank you very much.
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.
Thank you, Arji. As part of Aterian's Shareholder Perks Program, which as a reminder, investors can sign up for at aterian.io/perks. Participants have the ability to ask management questions during our earnings calls. So we want to thank all of our shareholder perks for their participation, for their loyalty and their program and for their questions. We picked two of the most popular questions that have been submitted by our shareholders, and I'll read them now for Artie and Josh to respond. So the first question, will the company be paying any dividends in the future?
Thanks, Devin, I'll take that one. So as we noted in 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 macro inventory environment and the uncertainty around tariffs, we feel prudent to conserve our cash at this point. But more broadly, we're very much focused on 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 we do expect to execute on this once the macro environment has stabilized.
All right, Josh. The second question. Would management consider revising its policy of granting employee stock options given the impact of those options on the company's P&L statement?
I can take that one, Josh.
Yes.
Thank you, Devin. Like many companies, we provide stock shares to our executives to motivate their performance and align their interests with those of Aterian shareholders. Our long-term incentive grants usually become effective over three years. If the stock performs well, our executives benefit in the same way as our shareholders. We recognize it impacts our profit and loss statement, but it helps us manage cash. Essentially, it's about total compensation; offering more shares means we can reduce cash compensation compared to standard salaries. The savings from cash compensation can then be reinvested into the business for long-term growth. Our team believes the stock is significantly undervalued, making this an effective tool for attracting and retaining top talent as a small company. If our team succeeds as we anticipate, it will benefit everyone involved. We will continue to review our policy as we grow, but for now, it effectively helps us build and keep talent.
Great. Thank you, Arty. With those two questions answered, we will conclude today's call. We appreciate everyone's participation today and look forward to speaking with you on our next earnings call. That wraps everything up for today. Thanks once again for your involvement. Arji and everyone, you may disconnect.