Prepared remarks
Thank you for holding. My name is John, and I will be your conference operator today. I would like to welcome everyone to the Aterian, Inc. Second Quarter Financial Results Conference Call. I will now turn the call over to Devin Sullivan of the Equity Group. Please proceed.
Thank you, John, and thank you all for joining us today to discuss Aterian's second 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 www.aterian.io. Before we get started, I'd 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 and 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 that 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 on Form 10-K. 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. A reconciliation of these non-GAAP measures to the most comparable GAAP measures and the definition of these indicators are included in our press release, which is available on the Investors portion of our website. 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 cannot be reasonably predicted. With that said, I'd now like to turn the call over to Arturo Rodriguez. Arty, please go ahead.
Thank you, Devin, and thank you all for being here today. I will cover a brief overview of our Q2 results, discuss the impact of tariffs on our business along with the proactive measures we are taking to manage this environment, and provide an update on our improved outlook for 2025. After my remarks, our CFO, Josh, will go over our second quarter financial results in more detail. Overall, the tariffs and trade policies that began earlier this year had a significant effect on our business, the industry, and consumer behavior. The uncertainty regarding the rates and their implementation played a crucial role in our decision-making regarding pricing, sourcing, and spending, driving us to reshape our business for the long term. Although the tariff environment posed considerable challenges in Q2, we believe we have moved past the worst of it. The actions we have taken have lessened the impact of tariffs and importantly, helped stabilize our business. Consequently, we anticipate improved performance in the second half of 2025 compared to the first half. In Q2, our net revenue was $19.5 million, down from $28 million in Q2 2024. This drop was primarily due to three factors: firstly, we implemented strategic price increases to counter anticipated tariff costs and navigated reduced run rates and inventory impacts from the tariffs. Secondly, the Northeast saw a delayed summer season, impacting our dehumidifier sales compared to the previous year. Lastly, there was a general decline in consumer spending, partly due to the uncertainty surrounding tariffs and trade policies. Our adjusted EBITDA was a loss of $2.2 million, compared to a gain of $0.2 million in the previous year, resulting from lower revenue, increased marketing expenses, and inventory reserve impacts, somewhat offset by savings from our fixed cost reduction plan. In Q2, we proactively adjusted pricing to mitigate rising costs. While this was necessary to protect our margins, it led to a sharp decline in our sales velocity through May and early June, which was a significant obstacle to our revenue. We face strong competition, especially from Amazon 1P in the dehumidifier and steam op segments, where Amazon did not significantly raise prices. This situation positioned our products as the more expensive option during May and June. We also anticipate that our products will continue to be among the highest-priced offerings through 2025 until pricing becomes more competitive in 2026. To address our declining daily run rates, we ran various promotions during this period, resulting in higher-than-normal advertising spending. This led to some inefficiencies, particularly with our higher-priced offerings, contributing to an additional one-time advertising spend of $0.9 million. Following this, we took an inventory reserve of $0.7 million. Nevertheless, our inventory levels remain healthy, albeit approximately $3 million above our desired levels, a result of our strategic decision to build up inventory in light of tariffs and the sales slowdown, which we expect to resolve over the next few quarters. Beyond the late start of our seasonal business, we noticed a broader decline in consumer demand. Our products maintained strong seller ranks but saw a decrease in overall sales volume year-over-year. Regarding our previously announced actions in response to tariffs, we are confident these remain the right decisions. We have made substantial progress on our fixed cost reduction plan, aiming for annualized savings of $5 million to $6 million, of which we have already secured about $5.5 million. This includes $3.8 million from headcount reductions made in May, with $1.7 million expected from vendor savings throughout the remainder of 2025. We are also searching for additional savings and leveraging AI to enhance productivity, focusing on operational leverage rather than headcount reduction. Our focus on AI is already yielding improvements in our customer service operations, and we anticipate announcing further advancements in September. We continue to progress in our initiatives to relocate manufacturing outside China. Despite reduced financial incentives due to current tariff rates, we have produced some of our dehumidifiers in Indonesia this year, helping us avoid peak Chinese tariffs. Consequently, we have reduced the percentage of our dehumidifiers manufactured in China from 100% in 2024 to approximately 65% in 2025. We see further opportunities to source from outside China for many products that face the 2025 tariffs and those from the 2017 Section 301 tariffs. We have also paused new category launches from China in Q2, specifically for hard electronic goods. However, with tariffs stabilizing, we are now restarting launches in this product space with a more focused approach, anticipating these to occur in the second half of 2026. We successfully navigated the peak tariffs in May and June, bringing in most goods while avoiding the highest incremental tariffs, which we achieved by collaborating with our manufacturers and supply chain partners. As previously stated, we have made strategic pricing adjustments to manage the shifting cost structure and to preserve margins while managing inventory as part of our tariff mitigation. Even with our price increases, we believe that the market, including Amazon 1P, will eventually raise prices, allowing us to be more competitive in 2026. We remain committed to our strategy of launching new products in low-tariff regions. We believe our ventures into consumables, which can often be sourced in the U.S., will yield better margins compared to our hard electronic goods. We are particularly excited about opportunities in the health and beauty space and expect to announce launches of new products under the Healing Solutions brand in October 2025. We are proud to introduce Squatty Potty flushable wipes, which we've sourced and brought to market in under a year. These wipes are septic-safe and suitable for sensitive skin, made with plant-based fibers and dermatologically tested, and will be available for sale in the UK on Amazon next week and in the U.S. shortly after Labor Day. While Q2 proved challenging, the actions we've taken position us for improvements moving forward. Josh will delve into our guidance, but in summary, we expect slightly better net revenues in the second half compared to the first half, with adjusted EBITDA projected between breakeven and a slight loss of $1 million, a substantial improvement over the first half. We are focused on maintaining our balance sheet as we adapt to the ongoing tariff situation and the broader economic environment. In closing, despite the significant disruptions caused by recent tariff volatility, our efforts to enhance operations and strengthen our financial position have equipped us with the resilience needed to navigate these challenges. We remain optimistic about Aterian's future and believe that our recent actions are fostering stability and will lead to a stronger second half. While short-term growth has been affected, our strategic pivot to consumables, highlighted by the Squatty Potty launch, aims to create a more resilient and profitable company in the long term. We appreciate our team's dedication and our shareholders' ongoing support and patience. The best is yet to come for Aterian. Now, I'll turn it over to Josh.
Thanks, Arty. Good evening, everyone. As Arty mentioned, Q2 was a difficult quarter as we adjusted pricing to offset rising costs driven by tariffs and supply chain volatility. While necessary to preserve margins, these changes triggered a decline in sales velocity on Amazon, which penalizes price instability. Promotional efforts to offset volume declines led to higher advertising spend with lower returns and slower sales extended inventory timelines requiring additional reserves. However, as we look forward, we've taken decisive steps to strengthen performance in the second half. Our fixed cost reduction plan is tracking well with $5.5 million in savings already identified and AI is driving early wins in customer service efficiency. We've begun resourcing outside China to reduce tariff exposure with more diversification to come. While price increases impacted Q2, we expect market normalization in 2026 to restore competitiveness. Our new U.S. source product launches offer higher margins and less volatility, helping position us for more stable, efficient growth ahead. Turning to the results for Q2. Net revenue for the second quarter of 2025 declined 30.5% to $19.5 million from $28 million in the year-ago quarter, primarily reflecting the reduction in consumer demand as we increased pricing to mitigate the impact of tariffs on our cost of goods sold. Our launch revenue was $0.3 million during Q2 2025 compared to $0.5 million in Q2 2024. While we have postponed our Asian source product launches for 2025, we are shifting our focus to consumables sourced in the U.S. Overall, gross margin for the second quarter decreased to 54.3% from 60.4% in the year-ago quarter. The year-over-year decline was primarily related to product mix and an obsolescence charge taken on long inventory as a result of buildup to avoid higher tariffs. I want to stress that these goods are not outdated or unsellable and that we do expect a reduction in this long inventory over the next six to nine months. Our overall Q2 2025 contribution margin, as defined in our earnings release, was 7.8%, a decrease from 7.4% in Q2 2024. Our contribution margin decrease primarily relates to the reduction in gross margin and an increase in marketing costs during the quarter. Assuming a normalized level of marketing spend and excluding the impact of the obsolescence charge taken in the period, our contribution margin for Q2 would have been closer to 15%. Looking deeper into our contribution margin for Q2 2025, our variable sales and distribution expenses as a percentage of net revenue increased to 46.5% as compared to 43% in the year-ago quarter. This increase in sales and distribution expenses as a percentage of revenue is primarily due to product mix and an increase in marketing costs. Our operating loss of $4.5 million in the second quarter of 2025 increased from a loss of $3.2 million in the year-ago quarter, primarily driven by reduced sales volume and contribution margin compared to the prior year period. Our second quarter 2025 operating loss included $1.8 million of restructuring costs and $0.1 million of noncash stock compensation expense, while our second quarter 2024 operating loss included $2.9 million of noncash stock compensation expense. Our net loss for the second quarter 2025 of $4.9 million increased by approximately 34% from a loss of $3.6 million in the year-ago quarter, primarily driven by a reduction in sales volume and contribution margin. Our adjusted EBITDA loss of $2.2 million, as defined in our earnings release, decreased compared to an adjusted EBITDA gain of $0.2 million in the second quarter of 2024, primarily due to a reduction in sales volume due to increased prices, increased marketing costs, and an obsolescence charge taken on long inventory. Moving on to the balance sheet. At June 30, 2025, we had cash of approximately $10.5 million compared with $18 million at December 31, 2024. Borrowings on our credit facility went from $6.9 million as of the end of the fourth quarter of 2024 to $7.2 million at the end of the second quarter of 2025. The credit facility balance is down from $2.4 million in the year-ago quarter end. At June 30, 2025, our inventory level was at $18.5 million, up from $13.7 million at the end of the fourth quarter of 2024 and up from $18.4 million in the year-ago quarter end. Increased inventory levels in the second quarter primarily reflected buildup in advance of tariffs and the resulted demand trends for our seasonal air quality products, resulting in a higher proportion of our working capital being tied up in inventory. As we look ahead to the second half of 2025, our focus remains on stabilizing the business while positioning for renewed growth in 2026. The combination of targeted cost savings, U.S. sourced product launches, focused marketing, and disciplined cash management gives us confidence in our ability to navigate ongoing tariff pressures. With these measures in place, we expect the following results for the remainder of the year. We expect net revenue for the six months ending December 31, 2025, of $36 million to $38 million and adjusted EBITDA of breakeven to a loss of $1 million. This compares to net revenues of $34.8 million and an adjusted EBITDA loss of $4.7 million for the six months ended June 30, 2025. Importantly, based on our liquidity position, the cost-saving measures now underway, and our focus on preserving cash, we believe we are well-positioned to navigate the current environment without raising additional equity capital this year. We also expect our working capital position to improve through the remainder of 2025. Tariff volatility is hitting the entire industry. But thanks to the work we've done to strengthen our balance sheet, Aterian is well-positioned to navigate this environment with flexibility and focus. The actions we've taken, while difficult, have been deliberate. I'm especially excited about the shift to consumables, starting with the launch of Squatty Potty flushable wipes. It's a strategic move that we believe will strengthen our business over time. Our goal remains the same: to build a strong, growing company. I want to thank our team for their effort and execution and our shareholders for their continued support. The steps we've taken now are setting us up for greater stability and long-term success. By executing on these initiatives, we're building a more resilient Aterian positioned for continued growth well into the future. With that, we'll open it up for questions.
Questions and answers
Our first question comes from Brian Kinstlinger with Alliance Global Partners.
Thanks for the update on the upcoming new product launches. Apart from the flushable wipes, could you elaborate on the expansion into other consumable products or any additional categories?
Yes, thank you for the question. I hope you're doing well. As I mentioned in my prepared remarks, the consumables provide us with a wide range of opportunities. We see significant potential in the health and beauty sector. We currently have our essential oil brands under the Healing Solutions umbrella, which positions us well to enter this market. Particularly when we consider Amazon, where we believe many of our strengths lie, they have been capturing considerable market share in the beauty segment, especially from competitors like Sephora and Ulta. I won't go into specific product launches, as that could compromise our competitive advantage, but I do believe there's a focus on the health and beauty space. I anticipate further announcements in October 2025 and product launches in that area, with all those products expected to be sourced in the U.S. and to offer a higher contribution margin compared to our hard goods.
Great. And then, you spoke about reducing Chinese-based manufacturing to 30% by the end of 2025. Are there any material updates to this timeline that we should know about, given the changing landscape?
I don't believe we indicated a specific 30% target. What we initially mentioned in May was our intention to reduce our overall Chinese manufactured goods, which comprise 70%, by approximately 40%. This would bring us to just below 50%. With tariffs now stabilizing, the 30% tariff level complicates our initiative a bit. We are actively working to diversify as much as we can, which allows us more flexibility and helps mitigate tariff volatility. In a short time this year, we've managed to move some of our dehumidifier production from China to Indonesia. Last year, all of our dehumidifiers came from China, but this year, around 65% are sourced from there. This means we've successfully reduced our risk by about 35%, and we believe the product quality remains comparable to the goods from China. As we move forward, we'll continue to explore sourcing and diversifying away from China, aiming to maintain optimal margins. Additionally, there are still ways to avoid tariffs while manufacturing in China. For instance, we're expanding in the U.K., and some products shipped from China to the U.K. won't incur tariffs. Thus, our approach to diversification is not limited to shifting Asian goods to the U.S.; it also encompasses a broader range of outsourcing opportunities while maximizing our current manufacturing partnerships. Some products may go to the U.K. or Europe, while others, sourced from Indonesia, go to the U.S. This creates advantages. Although the 30% tariff presents us with more challenges in diversifying, opportunities are still available, although the process is more complicated compared to when tariffs were at 145%.
Great. Two more. How would you describe the performance in the Latin American markets given the expanded presence in there with Mercado Libre?
Yes. Good question. Listen, MELI in some aspects, even Temu, which not to add to your question, but those marketplaces, which we just kind of launched in this past quarter, those are long-term plays. Like we still think the right way for us to put our products in front of our consumers is to be everywhere our consumers are. And that also means leveraging MELI to expand into South America and other parts. That also means leveraging key move for other types of consumers. But the way we look at this, this is a long-term play. Like they're small to our numbers today, but I think over the next two to three years, we do see those becoming bigger parts of our business, especially as those platforms evolve. Keep in mind that the expansion to MELI that we did into Mexico and South America, that's like a new initiative for MELI. That's a way to get U.S. consumer brands in front of their South American customers. And that's not something that's been around for a long time in the way they're doing it. So I do continue to see growth in that, but it's not going to be overnight. That's going to take time and effort and energy. As MELI grows, we will grow with them and similar for Temu.
Got it. And then with the current environment and the ongoing cost optimization, how have you been evaluating any potential M&A opportunities?
Listen, I think in some aspects, we always look at M&A, right? We always get a tremendous amount of inbound coming in. Right now, we got to focus on stabilizing our business. That's priority number one. I think all the moves that we've done, the six major strategic objectives, which I've highlighted and then Josh reconfirmed, those are where we're focused on. And once we get to a stabilized business model, I think over time, M&A always should be something to consider. But right now, I think as we look at H2, our primary focus is getting the company back to stability, which we think we're on track for, and delivering roughly something that's close to breakeven for the second half.
And it seems that we have no further questions for today. I would like to turn the call back over to Devin Sullivan.
Thank you, John. As part of Aterian's shareholder Perks program, which investors can sign up for @aterian.io/perks. Participants in this program have the ability to ask management questions during our earnings calls. And I want to thank all of our Perks participants for their loyalty and their participation in the program as well as their questions. The management team has picked a few of the more popular questions from the Perks program as well as some from some other sources. So I'll read those now. First question our gross margins are excellent, but what is the plan to overcome the significant selling and distribution costs, which seem to keep us from profitability no matter how much revenue we see from sales?
Thanks, Devin. So outside of payroll, our selling and distribution costs are primarily variable with sales. They're driven mainly by logistics, marketing, and our platform fees on our marketplaces. So with the exception of the variability in marketing spend that we saw during Q2, the selling and distribution cost rate as a percentage of sales has been very consistent for the past few years. So I think our opportunity really comes from consumables, including the previously mentioned Squatty Potty wipes, which carry better gross margins than our other product categories. So as we continue to shift our product mix towards U.S. sourced consumables, we expect greater leverage on gross margin, contribution margin, and operating profit.
Okay. Thanks, Josh. Our next question. Are you planning on promoting the brands on marketplaces like Instagram Shop and TikTok?
Thanks, Devin. I'll grab that one. Yes, we plan to push further into social in the coming quarters, and it's something we are working on to get better at. The Squatty Potty flushable wipes launch is going to be a perfect product to expand onto our social marketing and social media capabilities. And we have some exciting content related to that launch coming in September and October. I think as we think more broadly about the consumable space, I think that lends perfectly to expanding our social media and social marketing. So I do think it is something we'll continue to see and ultimately also leverage our existing brands as the products see fit.
All right. Our next question. What steps are being taken to ensure that the stock price doesn't lose compliance and require another reverse split?
Thanks, Devin. So our stock price is ultimately not within our direct control. Our focus right now is growing the business, which is the most sustainable way to support long-term shareholder value. So while we had a tough Q2, we do believe we have stabilized the business. We are optimistic about the back half of the year. We're optimistic about 2026 and launching consumables and launching our new geos and channels. Ultimately, we believe this will increase shareholder value in the long term.
Thank you, Josh. Our next question. What is the status of the share repurchase plan?
So back in March, we did announce the share repurchase plan after the increased tariffs were announced in early April. I think in May, we suspended the plan temporarily. Right now, based on the macroeconomic environment and where we are, we think preserving liquidity is important. We did end Q2 with $10.5 million of cash, but again, we think to be prudent, we're going to hold off on the share buyback program for now, but we will evaluate going forward on a quarter-to-quarter basis.
Our next question, can you provide some more color around the reaction to the price increases that were implemented? And then how much of the second half guidance is driven by pricing versus volume?
I'll grab that one, Josh?
Yes.
Revenue, especially in marketplaces, right, is predominantly based on your price and volumes, along with the right performance marketing. All our forecasting outside of new product launch is based off pricing, run rates and seasonality. The tariffs going from like 20% to 145%, back down to 30%, created a ton of pricing volatility, which is difficult to navigate and to forecast, frankly. As mentioned, when you're changing pricing that way to really understand where you need to go, the algorithm penalizes you as we said. Especially when your daily run rates slow, which we strategically needed to do to figure out the plan of how to navigate tariffs back through this. And it was even worse because some of our competitors did not raise price at all. So we do think now that we're stable. I think the forecast and guidance that Josh provided that we provided here today is really based on what we think stable pricing is and what our run rates will be. I think that's exactly what we do. As to how people reacted, I mean, listen, we still have great products. We have great DSR rankings. People love our products. A lot of our products are highly reviewed and highly rated on Amazon. I just think in this current environment, it's very volatile. So I think there's a lot of changes going on in consumer spending and how people are looking at pricing and value. I think we're very poised to be successful in H2 and into the future because we have great products that still provide great value to people. But this volatility makes it very difficult for companies to operate. Fortunately, I think with our strong balance sheet and our product portfolio, plus some of the stuff we're heading into with consumables, just gives us a really good shot to grow this company and be super successful.
All right. And our last question, two parts. To meet your adjusted EBITDA guidance, does this also include some scaling back in marketing spend? In addition to the cost-saving initiatives that you've discussed today, what other actions might need to be taken to hit our guidance for the second half of the year?
Thanks, Devin. As mentioned in the prepared remarks, we raised prices during Q2, but we did overspend on marketing for the period. The increased marketing spend, combined with the obsolescence charge we took on inventory or long inventory that we pulled in during Q2 to avoid the higher tariffs, put pressure on our contribution margin. But since then, we have adjusted our marketing approach to be more focused and efficient. With the marketing spend now optimized and revenues stabilized and you combine that with our fixed cost reductions, we do expect these actions to reduce losses in the back half of the year.
Okay. That concludes the Q&A portion of today's call. Thank you, everyone, for your participation today. We look forward to speaking with you on our third quarter financial results call and keeping you apprised of developments between now and then. So thank you again, everyone, and have a great afternoon.
Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines. Have a good day.