• Gross Margin: Improved to 65% from last year's Q1.

• Contribution Margin: Increased to 16% from last year's Q1.

• Net Revenue: Declined 42% to $20.2 million from $34.9 million in the year-ago quarter.

• Net Loss: Improved by 80% year-over-year.

• Adjusted EBITDA Loss: Improved by 38.4%.

• Inventory Levels: Decreased to $18.5 million from $40.4 million in the year-ago quarter.

• Cash Position: $17.5 million as of March 31, 2024, down from $20 million at the end of December 2023.

• Warning! GuruFocus has detected 4 Warning Signs with ATER.

Release Date: May 07, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Aterian Inc (NASDAQ:ATER) reported improved gross margins to 65% and contribution margin to 16% compared to Q1 of the previous year.

• The company has a strong focus on optimizing its SKU portfolio and simplifying logistics and technology infrastructure, which has led to better organization of revenue and operational workflows.

• Aterian Inc (NASDAQ:ATER) is on track to achieve adjusted EBITDA profitability in the second half of 2024, as per their previously-stated goal.

• The company has expanded to new marketplaces like Mercado Libre and Amazon Canada, which could drive growth through existing and new product launches.

• Aterian Inc (NASDAQ:ATER) has seen an increase in higher quality M&A opportunities, which could lead to accretive and synergistic transactions supporting overall growth.

Negative Points

• Net revenue for Q1 2024 declined by 42% to $20.2 million from $34.9 million in the year-ago quarter, primarily due to SKU rationalization efforts and continued pricing pressures.

• Despite the strategic SKU rationalization, the company experienced a significant drop in sales, indicating potential challenges in product demand and market competition.

• Aterian Inc (NASDAQ:ATER) reported no new product launches in Q1, which could impact the company's ability to innovate and capture new market segments.

• The company is still experiencing competitive pricing pressures which could affect profitability and market share.

• While the company is focusing on its core business, the reduction in SKUs and the strategic focus might limit market opportunities and revenue diversification in the short term.

Q & A Highlights

Q: What factors contributed to the highest gross margin as a public company for Rytary in Q1, and what is the sustainable gross margin range going forward? A: (Arturo Rodriguez, Co-Chief Executive Officer and Chief Financial Officer) The high gross margin in Q1 was primarily due to product mix, including a significant contribution from essential oils. The team has also been focusing on better pricing models. While the gross margin reached 65%, it is expected to normalize to high 50s to low 60s due to seasonal variations in product sales, such as humidifiers.

Q: Can you discuss the inventory plans for the next six months, especially in preparation for the holiday season? A: (Joseph Risico, Co-Chief Executive Officer) The company has normalized inventory levels and is managing not to be overstocked or understocked. As the summer season approaches, inventory levels might slightly increase but will remain within normal ranges due to a focus on core SKUs.

Q: What assumptions are driving the projection of profitability in the second half of the year? A: (Joseph Risico, Co-Chief Executive Officer) The expected profitability is primarily driven by the core business, without relying heavily on new products or channels. The focus is on improving contribution margins and reducing fixed costs. Seasonal product sales will also contribute to revenue increases.

Q: With no product launches in Q1, how much is being cut back on product innovation, and what are the expectations for product launches going forward? A: (Arturo Rodriguez, Co-Chief Executive Officer and Chief Financial Officer) The company has shifted from an internally developed model to a third-party model for technology, reducing traditional R&D expenses. Product innovation continues with a focus on improving product quality and features through the sourcing and engineering team based in China.

Q: How is the SKU rationalization impacting sales, and what is the expected growth trajectory into the second half of the year? A: (Arturo Rodriguez, Co-Chief Executive Officer and Chief Financial Officer) The SKU rationalization has led to a more focused product offering, which is expected to improve profitability despite a reduction in total SKUs. The revenue impact from SKU rationalization is decreasing, and the company anticipates a stronger performance in the second half of the year due to a concentration on core products.

Q: What is the current plan to diversify and segment products by channel and customer, possibly including small retail brands for customers like Wayfair, Home Depot, and Target? A: (Joseph Risico, Co-Chief Executive Officer) The company currently focuses on owning and operating its own brands rather than creating private label products for other retailers. This strategy aligns with the company's priorities to strengthen and expand its own brand presence.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.