Aterian, Inc. (NASDAQ:ATER) Q4 2022 Earnings Call Transcript March 9, 2023
Operator: Good afternoon and welcome to the Aterian, Inc. 2022 Fourth Quarter and Full Year Earnings Conference Call. Please note, this event is being recorded. I’d now like to turn the conference over to Ilya Grozovsky, Vice President of Investor Relations and Corporate Development. Please go ahead.
Ilya Grozovsky: Thank you for joining us today to discuss Aterian’s fourth quarter and full Year earnings results. On today’s call are Yaniv Sarig, Co-Founder and CEO; and Arturo Rodriguez, our Chief Financial Officer. A copy of today’s press release is available on the Investor Relations section of Aterian’s website at aterian.io. I would like to remind you that certain statements we will make in this presentation are forward-looking statements and these forward-looking statements reflect Aterian’s judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting Aterian’s business. Accordingly, you should not place undue reliance on these forward-looking statements.
For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our fourth quarter and full year earnings release as well as our filings with the SEC. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, the company may refer to certain non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today. With that, I will turn the call over to Yaniv.
Yaniv Sarig: Thank you, Ilya and thanks everyone on the call. Today, I’m going to go over the following topics. I’ll start with a quick introduction of Aterian, for those who are newer to our story, I’ll then review key takeaways from our fourth quarter of last year. and I’ll discuss our goals for 2023. Lastly, I’ll address the long-term prospects for Aterian and share why we believe in our vision for the consumer product platform in the future. For those who are new to the story, here’s what we need to know about our company. Aterian is part of a new breed of technology-enabled consumer product companies. We focus on building, acquiring and partnering with e-commerce brands online. Aterian owns and operates several consumer brands selling products across various categories on channels such as Amazon, Walmart, Shopify and eBay, both domestically and internationally.
To allow us to scale, we’ve invested in building our own proprietary platform called AIMEE. AIMEE enables our team to manage our business more efficiently by injecting technology into processes that would otherwise have to be executed manually and will require hiring an unscalable and unsustainable workforce. Through its ability to analyze vast amounts of data and automate daily recurring tasks, AIMEE allows our team to find new product opportunities we can launch under our brands, manage these products at scale effectively across various channels, automate certain marketing and fulfillment task and much more. Our goal in the long term is to become one of the most efficient consumer companies in the world, expanding our footprint globally while continuing to invest in technology and an agile supply chain to drive scale and profitability.
I’ll now take a few moments to speak about our Q4 results as well as our goals for 2023. As we shared previously, our goal was, first and foremost, a discount and sell through high-cost inventory. As a reminder, due to the shipping container cost skyrocketing in 2021 and 2022, consumer brands across our industry were forced to ship goods at an average cost of $70,000 per container to stay in business. These additional costs forced us to increase our product prices by an average of 20%, only to generate an average of 8% contribution margin, with some of our products seeing as low as 6% contribution margin versus our target of 15% at a normal price. As we saw the cost of shipping finally coming down, we took advantage of Q4 of last year and the demand that was generated by the holidays, discount our inventory to cycle through our existing goods so that we can replenish inventory at a lower cost basis, benefiting from pre-pandemic rates of shipping.
What we’re seeing now is an average cost of container that’s closer to $4,000 per container. While our adjusted EBITDA took a hit, the decision to liquidate the long inventory now puts us on track to get back to stronger contribution margin starting in Q1 and Q2 of this year, leading to our guidance of turning adjusted EBITDA profitable in the second half of 2023. This decision was also critical to preserve the competitive advantage of our product and avoid getting undercut by competitors who would benefit from the lower shipping rates. It’s important to understand that our discounting and inventory liquidation efforts do not reflect a weak portfolio. In fact, some of our best products were part of the strategic efforts, all to make room for inventory at a lower cost basis.
I’m happy to report our overall inventory position has been reduced from $76 million back when we started our normalization efforts in June of last year to $43 million in Q4. And the risky inventory has improved by $3 million and we expect additional normalization to happen in Q1 with another $3 million to $4 million of inventory cycle through. This cash generation improves our balance sheet heading into ’23. Our entire team feels now that Aterian has surmounted a very difficult period. And putting aside remaining inventory normalization we need to accomplish in Q1, we can finally look to pursue growth and profitability again. The energy and motivation we have comes from the relief and satisfaction of navigating complex challenges but also from a continued belief in our vision.
So what does the road ahead look like? I want to outline some of our goals in the next few months and explain how they tie into our vision. First and foremost, in line with the Q4 efforts, we are laser focused on achieving adjusted EBITDA profitability in the second half of the — for our core business. This effort is primarily based on getting our cost basis of products back to pre early pandemic levels and executing well on our marketing strategies. Separately, many of our competitors have not been able to navigate out of the difficult macro level environment and we’re in the process of assessing several significant M&A opportunities to acquire assets from other Amazon aggregators. This is an ongoing effort and while we cannot guarantee its results, we’re very optimistic about our ability to bolt on substantial amounts of additional contribution margin that will accelerate churning full year profitable in 2024.
Finally, going back to launch new products and while we have already over 20 new products being developed, we’re also looking to take our model a step further by starting to develop more differentiated and unique products. While we don’t expect to become a hardware company by any means, we believe that the insights from our data-driven approach can provide the opportunity to work closely with manufacturers to design more advanced differentiated features through a bootstrap approach. We’re also very much focused on continuing our international expansion. Recently, we made great progress with our European expansion and our goal is to be as optimally positioned with our existing portfolio in Europe in 2024. Following, I want to speak briefly about the long-term prospects for Aterian.
We launched this company back in 2014 because we believe that e-commerce adoption will grow steadily year-on-year and marketplaces will dominate the lion’s share of GMV globally. We were accurate about that prediction and a focus on building a company that can manage and scale brands and products with a marketplace for Doctrin. According to research bioessential third-party sales through online marketplaces will account for 59% of all global commerce by 2027. We also realized at an inception that marketplaces will allow retailers to delegate a lot of their work to the brand. using to the brands that use them which makes it difficult for those brands to scale. Just to look at the composition of sellers on Amazon tells a pretty remarkable story.
While Amazon is not publishing this figure, Industry estimates are that third-party sellers on its marketplace generate approximately $390 billion of GMV. Of the 1 million plus active sellers out there, industry estimates point to massive fragmentation only 60,000 sellers passing the $1 million a year revenue threshold in approximately 50 businesses only crossing the $100 million mark. So marketplaces of the future and have removed the barriers of entry that exist in traditional brick-and-mortar retail, allowing almost anyone to sell their products to hundreds of millions of buyers but this comes at a price. Brands must manage all aspects of the business themselves. This includes forecasting, managing inventory, managing prices and discounts, managing marketing.
This is where technology comes in. We always believe since inception, that the only way to scale a consumer company on marketplaces was to inject technology into its operations to automate the daily task required. Today, we use machine learning to help us reduce the cost of forecasting media buying and pricing optimization, recent exciting developments in AI should be eye-opening for any business leader out there. A timer is already leveraging large language models such as to help synthesize sentiment in reviews and we’re looking to extend our use of AI rapidly to further improve our efficiency. Aterian is a consumer product company, not on a I company but all consumer product companies out there I believe, from all companies out there, I believe that we have the DNA, the expertise and the culture to leverage technology to achieve a market-leading position in our industry over the long term.
In general, I believe that the world will rapidly see 2 types of businesses forming. Those have built the internal expertise to harness AI as a powerful force that drives efficiency and competitive edge and those who will be remembered in history books as not agile enough to adapt. The churn does not only wish to be part of the first group. It’s already 1 of the most sophisticated companies when it comes to applying technology to drive the value chain of e-commerce consumer brands. With that, I’ll pass it on to Arty.
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Arturo Rodriguez: Thanks, Yaniv and good day, everyone. Here are the financial performance details of our fourth quarter. For the fourth quarter of ’22, net revenue declined 13.3% and to $54.9 million from $63.3 million in the year ago quarter, primarily due to reduced consumer demand, offset by a strategy of liquidating high-cost inventory. The fourth quarter net revenue of $54.9 million is comprised primarily of $52.3 million of our organic business, a nominal amount of revenue from our most recent acquisition and $2.6 million of wholesale revenue. The year ago quarter net revenue of $63.3 million was comprised primarily of $31.3 million of our organic business, $27.6 million of net revenue from our acquisitions and $4.4 million of wholesale revenue.
Our organic revenue increased by $21 million due to classification of our past acquisition revenue going into organic revenue, our strategy to sell off higher-priced inventory and normalized inventory levels, offset by reduced consumer demand in the period. Our M&A revenue decreased approximately $27 million as all our material acquisitions have now been known for over a year and that revenue has shifted into the organic revenue categorization. Our Q4 acquisition, while nominal from a financial perspective, was strategic and designed to leverage a competitor and drive sales to our other Lean brand and we’re pleased with the progress of this strategy to date. Looking at our fourth quarter net revenue by phase, the $54.9 million broke down as follows: million, $0.1 million in launch and $13 million in liquidate and inventory normalization.
The year ago quarter net revenues of $63.3 million by phase broke down as follows: $52.7 million in sustained million launch and a late inventory normalization. Our sustained decrease of $12 million relates to renew shifting into liquidation phase and general consumer soft — our liquidation increased by $5 million from our strategic initiative to sell off higher price inventory and normalized inventory levels. Finally, on revenue, our launch revenue declined as we previously disclosed, are pausing of launching new products in ’22. The current launch revenues primarily attributed new valuations of existing products in the quarter. We are currently planning new product introductions for ’23, though the timing will be opportunistic. Overall gross margin for the fourth quarter declined to 37.1% from 45.6% in the year ago quarter and decreased from 45.5% in Q3 ’22 and primarily attributed to our strategic initiative to sell off higher-priced inventory normalized inventory levels.
Our overall Q4 ’22 contribution margin, as defined in our earnings release, was negative 11.5% and which decreased compared to the prior year CM at 7.9% which is directly attributed to higher liquidation revenue from our strategic initiative to sell a higher price inventory to normalized inventory level. Our sustained product contribution margin decreased to 8.3% versus 16.1% in Q4 ’21 as we also reduced pricing to normalized inventory levels and other thing management initiatives. We do expect our sustained contribution margin to improve as we progress in 2023. Looking deeper into contribution margin for Q4 ’22, our variable sales and distribution expenses as a percentage of revenue increased to 51.6% as compared to 40.1% in the year ago quarter.
This increase was primarily due to higher cost supply chain, including last mile fulfillment and our product mix, including liquidation and normalization of inventory. — offset by reduced storage costs. We do expect our sales and distribution expenses as a percentage of net revenue to improve as we progress in 2023. Our operating loss for the quarter of $22.8 million includes a reserve for BARDA credit of $1.6 million, $2.7 million of noncash stock compensation and a noncash loss on goodwill of $0.5 million. Our net loss for the quarter of $20.3 million includes a reserve for bar credits of $1.6 million, $2.7 million in noncash stock compensation, a noncash loss of goodwill of $0.5 million and a gain on fair value of warrant liability of $2.8 million.
Adjusted EBITDA, as defined in our earnings release, for the fourth quarter of 2020 was a loss of $16.2 million compared to a loss of $3 million in the fourth quarter ’21. Our strategic decision of liquidating higher cost inventory and normalizing our inventory levels impacted our adjusted EBITDA in the period. However, this was a very important effort leading us to improve our core business and putting us on track to get back to stronger contribution margins in ’23 and strengthening our balance sheet as we headed into the new year. Turning to the balance sheet. At December 31, we had cash of approximately $43.6 million compared with $26 million at the end of September 30. The increase in cash is primarily driven by the previously reported $20 million capital raised in early October, positive changes in working capital, offset by our net losses in the period.
Our working capital improvement was part of our goal to strengthen the balance sheet, driven by moving out our more expensive long inventory and at December 31 inventory landed at $43.3 million, we have made great strides in Q3 and Q4 of improving our inventory composition and reducing our overall inventory as we expect to be completed with this process by mid-Q2 ’23. Our credit facility balance landed at $21 million which is down almost $3 million from the sequential quarter and down almost $12 million from December 31, ’21. As our cash position has improved from capital raise and as we continue to normalize into. This reduced balance also resulted in lower interest expense. As we look at Q1 ’23 which is typically our lowest revenue quarter and taking into account the current global environment inflation, we believe net revenue will be between $32 million and $36 million.
Our adjusted EBITDA guidance is beginning to show improvement as we progress towards adjusted EBITDA profitability in the second half of — for the first quarter of ’23, we expect adjusted EBITDA loss to be in the range of $4.8 million to $5.8 million, anticipating continued impact of inventory liquidation. This Q1 ’23 adjusted EBITDA guidance on average is a 70% improvement from our Q4 ’22 reported adjusted EBITDA and on average 40% improvement from Q3 ’22 adjusted EBITDA as we are beginning to see the results of our strategic efforts of liquidating high-cost inventory and normalizing our inventory level. In closing, 22 was a challenging year but we have persevered through global supply chain disruptions and a challenging macroeconomic conditions.
We have significantly reduced our inventory by moving on high-cost inventory and normalizing our inventory levels which we believe puts us in a position to be adjusted EBITDA profitable in the second half of ’23. We have also strengthened our balance sheet in ’22 which gives us flexibility to navigate the current macroeconomic environment as it continues to unfold and allowing us to be later focused on driving our core business. We are excited and proud of the company we are building. Aterian continues to have a very strong brand and many of our products can be some of the best sellers on Amazon. We continue to have industry-leading technology and logistics and most importantly, our dedicated and hard-working people continue to do extraordinary work.
As such, we are very confident and optimistic about Aterian’s future. With that, I’ll turn it back to the operator to open the call up to questions.
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Q&A Session
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Operator: Our first question will come from Alex Fuhrman with Craig-Hallum Capital Group.
Alex Fuhrman: Congratulations on what looks like a strong success clearing some of the inventory that you’d been hoping to. I was wondering if you could talk about which categories you’ve seen the most demand for both during Q4 and now that we’ve got a couple of months of 2023 under your belt, where you’re seeing the most demand? And is that informing where you’re looking for M&A? Or are you really looking at all different categories for that?
Yaniv Sarig: Alex, Yaniv here. I’ll take that question. Good question. Overall, as we mentioned, overall consumer demand is a little softer, right? But because of all the efforts we’ve done on liquidation, we’ve got more success across pretty much the Board when it comes to the categories as typical with the seasonality of Q4 versus Q1, Q2 Q3, not a big difference there. I think I’d say to the second part of your question, the — where we’re looking for when it comes to acquisitions, I said in general, we want to diversify our portfolio a little bit. If possible, right, M&A is more opportunistic but as much as possible from, I think, the supply chains that have hurt us in the last few years. So we’re definitely tending to centered a little more towards consumer product companies that are making their goods not necessarily in Asia but maybe in the U.S. or Eastern Europe, South America.
But of course, we’re looking and leaving our eyes open to any of the opportunities. But again, if possible, we would the main goal potentially with the future M&A would be as much as possible, diversify from a supply chain perspective.
Alex Fuhrman: Okay, that’s really helpful. And then can you give us a little bit more color on the bridge of how you get from what you just reported and what you’re guiding to in Q1 to being adjusted EBITDA positive in the second half of the year. It looks like what you’re guiding to for profitability in Q1 is better than — I was expecting at least a much smaller than expected loss. How do you walk us from that in Q1 being positive in the second half of the year? Is it primarily gross margin as you start to sell through inventory that wasn’t brought in at insane container rates.
Yaniv Sarig: Yes. I’ll let Arty add. Go ahead, Arty.
Arturo Rodriguez: Yes. No, Alex, I think you nailed it right at the end. I think — as we said previously, it takes a couple of quarters here to get rid of this really expensive inventory that we brought in strategically back pre late 2021 but we had to take the impact, unfortunately and pay those container rates. As you move that through, you’re going to get back to a place where you can get back to target type CMs, right? And with that, you should drive into profitability. Obviously, consumer spend is always a question mark but we do feel very confident that I think once we move through this more expensive inventory and nature that we’re bringing in that’s starting to land in April and May. For Q3 and even parts of our Q2 seasonal sales will be at better margins. And that’s why we can sort of be pretty confident in what we’re seeing.
Operator: Our next question will come from Brian Kinstlinger with Alliance Global Partners.
Brian Kinstlinger: Sorry, I joined late, if you answered this in your prepared remarks but with the company releasing new SKUs now, maybe you can update us on how many SKUs were released in the fourth quarter. maybe how many you’re expecting in the first quarter and maybe the full year rough numbers. You don’t have the exact number but — and then how is the weak consumer spending environment changing the pace of SKU launches?
Yaniv Sarig: Brian, just to clarify, we’re starting to launch products but as you know, we’re at that process takes time. And so — my comment was on the fact that we have over 20 products that have been worked on and will be launched some of it this year, some of it next year. I think the impact you’ll see is that through this year, we will continue to develop and launch products and most of it will come in 2024. So as you remember, right, the main reason we paused launching products was because of the unreliability of supply chains, both in terms of good arriving on time with all the delays that we’ve seen in the past but also very importantly, right, the fluctuations in cost of shipping were so unpredictable that it just creates a situation where you plan to launch a product and by the time it arrives, your cost basis is higher than you expected and that’s just not leading towards a good launch, right?
So we essentially paused that for quite a while now. And now that we’re finally seeing that stability in the supply chain, both in terms of the price of shipping but also the reliability, we’re getting confident to go back to get and launch these products. But most of that the impact of these products and the launches happening will happen again second half of this year and mostly the impact will be felt in 2024.
Brian Kinstlinger: Okay. And so are there any in the first in the fourth quarter and expected in the first quarter? Or are they all in process right now?
Yaniv Sarig: So if there were any in the fourth quarter, there would have been product products that would be what we call variations means we kind of like to think of them as another version of an existing product. That’s where we would have felt more comfortable. I don’t — it’s not as material as when we typically do the launches that you’re thinking about. And so again, I think that the answer is that with the efforts that we’re putting on now, we’ll be able to do it at least in the next few months, give a little more clarity on the time line that we’re seeing around those launches happening.
Brian Kinstlinger: And then as I’ve read more so in the private market, I think some — there’s some undercapitalized fulfilled by Amazon companies that are struggling. Are you beginning to see any fire sales and how aggressive and you when do you expect to be this year in 2023 on M&A?
Yaniv Sarig: Yes, it’s a great question and you’re absolutely right there. There’s a lot of companies out there that are struggling and going through a lot of the challenges we went through in the last 1.5 years, let say, right? And again, some of them are really in a very difficult situation. So we’re very active talking to a lot of these competitors, exploring different opportunities, spending a lot of time with this. And as I mentioned in my remarks, we can’t guarantee any outcome but with the amount of effort that we’re putting out there and the things we’re seeing, we were overall quite optimistic that we’ll be able to find some opportunities with distressed assets that are actually quite good, right? I mean I think a lot of the things we’re seeing, obviously, it goes through the spectrum, right?
But there’s a lot of really good assets out there that we’re basically dealing with the same situation where the demand of COVID and on the other side, the pressure of supply chain is the perfect 1 that would these great assets in a challenging position. And so we’re as I mentioned, quite active talking to all these companies, they’re looking for these opportunities. We’re hoping to have an exciting thing to share with everyone but it’s still work in progress at this point.
Brian Kinstlinger: Last question I’ve got is when you first went public, there was a very pronounced seasonality to your business. Help us understand today how we should think about seasonality for the year in the different quarters.
Yaniv Sarig: Yes. So I think the big difference from when we first IPO-ed and today, right, was at the time, I think Q2 and Q3 were kind of like the 2 strongest quarters and Q1 and Q4 were quite like behind. I think given the profile of the acquisitions we’ve done and some changes to our portfolio, Q4 now is becoming a much stronger quarter, right and I think has the potential in a more normalized environment to see us even doing better over time. Q1 still is the one lag behind but it’s really it’s really, again, just the composition of the portfolio that we have. And so you’re still in a position where Q2 and Q3 are the strongest Q4 right behind there and then Q1 is still behind the 3 of them right when you compare it to back when we IPOed.
Operator: Our next question will come from Marvin Fong with BTIG.
Marvin Fong: I guess my first question, just on the first quarter revenue outlook down maybe something like 20% year-over-year. Just wondering if you could help us understand, I mean, how much of that is the consumer demand softness that you alluded to? Or is any of it just that you’re entering the quarter with a little bit less inventory than you were in the same quarter last year. I just wanted to understand that dynamic a little bit better.
Yaniv Sarig: Yes. Maybe I’ll start and see if Arty wants to add anything. But just in general, Marvin, 1 of the, I think, maybe benefits of how we run our business and the different brands that we have across different categories, is that as opposed to probably other companies who are maybe just active in one category, we have a little bit more wider visibility on demand. And the answer is, as you kind of mentioned yourself, right, is really mainly driven by consumer demand being soft, right? I think that’s no surprise given the overall economic outlook around us. But again, what’s really good that we’re seeing so far when it comes to our businesses, we’re always kind of looking at that demand in the context of the entire category and we have good visibility to the fact that it’s not that we’re losing market share but more of that just a soft demand across the board, right?
Arty, I don’t know if you want to add anything but that’s kind of like overall how we are looking at this.
Arturo Rodriguez: Yes. No, that’s right, Yaniv. I think that’s what we’re seeing that. I still think we still feel very confident on the year. I think we pointed in the past about being overall kind of flattish on the revenue side. So I just think a little bit — we’re seeing some of the consumer demand softness early in the year and then it should pick up back to where we believe will be Q3 and Q4 revenues for us. I think the other side of that Marvin is even at that lower amount, you could see the adjusted EBITDA guidance improvement, right? It’s a good testament of how we’ve really focused on clearing out the inventory that really set us up for a good 2023. And I think that’s the other part of it, even though the revenue is low, you sort of see already the improvement based on the guide of the adjusted EBITDA on the profitability of the quarter.
Marvin Fong: Yes. I mean you guys kind of basically touched on my next question which was sort of you’re reiterating reaching EBITDA breakeven in the second half of the year, you guys feel good in the sense that the consumer remains weak or even gets a little bit weaker, that you’ve stress tested it and you still feel good that you get that even if the consumer is softer.
Yaniv Sarig: Yes. I mean I think — yes, I think you’re right. First of all, the category — the consumer softness across the board, right? But I think also our experience with some of the categories and the positioning that we have on those in Q2, Q3 is giving us a lot of comfort around that. But again, the most important point here is really the cost base of the product, right? The contribution margin expansion that we were expecting is due to the fact that the efforts that we put in Q4 to make room for that inventory at a lower cost basis is going to create that money expansion. And our logistics team has done a great job of securing a very significant amount of the inventory we needed for the second half at a lower cost which also gives us a lot of comfort around that, right?
I guess there was a lot of challenges Again, as I mentioned in the last 1.5 years, right, not just about the price of shipping but also the ability to even get your goods on a ship. And so now we feel quite confident in our projections given the fact that we were able to secure a position on the ship at a lower cost and then we made room for that inventory to replace the older inventory, right? All these things combined give us that comfort with our prediction.
Marvin Fong: Got you. And I guess my last question, maybe a more fun topic is you mentioned leveraging ChatGPT and OpenAI and that sort of thing. And also curious, I think you guys had always employed some form of AI looking at reviews and helping guide your — our business decisions and product dividends. Could you just kind of expand on what capabilities you’re achieving now or expect to achieve in the near future with these new large language models that maybe you weren’t able to efficiently in the past.
Yaniv Sarig: Yes, absolutely. So we use machine learning and automation across many different aspects of our business. I think if you really want to bucket in the 2 kind of big areas is 1 is understanding the consumer, their sentiment, what they think about other products, they think about our products. And the other side of it is just managing the complex quantitative they do the effort of managing the products, right which includes, for example, forecasting which is where we have developed our own machine learning base forecast and things like media buying and pricing, they use automation as well, right? So when it comes to what you mentioned with ChatGPT and large language model, I mean, I think the excitement obviously for us is huge.
And as I mentioned in my comments before, we already looking at — I mean looking — we are already using ChatGPT to, in a way, actually augment some of the efforts that we’ve had with our own code around sentiment analysis on reviews. But Marc, the most important thing that I think a lot of people that are not necessarily in the weeds on AI don’t realize is that — the hardest thing about AI is actually having good data. And when I say that, what I mean is a lot of organization, except — especially in the consumer product industry that is not necessarily a fact driven, right? Not necessarily designed or have the DNA or have the systems and infrastructure and access — and their own data in a way set up for AI, right? And that’s something that really gives us some advantage, right?
Because we — we’re a consumer company, right but we’re a consumer company that uses all our technology and things like a technology company, we have put use in a position through the years of effort that we put that we are set up to use across the board in many different ways. And again, with the large language models, I think that we’ll see in the next few years, a lot of disruption across many different functions of business but I think only companies that actually have put the effort to prepare themselves to put that data to normalize it to make it available to these models are going to be the ones benefiting from it, right? And I think that’s where again, both with our proprietary software and all the efforts that we’ve made to kind of make the data available to our own algorithms, we have the ability now to relate these advances of technology and get even more efficiency across many different functions, right?
So, we’re very excited about everything that’s happening out there and we’re really happy that we again set ourselves for success by always see in that future and preparing for it and not waiting for it to happen actually putting it to work with our own hands, right? So really excited about all that stuff and what it could do for us in the future.
Operator: Our next question will come from Matt Koranda with ROTH MKM.
Mike Zabran: It’s Mike Zabran on for Matt. So the recent heavy discounting makes a lot of sense even on the more premier products but just any visibility on when we can expect a halt or even a reduction in the level of discounting? And to what extent is pulling back on that heavy discounting factored into the half EBITDA profitability expectation?
Yaniv Sarig: Arty, I’ll let you take that?
Arturo Rodriguez: Yes. Yes. No, I think again, if you follow discounting and pricing on Amazon, it’s a bit dynamic, right? But the point here was if we can clear out all this expensive inventory and normalize our inventory levels, we can bring back to product at normal costing because now we’re back to like pre-pandemic pricing from a shipping container perspective. And so as such, the view we’ve been saying is that as we enter the second half of the year, all that should be normalized. So we should be back to more normalized pricing along with normalized costing to get to a normalized contribution margin or starting to see a good chunk of that in Q3 and into Q4. So that’s why we’re really pointing towards that same half point. We could get that a little bit earlier into Q2 but we’re really not — we can’t really say on that. So that’s why we’re really focused on the second half right now.
Mike Zabran: Okay. So normal level of competitive discounting in the second half of the year but first half of the year, we should get through all of the discounting to clear the excess inventory. Am I understanding that correct?
Arturo Rodriguez: Yes, yes. I mean you’re always doing some form of discounting and price adjustments just to stay at the competitive Landscape depending on the season. That’s normal, yes. But yes, you’re right. You should see more normal pricing type position as we enter the second half, for sure.
Mike Zabran: Got it. That makes sense. Just 1 more for me. How are we circumventing the Amazon SBA fees? So I understand you guys have 3PL sites and FDA at your disposal but maybe just speak to how we’re optimizing between using Amazon versus 3 pill sites to get products to customers.
Yaniv Sarig: That’s actually a great question. and really, the answer is, as you know, Matt, like we put a lot of effort in building a network of 3PLs that’s connected to our Amy platform which, as you remember, we used to do our own fulfillment for the larger items but also for the smaller items which typically gets fulfilled to BA, restore those items in our own 3PL before we send them to FDA to go to going in fulfilled, right? And the answer to your question relies on really how can we optimize the BPL distribution of the products that go to FDA to reduce the cost of NBA, meaning if you have — again, we have, I think, at this point, over 19 3PLs, maybe 1 less because we’re optimizing all the time. When our logistics department receives containers, they actually use a bunch of different models that we put together to figure out what’s the optimal way to send those inventories to 3PL.
And the goal there for that inventory is to be as close as possible to the FDA warehouses to which we ship them so that we can, a, have less inventory in FBA and b, spend less money sending it to A which then offsets a little bit some of those kind of higher FAs that we’re seeing recently right? So again, our network of warehouses doesn’t only give us an arena when it comes to oversized items because our fulfillment there is quite competitive with FDA. But also for the smaller items, where the fulfillment will happen to FVA, the distribution to be as so as possible to the FBS standards helps a lot.
Operator: It appears there are no further questions. This concludes your question-and-answer session. I would like to turn the conference back over to Ilya Grozovsky for any closing remarks.
Ilya Grozovsky: Thanks. As part of our shareholder Perks program which, as a reminder, investors can sign up for a riper participants have the ability to ask management questions on our earnings calls. I want to thank all of the shareholder Perks participants for their loyalty, their participation in program and for their questions. I have picked a few of the most popular questions this quarter and that they have sent in. So here they are. First question is, when do you intend to be fully operational in Europe and do you plan to cover more European countries in the future?
Yaniv Sarig: Thanks, Ilya. So obviously, we’re really excited about Europe. It’s been something that we wanted to do for a while but the supply chain crisis was preventing us from making moves a little earlier. But in general, as we mentioned in the prior press release, we already have good infrastructure set up in some of the most important countries. And we currently don’t expect to go into further countries in Europe. But really, it’s about maximizing what we’re already in which are the biggest markets and just sending more of our products there, right? That’s the big effort here in 2023. Is now that the supply chain issues are cleared, we’re focused on making sure that we can maximize the amount of our existing portfolio products that are not yet in Europe that we can bring to market in Europe which again, should have a significant effect on 2024, right?
Once we’ve achieved that, we could then look at other countries in Europe but there’s no current plan to do that at this point there’s up work with what we’re doing.
Ilya Grozovsky: Great. Next question was, when do you expect to clear inventory purchased during Covid and start benefiting from the lower shipping costs.
Yaniv Sarig: Yes. So as already mentioned as well, right, we made great progress on reducing the inventory. I mean, it was almost — it was probably $73 million back in June down to $43 million. We still have a bit of inventory on the balance sheet that remains longer and we’re going to clear it out through the end of the second quarter at most. And really, our target is to get to less than 5% long inventory which I think at this point is quite achievable based on the progress we’ve made in Q4 and continuous work in Q1.
Ilya Grozovsky: Great. okay. And the last question was what was the health wellness brand that you acquired in October of 2022? And how will that come to market?
Yaniv Sarig: Yes. So there was a lot of interest in this. And here’s what we want to share, right? So we bought a small competitor to Square party. It was a competitor that had a product specifically that was competing against that brand and was actually undercutting our price and hurting our sales at the quad-pay level. We had the opportunity to acquire this very small brand because they were like a lot of other consumer companies in a difficult position. And we did it really just because we wanted to control the listing and stop undercutting body which is a long-term investment, right? Because if we if that competitor has gone through the challenges that they had and continue to invest in their business, they could have further chips at our Swift brand. And so we just took advantage of that and brought that product in, so that they’re not a long-term issue for us, right?
Ilya Grozovsky: Got it. Great. This concludes the Q&A portion of the call. In terms of upcoming calendar, Aterian management will be participating in the 35th Annual ROTH Conference, March 12 through 14 in Laguna Nigel, California. We look forward to speaking with you on future calls. This ends our call and you may now disconnect. Thank you.
Operator: Thank you for attending today’s presentation. You may now disconnect.