Aterian, Inc. (ATER) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Mohawk Group Holdings Inc. Q2 Earnings Report. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Ilya Grozovsky, Director of Investor Relations. Please go ahead.

Thank you. Thank you for joining us today to discuss Mohawk's Second Quarter 2020 Earnings Results. On today's call are Yaniv Sarig, Co-Founder and CEO; and Fabrice Hamaide, Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Mohawk's website at mohawkgp.com. 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 Mohawk's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Mohawk's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of these risks and uncertainties associated with the forward-looking statements to be made on this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included on our second quarter earnings release as well as our filings with the SEC. Please note that the SEC's EDGAR site is currently experiencing technical issues and not accepting filings, and our filings may not show up until later. 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.

Thanks, Ilya, and good afternoon, everyone. Thank you for joining us today for this call. I would like to first and foremost thank our entire team at Mohawk for all their hard work during these last several months. I'm once again very proud of our resilient culture, our ability to adapt to continuously improve and produce strong results despite the challenges. Of all of Mohawk's strength and capabilities, I put our teams grit and our never-say-die culture above all other factors that will drive the company's long-term success. To that extent, our people safety remains our number one priority. As the world continues to face the challenges brought by the COVID-19 pandemic, I would also like to take this opportunity to thank our vendors, suppliers and other business partners who have been incredibly supportive and helping ensure we have business continuity. For those on the call, our shareholders and other friends of the company, we hope that you and your family and love doing their safe and healthy. This quarter represented a very special milestone for me personally. Many years ago, we decided to take a blitz scaling approach to grow our business. We believed in our business model and the fact that we would benefit from reinvesting every dollar we make back into launching more products and continue to develop our e-commerce platform, AIMEE, to drive increased efficiency as we scale. We knew that eventually we would reach a point with the growth of positive contribution margin from our product, which surpass our operating fixed costs and allow us to continue to grow while generating positive adjusted EBITDA. I'm really excited to report that I believe that the second quarter of 2020 represents an important turning point for Mohawk. In addition to reporting 97% year-over-year revenue growth, and a record $59.8 million in net sales. We're also reporting our first profitable quarter in terms of adjusted EBITDA. Thanks to our platform business model, we have more than doubled our revenue since 2018 and improved unit economics, allowing us to generate $8 million of operating cash flow in this quarter, while our headcount has remained essentially flat. I believe that our investment in our platform business model, coupled with the increased growth in e-commerce adoption, will continue to put us on a pathway to healthy growth and self reliance and should move the company to a whole new level. With our main channel, Amazon continuing to see massive demand for its services, our sales have accelerated as we announced strong year-over-year increase in sales in Q2. Mohawk continues to avoid a lot of the customer shipment delays that other sellers on marketplaces are facing during the second quarter. This is a result of our software's platform last-mile fulfillment integration with our 3PL warehousing partners. When looking at the retail industry at large, we believe that the current pandemic has created a tipping point towards the digital-first economy. We're watching closely earnings from other e-commerce and digital payment firms. The data we're seeing seems to be showing that across the board, more users are making the shift to online platforms for various needs. We're excited to be building a consumer product company, that has since inception anticipated this transformation and to see that it is now accelerating. We continue to believe that a new breed of consumer brands will emerge from this shift to online, and we're thrilled to be building a business that we believe could be a leader in this space in the years to come. With that, I will pass it on to Fabrice to discuss our financial results.

Thanks, Yaniv, and good afternoon, everyone. Here are the operational performance details of our second quarter. For the second quarter of 2020, net revenue increased 96.9% to $59.8 million from $30.4 million in the year ago period. The gain was primarily attributable to increased direct sales volume of new products launched since the second half of 2019, which contributed $23.1 million in net revenues. And historical products as well as the wholesale revenue of PPE products, which contributed $5.7 million. We experienced a sales interruption on our home labs dehumidifiers for 3 weeks in June, while we resolved an inquiry from the EPA. An estimate a $4 million missed opportunity in sales during the quarter as a result. Since early July, we have resolved the inquiry and resumed selling our home labs dehumidifiers. Gross margin for the second quarter increased 135% from a year ago to 46.2% and was up 600 basis points on a sequential basis. The sequential improvement in gross margin was due to improved product unit economics stemming from both lower COGS and higher sales prices as more products reached a sustained phase, partially offset by the wholesale PPE sales, which carry a slightly lower gross margin. In terms of our product segments, launched sustained SaaS, liquidation and other. Overall, our sustained revenue grew to $44 million and grew 175% as compared to first quarter 2020. In Q2 2020, we launched 8 products on top of the 16 that we launched in Q1 2020, bringing the total for the first half of 2020 to 24. Our launch revenue for Q2 2020 was $5.7 million. Our SaaS revenue remained essentially flat as we continue to work on our market segmentation and building a repeatable funnel and conversion process. Finally, for Q2 2020, liquidation and other revenue was approximately $3.9 million and $5.9 million, respectively, versus our first quarter 2020 liquidation and other revenue of $2.2 million and $0.2 million, respectively. The increase in other revenue is a result of wholesale PPE revenues of $5.7 million to states and other government entities. Our overall Q2 2020 contribution margin was 16.8%, a significant improvement versus the prior year's 5.7% and compared to our Q1 2020 contribution margin of negative 2.9%. The year-over-year improvement as well as a sequential improvement were driven by improved product unit economics coming from higher average selling prices, lower COGS and lower fulfillment costs. Increased sustained revenue mix and higher sale prices of the launch revenue as they reach the end of the launch phase. Our sustained business drove the majority of our positive CM at 19.8%. The fixed costs for Q2 2020 were $6.6 million compared to $5.4 million in the prior year quarter, representing an increase due to onetime costs of severance, recruiting and bonus accrual. As a percentage of net revenue, fixed costs decreased to 11.1% from 17.8% in the year ago quarter and compared with $5.7 million or 22.1% of net revenues in first quarter 2020. The improvement in fixed cost margin highlights our ability to launch new products and grow revenue while keeping fixed costs essentially flat, thanks to the high degree of automation of our business model. This is our first quarter of adjusted EBITDA profitability, a quarter sooner than what we had previously anticipated. Adjusted EBITDA for the second quarter of 2020 improved to $3.4 million from a loss of $3.7 million in the second quarter of 2019 and also saw sequential improvement from a loss of $6.4 million in the first quarter of 2020. I would highlight that our adjusted EBITDA profitability is a result of the growth in our business from both our existing products and new product launches, combined with continued improvements in our unit economics and our fixed operating expense leverage, thanks to the high degree of automation of the business model. Turning to the balance sheet. As of June 30, 2020, and we had cash of $17.2 million compared with $14.1 million at the end of March 31, 2020. The sequential increase in cash, while at the same time, reducing our debt, is the result of improved margins and seasonality impact on sales and inventory turns. Cash generated from operating activities for the second quarter was $8.2 million compared to cash used in operating activities of $17.1 million in the first quarter of 2020. Second quarter 2020 operating activities were impacted by decreased cash operating loss and a net increase in cash from working capital as we turn our inventory on hand. Overall, cash generated was $3.1 million, compared to cash burn of $16.3 million in the first quarter of 2020 due to increased sales at higher margins, controlled fixed costs and working capital. As of June 30, 2020, our total debt, which consists of borrowings under our revolving credit facility and our $15 million term loan decreased to $31.9 million compared to $35.1 million as of March 2020 and compared to $37.9 million at the end of December 31, 2019. This decrease is a direct reflection of our planned seasonality-driven increased inventory from Q1 to prepare for the seasonal increase in sales of Q2 and Q3. In terms of outlook, for new products in the third quarter 2020, we expect to launch approximately 10 new products. We could experience some limited inventory stock-outs in the quarter as we work to absorb the faster growth rates of Q2 and forecasted Q3. To conclude the key takeaways of the quarter are: faster growth, more profitability, generating cash. For 2020, we reiterate our June 4 updated guidance and continue to expect net revenue to be in the range of $170 million to $180 million, driven primarily by continued growth of our existing product portfolio, our PPE efforts and the positive contribution from new products launched in 2020 and late in 2019. The company expects positive adjusted EBITDA in the third and fourth quarter of 2020. And in addition, expects positive adjusted EBITDA on a full year basis in 2020, a year earlier than anticipated. With that, I'll turn it back to the operator to open the call for your questions.

[Operator Instructions] We have your first question from Thomas Forte from D.A. Davidson.

Congratulations on a very successful quarter. I have 2 Amazon related questions for Mohawk. So Yaniv, I feel like you're uniquely qualified to answer this one. When you think about yesterday's testimony by the 4 CEOs in big tech Amazon, Apple, Facebook and Google, in particular, the focus for Amazon is if the company is using its data to advance is first-party sales at the detriment of third party sales? And then second, can you remind us, they're -- looks like they're going to delay Amazon Prime Day this year. So instead of June or July, it might be October, can you remind investors on the significance of Prime Day for Mohawk?

Sure. Thank you, Tom. So when it comes first to Amazon being a competitor, we -- as we mentioned a few times in the past to lenders as well, right, we have -- Mohawk itself has not yet personally been impacted by any of these activities that Amazon has taken. From our perspective, as long as we do our job well on the market research side, which is really one of our strongest capabilities, the ability to really kind of analyze the data on the marketplace and identify where the opportunities are. It's -- for us, we've not seen too much difference where the competitors were going after Amazon or any other company. It's true that Amazon users advertising with some site preferential to themselves. But in general, we've not seen that affected us at least and [ where we enter certain ] markets. When it comes to Prime Day, one of the things that -- obviously, that's indicative of the fact that Amazon's FBA and their warehouses are just completely overwhelmed the demand that they're seeing right now, which points to the type of volumes that they're seeing. And that's the main reason they're delaying Prime Day. For us, Prime Day is obviously an interesting event, but not one that is dramatically changing anything for us. We don't typically take any kind of like different strategy during Prime Day. We adjust somewhat to the demand of the market. But it is not a consequential event for us if it's moved further down the line. So we're happy that it still happens, but it's not something that we are necessarily depending on.

We have your next question from Matt Koranda from ROTH.

Within the quarter, could you help us understand how much of the growth was price-driven versus volume in Q2?

Sure. So I'll take that one, Yaniv.

Yes, sure.

It is essentially 50-50 actually, 45% on the price side and 55% on the volume side?

Okay. That's very helpful. And then when we look at the 2020 revenue guide, unchanged, obviously, from the last time you guys provided the full year guide. And I think it implies something like around $90 million in revenue for the back half of the year, which seems like maybe a little bit of a deceleration in growth is implied. But I'm wondering, help us with the assumptions there that you guys are making? Is there some conservatism baked in from sort of the inventory situation? I know you mentioned there may be the possibility of stock-outs. What are we thinking sort of build that up the bottom-up for us, if you could?

Sure, sure. The reason why we don't change the guidance is twofold. I mean the first one, remember, we updated our guidance upwards twice already in the -- during the quarter, right? So we can't do that every month. We wish we could, but we can't do that every month. And the second, there's 2 other reasons. I mean the first 1 is: yes, we are expecting some stock-outs as we're absorbing the extra growth rates of Q2 and Q3. And some of our manufacturers are actually experiencing that across the board from most e-commerce players. And therefore, some inventory lead times have extended a little bit on some of our products. And the second reason is because on the PPE side, it's highly -- that revenue is highly volatile, obviously. It's very difficult to accurately predict that revenue. So it's difficult to actually make a significant change based on the PPE impact.

Okay. That's helpful, Fabrice. And then on the EBITDA guidance, I mean, the language slightly changed in terms of full year EBITDA profitability, which is great. Is that more just the strength that you guys had within the quarter here? Or is that sort of a change in your internal expectations for the back half of the year in terms of EBITDA contribution in Q3 and Q4?

Well, I mean, as you saw, our contribution margin is really strong. We expect it to remain stronger than originally anticipated, maybe not as strong as what we experienced in Q2, which was obviously impacted by the COVID situation. And how that unfolds in Q3, Q4 is obviously unknown by -- for everyone. But the strength and the strength of our listings actually and the cost savings now that we're benefiting from the full effect of our fulfillment platform, in particular, as well as increased volumes on the COGS side, which we're starting to actually get better COGS, at the same time, give us a reasonable level of comfort on the contribution margin strength in the second half as well, right? So it's a mix of both Q2 strength and level of EBITDA -- adjusted EBITDA that we posted as well as confidence in the contribution margin and, therefore, EBITDA since we have full control of our fixed costs, thanks to the operating leverage that we have of the second half as well.

Got it. Does this change the contribution margin sort of equation that you've given us before? Because I mean, I was under the impression, given you guys, your historical contribution margins in the sustained category were kind of in the high single digits, maybe approaching the low double digits. You put up a nearly 20% contribution margin this quarter and sustained and you just referenced it. But like we probably shouldn't drag that out, I would assume, but help us understand sort of what's a reasonable level for the sustained contribution margins on a go-forward basis, maybe in Q3, Q4 of this year?

Yes. We don't give specific guidance, obviously, at the CM level. But what is actually being very clear is that first more of the -- more of our listings and products have significant dominance and price elasticity faster than we had anticipated, which is great news. And it's reflected by the number of the -- the ever-increasing number of reviews that we have. We're now north of 1,600 reviews on average per product. And that's a significant increase on an ongoing basis. And the second reason is, we're actually delivering the economies of scale, in particular, the unit economics level, in particular, on the fulfillment side, faster than anticipated as well. So most likely overall, our sustained CM will be significantly north of 10%, which we had anticipated to stay there for quite a while, though we always indicated that a little by little CM would increase. It's just happening faster than anticipated. And therefore, as our operating leverage remains long term, obviously, our overall EBITDA structure as a company on a long-term basis once our growth slows down, which is years out, will be closer to -- instead of being closer to a 10% EBITDA business, will be probably closer to a 13% to 15% EBITDA business.

Great to hear. That's helpful. And then just one other one on the contribution margins. I noticed launch, which typically should be negative. I think you guys usually typically say, it should be kind of in the minus 10-plus percent range. Look like it was breakeven. Was there anything unique about this quarter to call out in terms of launch? Or is it just the limited launches that you guys had within the quarter?

It's a mix of 2 things. I mean, it's -- you remember that the launch period is more or less 3 months, sometimes more, sometimes less. But that means that in new launch, we launched a lot of products in Q1. That means -- and then they actually migrate to sustain. So it's not a negative CM from day 1 to day 90, and then all of a sudden, and positive CM, right? It's actually hyper even smaller spend at the very beginning and then, slowly, the product actually migrates to its sustained CM over the course of the 3 months, right? So what actually happens here is that most of the products that were launched in Q1 have -- were at the tail end of their -- in May and June, were at the tail end of the launch process. And therefore, already getting into the positive CM category -- territory. And at the same time, we launched a smaller number of products in Q2. Therefore, the mix inside launch is actually positive.

Okay. That's super clear. And then just one last one, I'll sneak in, and I'll jump back in the queue guys. Sorry for so many questions. But on the hOmeLabs front, you mentioned you had a stoppage during the quarter. Is there -- how is that stoppage addressed? Help us just understand that? And then any risk that EPA does another one of these stoppages on any other environmental appliances that you sell? Or are you pretty sure you've addressed it?

Well, we've addressed it. I mean, and we got an official notice of clearance from the EPA to be able to actually resume sales. So it's completely addressed and behind us. And we're very careful about being fully compliant with all rules and regulations of the EPA, FTC and so on. And in this particular case, it was a marketing claim on our dehumidifiers, where we're mentioning that dehumidifiers help reduce mold. Which is true, but is a marketing claim that they didn't feel comfortable with and felt like it was a pesticidal type of claim, which in this environment, they're extremely, extremely sensitive to any claims that may mislead consumers as to what the product does because, as you know, there's a lot of scams out there saying that my product actually removes any kind of virus-related to the COVID side and so on. And therefore, they cast an extremely wide net to protect the consumers rightfully so and they asked us to actually remove that marketing claim, which we did.

We have your next question from Brian Kinstlinger from Alliance Global.

Can you talk about how many of the 8 products were PPE SKUs? And how quickly can you build inventory there?

I'll take that Fabrice. So on the Holonix side, a couple of things. Part of the PPE effort is obviously to utilize our supply chain, right, to be able to help and obviously generate valuable business for us, right? At the same time, it's also creating the relationships with manufacturers that provide these type of items and that has been successful. We launched one product on Amazon. It was a set of masks that basically ran out of inventory at an incredible pace, the demand is continuing to be absolutely through the roof. And obviously, we're going to continue to go after that, right. When it comes to the hand sanitizer item, we've taken longer to bring it online. And actually just was brought online recently a couple of days ago on Amazon, and we're looking to start launching and promoting the item. We've just been very, very careful in terms of regulation and in terms of just making sure that we're checking all the boxes and have taken a little bit of a longer time to bring the products to market. But so far, we're seeing, again, incredible demand still being around, and so we're excited about the brand continuing to its launch.

Okay. And did I hear correctly that the government was one of the bigger customers for that product?