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

Ladies and gentlemen, thank you for standing by, and welcome to the Mohawk Acquisition and Stock Offering Update Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ilya Grozovsky, Director of Investor Relations and Corporate Development. Please go ahead, sir.

Thank you for joining us today to discuss Mohawk's acquisition and concurrent stock offering. This call does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state or jurisdiction. 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 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 press release issued this morning as well as our filings with the SEC. We do not undertake any obligation to update or alter any forward-looking statements, whether as the 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 -- in the release filed earlier today. With that, I will turn the call over to Yaniv.

Thank you, Ilya, and thank you for joining us today everyone. I'm very excited to announce that Mohawk has signed a definitive acquisition agreement that furthers our M&A strategy. We've acquired Truweo, a leading e-commerce brand in the health and personal wellness vertical, which has built a considerable dominance in the posture correction category on Amazon. Importantly, Mohawk is not adding any headcount as a result of this acquisition. We're acquiring only the online listings, the brand's IP, the inventory and the manufacturer relationship. We will not see any increased fixed cost, as we ruled out on our platform AIMEE, to assist our existing team with managing the online listings going forward. As a result, the addition of Truweo will be accretive to our earnings. We believe that this acquisition model is highly repeatable. With millions of active Amazon sellers today, many of whom have built incredibly successful consumer brands, we believe the industry will experience a consolidation. Mohawk Group is incredibly well positioned to execute on consolidating, efficiently managing and scaling existing online brands due to the economies of scale of our technology, supply chain platform. And this obviously allows us to do these deals at a very accretive multiple. Concurrent with this acquisition, we announced this morning an underwritten common stock offering. The gross proceeds to the company from this offering are expected to be approximately $23.5 million before deducting placement agent fees and other offering expenses payable to the company. The company intends to use the net proceeds from this offering to complete the acquisition of Truweo. I would note that you should refer to the prospectus supplement that was filed earlier this morning for details of the offering, along with the company's other SEC filings. We expect the offer and the acquisition to close on Wednesday, August 26. With that, I will turn it over to questions.

[Operator Instructions] Our first question comes from Brian Kinstlinger with Alliance Global Partners.

Congrats on all the events in the last 24 hours. First, a simple search on Amazon of Truweo shows a number of different posture braces, as you suggested. Can you quantify the number of active SKUs the company has? And are posture braces all of the revenue they generate?

Yes. Brian, thank you so much for the feedback, and we're also very excited for everything that's happened in the last 24 hours. When you search for products on Amazon and you search for the brand, Amazon will also show you other products that are in the category. So just to be very clear, not all the posture braces you will see on Amazon are going to be coming from Truweo, right? The main one is -- the one you'll probably say the top of the search that has over 26,000 reviews and is the leader, bestseller in the category, that is -- that particular product is the most important product in Truweo's portfolio. There are 3 other -- there are 3 products in total, but 98% of the sales come from that product, the posture corrector that leads the category.

Great. And then can you talk about -- 2 more questions. The first one is can you talk about the growth trends Truweo has experienced during the pandemic?

Yes. So of course, during the pandemic, pretty much all of e-commerce has grown significantly, right? There was definitely a push there across the board, e-commerce getting a lot more adoption and just scaling much faster, right? The really exciting thing about Truweo is even previous to the pandemic giving it a further push on the growth, there was already very, very exciting growth in the product and just in general in the category. The demand for posture corrector seems to be increasing quite steadily for the last 2 years. And so of course, there were some drivers by COVID here. But from our analysis, this brand has really secured strong control, and the category on Amazon is benefiting from the overall increase in adoption of e-commerce, the increase in demand for the category itself and as I mentioned also, a little bit also from COVID itself, right?

Great. Yes. So my last question is as I looked at that main SKU, it looked like the ratings are 4.3 out of 5. It has 26,000 reviews. So obviously, it's at the top of the category. Have you ran the analysis through AIMEE and identified changes that can capture even more share of this product to improve customer satisfaction?

Yes. There's definitely -- just like every product, right, no product is perfect, and there are potentially some things that we'll look at. But overall, we're very happy with the organic performance of this product over time. As you mentioned, great ratings and a lot of ratings in terms of the numbers of ratings, right? So we're very happy with how the product has performed organically. Where we're seeing potential opportunities is also in extending the line, right? There might be other products that could be a good fit, pending us, obviously, further exploring the data, right? Remember, the data is very fluid, right? The categories are obviously constantly changing, but we will obviously keep an eye always on the data and look at the potential expansion in the category itself and other categories that are seen in the data that's related to it, right? But overall, the product has performed really well, and that's the exact strategy that we're looking to execute here on the M&A, right? There are, again, so many different brands and products out there that have historically done very well, has captured a very large market share in the category. And for us, it's about bringing in those winners into our portfolio, as we mentioned, in an accretive way, which we think is very scalable.

Our next question comes from Matt Koranda with ROTH Capital.

Just a question on the share of the category that Truweo has. Curious to get your take on what you think their actual market share in the category on Amazon is in terms of posture correction and then just the growth rate to expect on a go-forward basis with the SKUs that they have in place, just the existing SKUs without the adjacencies you mentioned.

Yes. So the market share, obviously, is very -- they are very strongly in control of the top position in the market, right? That's a fluid thing, right? It evolves every day. As you know, right, e-commerce is very good from that perspective. But what we've seen is overall that dominance has subsided for the last 12-plus months that we've looked at the product, right? And so we feel very much that -- without committing particularly to controlling market share, to a certain number, right, we believe that, that dominance will exist going forward. And it's really a function of really how much -- the constant decision of how much market share do you want to take versus how much profitability you want to drive. And that's something we want to be in control of using our algorithms, using the data, with always the idea of finding that right balance between maintaining market share but not obsessing over maintaining market share at any cost and reducing profitability. Remember, one of the things to understand is because the shelf is so infinite online, when you hold a certain amount of market share, it's about how the company -- the other products that fight you off for the market share, right, how fragmented is their control of the market share. The more it's fragmented, the more you have strength in the ability to really drive better pricing, better margins because there's really no one kind of like product that's potentially menacing you, right? So that's something we'll always keep an eye on going forward. But we're very happy with how that market share is split with the other incumbents in the category and the control that Truweo has. In terms of the growth going forward, as I mentioned, look, I mean, these products are really products that are already on the top of the category. They're doing very well. That's one of the reasons we bring them into the portfolio. We believe, based on our data, that we can maintain them for a very long time within the top of the category. And what we're going to see is really the growth of the category itself, which, based on search volume numbers, has significantly grown in the last 2 years, as well as growth of e-commerce and adoption of e-commerce, which will also drive that, right? So we're looking at healthy growth, right, going forward, and we believe that it's about maintaining it and about constantly keeping an eye on the control of the market and the inability of any other kind of incumbent to go after us. That's really what we're going to be focusing on.

Got it. And then maybe talk a little bit about the margin profile for us in terms of -- for modeling purposes. I mean obviously, we could see a relatively high EBITDA margin profile of the business, and you don't plan to take any overhead with that business. So should we factor in some margin expansion from those actions because it's an asset acquisition overall? Help us understand that on a go-forward basis in terms of modeling EBITDA margin. And then just for our purposes as well, what do gross margins look like in the business?

Sure. Fabrice, do you want to take that one?

Sure, sure. Matt, so at the gross margin level, it's a business that actually runs at approximately 70% historical gross margins, and we don't expect that to change over time. When it comes to the EBITDA margins versus the assets, so in reality, remember, businesses like this are actually running on extremely, extremely thin OpEx. It's essentially one person with a couple of consultants. So the saving there and therefore, margin expansion is actually quite minor. And on the other side, we actually always plan ourselves to actually potentially super spend in advertising or other marketing activities to potentially take more market share going forward if we can, right? So for the moment, you should not plan on any margin expansion going forward. And obviously because, if we have the choice -- considering the high level of profitability of that product, if we have room to actually gain more market share and overall generate more EBITDA from a dollar perspective by investing more on a per-unit basis in advertising, that's the choice that we would do on a SKU like this one, right?

Got it. And then just with regard to the guidance raise, it looks like, just back of the envelope, you guys are just factoring in the incremental revenue from Truweo in the $5 million raise to the guide. But help us understand, maybe just in terms of the base business, how demand has been tracking over the last couple of weeks. And any changes in terms of supply chain lead times? I know that was an issue you guys mentioned on the Q2 call. But are we feeling good about our inventory position to fulfill existing demand just in light of demand patterns over the last couple of weeks? It would be helpful to get your commentary there as well.

Yes, sure. So yes, we increased our guidance just by the amount -- the recognized amount in the year of Truweo. That's correct. The rest of the business is still going according to plan. No update. Yes, we are suffering some inventory shorts, but that was actually factored in and discussed on our last earnings call, as you know, right? No change there. And the planning on resolving those inventory shorts towards the end of the quarter and early Q4 is still on par with expectations. From a demand perspective, market is actually -- from a forecasting perspective, we are exactly on plan as we expected. So no surprise. Obviously, it's a very fluid environment, right, with the COVID situation. So we're tracking this. Obviously, even ourselves, that's a part of the business model on an hourly basis and daily basis, to actually discuss at this stage what are going to be the full trends or are there going to be changes to trends going into the winter if COVID accelerates or not and so on. It's too early. For the moment, we are very comfortable with our guidance on the organic business outside of Truweo and are making absolutely no changes to it, right?

Got it. Last one really quickly. It does look like shipping rates across the board have been increasing or at least some of the major carriers have been raising rates kind of into the holiday season just given capacity restrictions. Any adjustments that we should be making to sort of the base business margin profile as you kind of head into 3Q, 4Q and look at the kind of the high season from a holiday perspective.

So -- yes. So the answer is no. I mean if you're talking to the biggest factor, which is last mile, right, the answer is no. There's no need to make any changes, right, to the margin profile of the business. We have secured specific terms on this and guaranteed terms from UPS in our last round of RFP. So we're well suited there. So remember -- but that, I think, is already factored in your model as well as the fact that when you get into Q4, you have a higher mix of FBA versus FBM and therefore, the performance rate actually is slightly higher because of that, right? But that's part of the product mix element.

Our next question comes from Allen Klee with National Securities.

So it looks like you're buying this at a very attractive price, but you did say that you don't expect the margins to improve. So what are -- why will this be worth more to you than if it was by itself, not acquired by yourselves?

Why don't you answer, Yaniv?

Sorry, when you say -- can you explain again the question not acquired by us? Can you ask that again, sorry?

Well, how will this be -- if you -- the run rate of the company, the revenue run rate or the profitability run rate, why would it change being part of Mohawk versus if they were just doing it themselves?

Just to be clear, right, like -- so we're acquiring the assets of Truweo, right? And it's going to become -- basically, the product can become product portfolios in ours, right -- in our portfolio, adding obviously, in an accretive way, revenue and additional -- as you saw in the guidance change, right, additional -- well, sorry, as you saw on the guidance, additional revenue. But also, we expect it to add a lot to the bottom line, right? So from our perspective, when we look at these acquisitions, again, a lot of times, we're looking at companies that have done a phenomenal job of building a small but very profitable brand; being at the right place at the right time; that have executed well; we believe their product is very strongly entrenched in the categories and has a nature that's quasi-evergreen and has a very long tail of additional revenue, additional margin, right, and especially, growth in the category itself, right? The growth of the category, the growth of e-commerce itself will drive further growth of this product. But when you look at this type of acquisitions, it's -- a lot of the time because -- what our data is showing us is that it's very quasi-impossible for anyone to come in and try to take away market share from this incumbent because it's so well entrenched in that we don't expect that in the category, there will be any kind of like significant feature or technology changes that would make anyone coming in be able to take that market share away from them, right? So for us, when we look at the data, when the -- when we see a category like that where we don't believe that we can go in an efficient way, bring in a new product to take significant market share, the question then becomes does it make sense to acquire these companies, right? In a lot of cases, as I mentioned earlier also in the discussion, right, there are so many of these third-party sellers that have built great little businesses that are very profitable and that have entrenched themselves in the category so well that it just makes more sense -- because of the multiples at which they're selling, it's the make versus buy decision, and in this case, the buy decision was, in our opinion, a great one, right? And another -- and again, we believe that there is a lot more of these opportunities out there and that it's a very scalable additional engine of growth for us. But to be clear, right, the most important part here is, obviously, we're not taking the extra fixed costs that came with managing this product. We're not adding any fixed costs so there's a little bit of improvement there. But overall, we're going to invest in this product and continue to run it going forward, and that's really where the value comes from, right?

And Allen, I mean, to complement what Yaniv was saying. I think that our market cap Friday night was 17x 2021 EBITDA modeled, right, or analyst consensus. When you're buying something that is dominant and a recurring revenue and EBITDA generator at 2.5, by definition, it's accretive on a per share basis, right? And that's where it's actually really interesting if you actually -- can actually bring in those assets on an existing platform and benefit from the operating leverage, which we do. Makes sense?