Aterian, Inc.

Good afternoon and welcome to the Ethereum Inc. 2022 4th Quarter and Full Year Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal Conference Specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touch-tone phone. To withdraw from the question queue, please press star then 2. Please note this event is being recorded. I'd like to turn the conference over to Ilya Grasovsky, Vice President of Investor Relations and Corporate Development. Please go ahead.

Thank you for joining us today to discuss Atarian's fourth quarter and full year 2022 earnings results. On today's call are Yaniv Tsarig, 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 Atarian's website, at eterion.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 Eterion's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Eterion'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.

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 Ethereum 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 Ethereum and share why we believe in our vision for the consumer product platform of the future. For those who are newer to the story, here's what we need to know about our company. Ethereum is part of a new breed of technology-enabled consumer product companies. We focus on building, acquiring, and partnering with e-commerce brands online. Ethereum 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 Amy. Amy enables our team to manage our business more efficiently by injecting technology into processes that would otherwise have to be executed manually and would require hiring an unscalable and unsustainable workforce. Through its ability to analyze vast amounts of data and automate daily recurring tasks, Amy allows our team to find new product opportunities we can launch under our brand, manage these products at scale effectively across various channels, automate certain marketing and fulfillment tasks, and much more. Our goal in the long term is to become one of the most efficient consumer companies in the world, expanding our food chain 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 2020-23. As we shared previously, our goal was first and foremost to discount and sell through high-cost inventory. As a reminder, due to the shipping container costs skyrocketing in 2021 and 2022, consumer brands across our industry were forced to ship goods at an average cost of $17K 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 to 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 put us on track to get back the stronger contribution margin starting in Q1 and Q2 of this year and 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 cycled through. This cash generation improves our balance sheet heading into 23. Our entire team feels now that Ethereum 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 effort, we're laser-focused on achieving adjusted EBITDA profitability in the second half 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 micro-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 turning full-year profitable in 2024. We're also 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've made great progress with our European expansion, and our goal is to be as optimally positioned with our existing portfolio in Europe in 2024. Finally, I want to speak briefly about the long-term prospects for Ethereum. 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 have focused on building a company that can manage and scale brands and products with a marketplace-first doctrine. According to research by Essential, third-party sales through online marketplaces will account for 59% of all global commerce by 2027. We also realized at inception that marketplaces will allow retailers to delegate a lot of their work to the brands that use them, which makes it difficult for those brands to scale. Just a 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 market list generate approximately $390 billion of GMV. Of the 1 million-plus active sellers out there, Industry estimates point to massive fragmentation with only 60,000 sellers passing the $1 million a year revenue threshold and approximately 50 businesses only crossing the $100 million mark. So marketplaces of the future, and they've removed the barrier of entry that exists 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 believed since inception that the only way to scale a consumer company on marketplaces was to inject technology into its operations to automate the daily tasks 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. Ethereum is already leveraging large language models such as ChatGPT to help synthesize sentiment in reviews, and we're looking to extend our use of AI rapidly to further improve our efficiency. Ethereum is a consumer product company, not an AI 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 two types of businesses forming. Those that build 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. Ethereum does not only wish to be part of the first group. It's already one 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 Arti.