Good afternoon, and welcome to the Aterian Inc. 2022 fourth 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 zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one your touch tone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I'd now like to turn the conference over to Ilya Grozovsky, Vice President of Investor Relations & Corporate Development. Please go ahead.
Thank you for joining us today to discuss Aterian's fourth quarter and full-year 2022 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.
Thank you, Ilya, and thanks everyone on the call. Today I'm gonna go over the following topics. I'll start with a quick introduction of Aterian for those who are newer to our story. I'll 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 of the future. For those who are newer to the story, here's what you 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 would 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 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 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 to 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 $17,000 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, 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. 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, 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 of an inventory liquidation efforts do not reflect a weak portfolio. In fact, some of our best products were part of the strategic effort, 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. The risky inventory has improved by $3 million, and we expect additional normalization to happen in Q1 with another $3 million-$4 million of inventory cycled through. This cash generation improved our balance sheet heading into 2023.
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. 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 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 turning full-year profitable in 2024. We're also finally going back to launch new products. 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. Finally, 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 have focused on building a company that can manage and scale brands and products with a marketplace first doctrine.
According to research bioessential, 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 marketplace generate approximately $390 billion of GMV. Of the one 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.
Marketplaces are 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. 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.
Aterian 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. Aterian is a consumer product company, not an AI company. All consumer product companies out there, 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.
Aterian 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 Arty.
Thank you, Yaniv, and good day, everyone. Here are the financial performance details of our fourth quarter. For the fourth quarter of 2022, net revenue declined 13.3% to $54.9 million from $63.3 million in the year-ago quarter, primarily due to reduced consumer demand, offset by our 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 acquisition, 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 normalize 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 owned 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 one of our other leading brands, and we are 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: $40.8 million in sustain, $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 sustain, $2.6 million in launch, and $8 million in liquidate and inventory normalization. Our sustain decrease of $12 million relates to revenue shifting into liquidation phase and general consumer soft. Our liquidation increased by $5 million from our strategic initiative to sell off higher priced inventory and normalize inventory levels. Finally, on revenue, our launch revenue declined as we previously disclosed our pausing of launching new products in 2022. The current launch revenue is primarily attributed to new variations of existing products in the quarter. We are currently planning new product introductions for 2023, 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 2022, primarily attributed to our strategic initiative to sell off higher priced inventory and normalized inventory levels. Our overall Q4 2022 contribution margin, as defined in our earnings release, was -11.5%, which decreased compared to the prior year CM of 7.9%, which is directly attributed to higher liquidation revenue from our strategic initiative to sell a higher price inventory, normalize inventory level. Our Q4 2022 saw our sustained product contribution margin decreased to 8.3% versus 16.1% in Q4 2021, as we also reduced pricing to normalize inventory levels and other listing management initiative.
We do expect our sustained contribution margin to improve as we progress in 2023. Looking deeper into contribution margin for Q4 2022, our variable sales and distribution expenses as a percentage of net 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 barter credits of $1.6 million, $2.7 million in non-cash stock compensation, and a non-cash loss on goodwill of $0.5 million.
Our net loss for the quarter of $20.3 million includes a reserve for barter credits of $1.6 million, $2.7 million non-cash stock compensation, a non-cash 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 2022, was a loss of $16.2 million, compared to a loss of $3 million in the fourth quarter of 2021. Our strategic decision of liquidating higher cost inventory and normalizing our inventory levels impacted our Adjusted EBITDA in the period. 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 2023 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 was primarily driven by the previously reported $20 million capital raise 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 2023.
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, 2021. Our cash position has improved from capital raise and as we continue to normalize inventory. This reduced balance also resulted in lower interest expense. We look at Q1 2023, 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 2023. For the first quarter of 2023, we expect adjusted EBITDA loss to be in the range of $4.8 million to $5.8 million, anticipating continued impact of inventory liquidations.
This Q1 2023 adjusted EBITDA guidance on average is a 70% improvement from our Q4 2022 reported adjusted EBITDA and on average, a 40% improvement from Q3 2022 adjusted EBITDA as we are beginning to see the results of our strategic efforts of liquidating high cost inventory and normalizing our inventory levels. In closing, 2022 was a challenging year, but we have persevered through global supply chain disruptions in a challenging macroeconomic condition. We have significantly reduced our inventory by moving on high cost inventory and normalizing our inventory levels, which we believe puts us in a positive position to be adjusted EBITDA profitable in the second half of 2023. We've also strengthened our balance sheet in 2022, which gives us flexibility to navigate the current macroeconomic environment as it continues to unfold and allowing us to be laser focused on driving our core business.
We are excited and proud of the company we are building. Aterian continues to have very strong brands and many of our products continue to be some of the best sellers on Amazon. We continue to have industry leading technology and logistics and most importantly, our dedicated and hardworking 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.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Alex Fuhrman with Craig-Hallum Capital Group. You may now go ahead.
Great, guys. Thank you for taking my question and, you know, congratulations on, you know, what looks like a strong success clearing some of the inventory that you'd been hoping to. You know, 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 months of 2023 under your belt. You know, where you're seeing the most demand, is that informing where you're looking for M&A or are you really looking at all different categories for that?
Hey, hey, Alex. Yaniv here. I'll take that question. Good question. You know, overall as we mentioned, you know, overall consumer demand is a little softer, right? Because of all the efforts we've done on liquidation, we've gotten more success across pretty much the board when it comes to the categories. As typical, you know, with the seasonality of Q4 versus Q1, Q2, Q3, not a big difference there. I'd say to the second part of your question, you know, where we're looking for when it comes to acquisitions, I'd say that in general we probably wanna 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 two years.
We're definitely tending to set our eyes 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. Of course we're looking and leaving our eyes open to any of the opportunities. Again, if possible, the main goal potentially with the future M&A would be to, as much as possible, diversify from a supply chain perspective.
Okay. That's, that's really helpful. Thank you for that. Can you give us a little bit more color on, you know, 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, You know, I was expecting at least a much smaller than expected loss. You know, how do you walk us from that in Q1 to being positive in the second half of the year? Is it primarily gross margin as you start to sell through inventory that, you know, wasn't brought in at insane container rates?
Yeah. I'll let, I'll let Arty, take that. Go ahead, Arty.
Yep. Thank you, Yaniv. No, Alex, I think you nailed it right at the end. I think, you know, as we said previously, it's taken us a couple quarters here to get rid of this really expensive inventory that we brought in strategically back, you know, pre, you know, late 2021. We had to take the impact unfortunately, and pay those container rates. As you move that through, you're gonna get back to a place where you can get back to target type CMs, right? With that, you should drive into profitability.
Obviously, you know, consumer spend's always a question mark, but we do feel very confident that I think once we move through this more expensive inventory and the inventory that we're bringing in that's starting to land in April and May for our Q3 and even parts of our Q2, seasonal sales, we'll be at better margins. That's why we can sort of feel pretty confident in what we're saying.
Okay, that's really helpful. Thank you both.
Our next question will come from Brian Kinstlinger with Alliance Global Partners. You may now go ahead.
Great. Thanks so much for taking my questions. 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 for the full-year, rough numbers. I know you don't know the exact number. How is the weak consumer spending environment changing the pace of SKU launches?
Hey, Brian. Just to clarify, you know, we're starting to launch products, but, you know, as you know, right, that process takes time. 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.
As you remember, right, the main reason we paused launching products was because of the unreliability of supply chains, both in terms of goods 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 know, 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. We, you know, essentially paused that for quite a while now.
Now that we're finally seeing a stability in the supply chain, both in terms of the price of shipping but also the reliability, we're getting confident to go back again and launch these products. 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.
Okay. Were there any in the first, in the fourth quarter and expected in the first quarter, or are they all in process right now?
You know, if, you know, there were any in the fourth quarter, they would have been pro-products that would be what we call variations, which means we kind of like think of them as another version of an existing product. That's where we would've felt more comfortable. I don't. It's not as material as when we typically do the launches that you're, you know, thinking about. Again, you know, I think that the answer is that, you know, with the efforts that we're putting on now, we'll be able to at least in the next few months, give a little more clarity on the timeline that we're seeing around those launches happening.
Right. As I've read, more so in the private market, I think there's some undercapitalized fulfilled by Amazon companies that are struggling. Are you getting to see any fire sales, how aggressive can you expect to be this year in 2023 on M&A?
Yeah, that's a great question, and you're absolutely right there. There is a lot of companies out there that are struggling, going through a lot of the challenges we went through in the last year and a half, I'd say, right? Again, some of them are really in very difficult situations. We're very active, talking to a lot of these competitors, exploring different opportunities, spending a lot of time on this. 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're overall, you know, quite optimistic that we'll be able to find some opportunities with the stressed assets that are actually quite good, right?
I mean, I think a lot of the things we're seeing, you know, obviously it goes through the spectrum, right? There's a lot of really good assets out there that were basically dealing with the same situation where, you know, the demand of COVID and on the other side, the pressure of supply chains caused the perfect storm that put these great assets in a challenging position. We're, as I mentioned, quite active talking to a lot of these companies and looking for these opportunities. You know, we're hoping to have an exciting thing to share with everyone, but it's still work in progress at this point.
A quick thank you. 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 and the different quarters?
Yeah. I think, you know, I think the big difference from when we first IPO-ed and to today, right, was at the time, I think Q2 and Q3 were kind of like the two strongest quarters, and Q1 and Q4 were quite lag behind. I think, you know, given the profile of the acquisitions we've done and some changes to our portfolio, you know, 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, you know, it's really again, just the composition of the portfolio that we have.
You're still in a position where Q2 and Q3 are the strongest, Q4 right behind there, and then Q1 still behind the three of them, right? When you compare to back then when we IPO-ed.
Great. Thank you so much.
Brian, thank you.
Our next question will come from Marvin Fong with BTIG. You may now go ahead.
Great. Thanks for taking my questions. Good evening. I guess my first question, just on the first quarter revenue outlook, you know, 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? Just wanted to understand that dynamic a little bit better.
Yeah. Maybe I'll start and see if Arty wants to add anything. Just in general, Marvin, you know, one of the, I think maybe benefits of how we run our business and the, you know, the different brands that we have across different categories is that as opposed to probably, you know, other companies who are maybe just active in one category, we have a little bit more of a wider visibility on demand. You know, 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, you know, the overall economic, sort of, outlook around us.
Again, what's really good that we're seeing so far when it comes to our business is 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 that just the soft demand across the board, right? Arty, I don't know if you wanna add anything, but that's kind of like overall how we're looking at this.
Yeah, no, and that's right, Yaniv. I think that's why we're seeing that, and I still think, you know, we still feel very confident on the year. I think we've pointed in the past about, you know, being overall kind of flattish on the revenue side. I just think a little bit of 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 stronger 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?
You know, it's a good testament of how we've really, you know, focused on clearing out the inventory to really set us up for a good 2023. I think that's the other part of it. Even though the revenue is low, you can sort of see already the improvement based off the guide of the adjusted EBITDA on the profitability of the quarter.
Mm-hmm. Yeah, I mean, you guys kind of basically touched on my next question, which was sort of, you know, you reiterating reaching EBITDA breakeven in the second half of the year. You know, do you guys feel good in the sense that, you know, the consumer remains weak or even gets a little bit weaker, that you've stress tested it and you still feel good that you can hit that even if the consumer is softer?
I mean, I think, yes, I think you're right? Like, first of all, the categories... Consumer softness across the board, right? I think also our experience with some of the categories and the positioning that we have on those in Q3 is giving us a lot of comfort around that. 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 base is gonna create that margin expansion.
you know, our logistics team has done a great job at 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. Like there was a lot of challenges, again, as I mentioned in the last year and a half, right. Not just about the price of shipping, but also the ability to even get your goods on a ship. Now we feel quite confident in our projections given the fact that we were able to secure 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, give us that comfort with our prediction.
Gotcha. I guess my last question may be a more fun topic is, you mentioned leveraging ChatGPT and OpenAI and that sort of thing. I was just curious, you know, I think you guys had always employed some form of AI, you know, looking at reviews and helping guide your business decisions and product decisions. Could you just kind of expand on, you know, 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 as efficiently in the past?
Yeah, absolutely. You know, we use machine learning and automation across many different aspects of our business. I think, you know, if you really want to bucket them into two kind of big areas is one is understanding the consumer, their sentiment, what they think about other products, what they think about our products. The other side of it is just managing the complex quantitative day-to-day effort of managing the products, right? Which includes, you know, for example, forecasting, which is where we have developed, you know, our own machine learning-based forecast, and things like media buying and pricing that use automation as well, right? When it comes to what you mentioned with ChatGPT and large language model, I mean, I think the excitement obviously for us is huge.
As I mentioned in my comments before, we already started looking at, I mean, not 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. You know, Marv, you know, the most important thing that I think a lot of people that are not necessarily, you know, in the weeds on AI don't realize is that the hardest thing about AI is actually having good data. When I say that, what I mean is a lot of organizations, except especially in the consumer product industry that is not necessarily as tech-driven, right?
Are 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? That's something that really gives us an advantage, right? Because we're a consumer company, right? We're a consumer company that uses a lot of technology and thinks like a technology company. We have put ourselves in a position through the years of effort that we put to where, that we are set up to use AI across the board in many different ways. 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.
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 gonna be the ones benefiting from it, right? 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 overlay these advances of technology and get even more efficiency across many different functions, right? 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 seeing that future and preparing for it and, you know, not waiting for it to happen, actually putting it to work with our own hands, right?
Really excited about all that stuff and what it could do for us in the future.
That sounds great. Thanks a lot, Yaniv and Arty.
Thank you.
Thanks, Marvin.
Again, if you have a question, please press star then one. Our next question will come from Matt Koranda with Roth MKM. You may now go ahead.
Hey, guys. It's Mike Zabran on for Matt. 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? To what extent is pulling back on that heavy discounting factored into the second half EBITDA profitability expectation?
Arty, would you take that?
Yeah, no, I think, again, if you follow discounting and pricing on Amazon, it's a bit dynamic, right? The, the point here was if we can clear out all this expensive inventory and normalize our inventory levels, we can bring back the product at normal costing because now we're back to, like, pre-pandemic pricing from a shipping container perspective. As such, you know, the view we've been saying is that as we enter the second half of the year, all that should be normalized. We should be back to more normalized pricing along with normalized costing to get to a normalized contribution margin. We're starting to see, you know, a good chunk of that in Q3 and into Q4. That's why we're really pointing towards that second half point.
You know, we could get that a little bit earlier into Q2. We're really not. We can't really say on that. That's why we're really focused on the second half right now.
You know, 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?
Yeah. Yes. I mean, you're always doing some form of discounting and price adjustments just to stay at the competitive
Right
landscape, depending on the season. That's normal. Yeah, you're right. We should see more normal pricing type positions as we enter the second half for sure.
Got it. That makes sense. Just one more from me. How are we circumventing the Amazon FBA fees? Understanding you guys have, you know, 3PL sites and FBA at your disposal, but maybe just speak to how we're optimizing between using Amazon versus the 3PL sites to get products to customers.
That's actually a great question. Really the answer is, as you know, Matt, like, we put a lot of effort in building, you know, a network of 3PLs that's connected to our AIMEE platform, which, as you remember, we use to do our own fulfillment for the larger items. Also for the smaller items, which typically gets fulfilled through FBA, we store those items in our own 3PL before we send them to FBA to go to getting it fulfilled, right? The answer to your question relies on really how can we optimize the 3PL distribution of the products that go to FBA to reduce the cost of FBA. Meaning, you know, if you have, Again, we have, I think, at this point over 19 3PLs.
Might be, maybe one less 'cause we're optimizing all the time. You know, 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 the 3PL. The goal there for that inventory is to be as close as possible to the FBA warehouses to which we ship them so that we can, A, have less inventory in FBA, and B, spend less money sending it to FBA, which then offsets a little bit some of those kind of higher FBA fees that we're seeing recently, right? Again, our network of warehouses doesn't only give us an advantage when it comes to oversized items, because our fulfillment there is quite competitive with FBA.
Also for the smaller items where the fulfillment will happen through FBA, the distribution to be as close as possible to the FBA centers helps a lot.
That's helpful. That's all for me. Thanks, guys.
Thank you.
It appears there are no further questions. This concludes our question and answer session. I would like to turn the conference back over to Ilya Grozovsky for any closing remarks.
Thanks. As part of our shareholder perks program, which as a reminder investors can sign up for at aterian.io/perks, participants have the ability to ask management questions on our earnings calls. I wanna thank all of the shareholder perks participants for their loyalty, their participation in the program, and for their questions. I've picked a few of the most popular questions this quarter and that they have sent in. 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?
Yeah. Thanks, Ilya. Good seeing you here. Yeah, 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. In general, you know, 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. Really, it's about maximizing where 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, you know, the supply chain issues have cleared, we're focused on making sure that we can maximize the amount of our existing portfolio products that are not there 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. There's no current plan to do that at this point. There's enough work with what we're doing.
Great. Thanks. Next question was, when do you expect to clear inventory purchased during COVID and start benefiting from the lower shipping costs?
As already mentioned, you know, as well, right, we made great progress on reducing the inventory. I mean, it was almost approximately $73 million back in June. We're now down to $43 million. You know, we still have a bit of inventory on the balance sheet that remains longer, and we're gonna clear it out through the end of the second quarter at most. You know, 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.
Great. Okay, the last question was, what was the health and wellness brand that you acquired in October of 2022, and how will that come to market?
Yeah. There was a lot of, you know, a lot of interest in this and, you know, here's what we wanna share, right? We bought a small competitor to Squatty Potty. It was a competitor that, you know, had a product specifically that was competing against that brand and was actually undercutting our price and hurting our sales at the Squatty Potty 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. We did it really just because we wanted to control that listing and stop the undercutting Squatty Potty, which is a long-term investment, right?
If that competitor had gone through the challenges that they had and continued to invest in their business, they could have further chipped at our Squatty Potty brand. We just took advantage of that and brought that product in so that they're not a long-term issue for us, right?
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 12th through 14th in Laguna Niguel, California. We look forward to speaking with you on future calls. This ends our call, and you may now disconnect. Thank you.