LifeVantage Corporation
Q2 2018 Earnings Call Transcript

Published: 16 Aug 2018

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to today’s conference call to discuss LifeVantage’s Fourth Quarter and Full Year Fiscal 2018 Financial Results. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up. Hosting today’s conference will be Scott Van Winkle with ICR. As a reminder, today’s conference is being recorded. And now, I would like to turn the conference over to Mr. Van Winkle. Please go ahead, sir.

[Scott Van Winkle:]

Great. Thank you and good afternoon ladies and gentlemen and welcome to LifeVantage Corporation’s conference call to discuss results for the fourth quarter and full year fiscal 2018. On the call today from LifeVantage with prepared remarks are Darren Jensen, Chief Executive Officer; and Steve Fife, Chief Financial Officer. By now, everyone should have access to the earnings release which went out this afternoon at approximately 4.05 p.m. Eastern Time. If you have not received the release, it’s available on the Investor Relations portion of LifeVantage’s website at www.lifevantage.com. The call is being webcast and a replay will be available on the company’s website as well. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These statements are based upon current expectations of the company’s management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of LifeVantage’s most recently filed Forms 10-Q and 10-K. Please note that during today’s call, we will discuss non-GAAP financial measures, including results on an adjusted basis. Management believes these financial measures can facilitate a more complete analysis and greater transparency into LifeVantage’s ongoing results of operations, particularly when comparing underlying operating results from period-to-period. We have included a reconciliation of these non-GAAP measures with today’s release. This call also contains time-sensitive information that is accurate only as of the date of this live broadcast, August 15, 2018. LifeVantage assumes no obligation to update any forward-looking projections that maybe made in today’s release or call. Now, I will turn the call over to the company’s CEO, Darren Jensen.

[Darren Jensen:]

Thank you, Scott and good afternoon everyone. I am pleased to join you today to discuss our fourth quarter results. We ended the fiscal year on a strong note with accelerated sales growth, improved profits and most importantly, what I believe is sustainable momentum. The fourth quarter was our strongest quarter of the year in terms of sales, earnings, active member count, and revenue growth. We also increased retention rates, average order size and subscription rates. We had a very strong response to our most recent digital rollout and there is still more to come. Everyone at LifeVantage, were part of last year to implement the eight key initiatives we believe were driving and transforming our business. I would like to thank everyone in the LifeVantage family who has worked diligently towards the transformation we have undertaken and contributed to our improved financial performance. With that said, we are not done yet. We have a plan in place for fiscal 2018 to further build upon the recent momentum doubling down on key initiatives and further strengthening our foundation. Before I discuss our goals for 2019, let me recap what we have accomplished thus far which is evident in our fourth quarter results. During the quarter, we generated $54 million of revenue, up 6.7% year-over-year and up 6.9% sequentially. We produced good growth domestically and across our international markets. We reported $0.20 of adjusted EPS in the fourth quarter and exceeded the high-end of our full year earnings guidance range. Recall that our key initiatives in 2018 were focused on increasing average order size geographical expansion and distributor and customer acquisitions. During the fourth quarter, our average order size increased 11.9% from the prior year driven by the success of our stacking initiative. Stacks represented 17% of sales during the fourth quarter, up from 16% in the third quarter and above our initial year end target of 12%. To-date, we have rolled out Vitality Stack and Beauty Stack and we will continue to rollout these stacks to additional international markets. We also have more innovation in the pipeline to expand on our stacking success and to further biohacking culture we have developed at LifeVantage. Moving to geographical expansion, we launched in Germany at the beginning of the year and have executed our Greater China strategy over the last six months. In February, we entered Mainland China with an innovated new business model utilizing e-commerce and social marketers. And at the end of June, we opened Taiwan. We saw a tremendous interest in our Taiwan launch and our existing business in Hong Kong allows us to hit the ground running. We are encouraged by the performance to-date across Greater China and looks to build the long-term opportunity across this key region. Many of our 2018 initiatives were focused on distributor and customer acquisition which along with improved retention rate led to an increase in our total active members. Total active members which include both distributors and customers increased 3.5% to 179,000 at the end of the fourth quarter compared to 173,000 at the end of the third quarter. Distributor retention measured by first year activity increased to 48.8% at the end of the fourth quarter, up from 41.8% a year ago and customer retention increased to 50.9%, up from 45.6%. In addition, approximately 80% of our total active members are on a monthly subscription program. With higher retention rates, improved access to new customers due the recent lead launch – through the recent launch of our global customer acquisition and auto assign customer programs and the success of Red Carpet, we believe we have the foundation in place to improve growth rate of our active members. Red Carpet has been a significant contributor to our recent growth, coupled with our pace at our program which is focused on distributor leadership advancement. These initiatives have improved retention rates and driven higher total active member counts. Red Carpet is designed to attract new distributor leadership by identifying experienced leaders who are in transition and attract them to LifeVantage. The pace that our program is designed to encourage all of our distributors to engage quickly into the business and advance. As we look to 2019, our key initiatives focused on continuing our improved growth trajectory. Among these initiatives we will be doubling down on our Red Carpet program, international expansion and product strategies including our plan to launch an additional product category at our global convention in October. We also plan to add next level functionality to the LifeVantage and digital program to include machine learning that is designed to turn a distributor smartphone into a powerful productivity tool. We look to strengthen current markets and to continue to promote our biohacking culture. At the corporate level building us on the success of our recent ERP upgrades we are evaluating our key enterprise systems and developing an IT roadmap to enhance distributor facing technologies. Our goals for 2019 are to drive our global business with the launch of new products, expanded availability of our existing products internationally and new market development. We will focus on continued growth in total active member count, retention rates and average order size while leveraging Red Carpet and Pacesetter to enhance our distributor leadership supporting our global growth opportunities. We will continue the roll out of our digital initiative, layering in new – powerful new tools with the goal of improving distributor productivity and success. We believe that these are the key metrics to measure our performance and we look forward to updating you on our progress. With that, let me turn it over to Steve to run through the financial results. Steve?

[Steve Fife:]

Thank you, Darren and good afternoon everyone. I am pleased to report our fourth quarter results. We generated another quarter of an improved revenue growth and good margin performance that is driving stronger earnings, EBITDA and cash flow. Let me run through results for you. I am pleased to note that I will be addressing, discussing our non-GAAP adjusted results. You can refer to the GAAP to non-GAAP reconciliation in today’s press release for additional detail. Fourth quarter revenue was $54 million representing a 6.7% increase year-over-year and a 6.9% sequential increase when compared to the third quarter of 2018. Revenue in the Americas increased 4.7% to $40.5 million and revenue in Asia-Pacific and Europe increased 13.3% to $13.5 million, all year-over-year. Both regions also reported growth on a sequential basis with revenue in the Americas increasing 6.6% and revenue in Asia-Pacific and Europe increased 7.8%. Adjusted gross margin was 83.5%, which includes the benefit of a change in estimated accrued import liabilities. This compares to 82.4% for the fourth quarter of fiscal 2017 where there no adjustments to gross margin. The increase was driven by reduced cost associated with inventory obsolescence, the benefit of a price increase and changes in product and market mix. Commissions and incentive expenses as a percent of sales increased 274 basis points to 50.1% compared to 47.4% in the prior year period. Commission and incentive expense was higher this quarter due to the success of our Red Carpet program and Pacesetter promotion during the fourth quarter as well as the typical variation that occur based on revenue mix each period. Our target for commissions and incentive remains 48% which can fluctuate based on the timing of promotion and incentive program. Adjusted SG&A as a percent of sales were 26.6% compared to adjusted SG&A as a percent of sales of 31.2% the year ago. In addition to sales leverage on our relatively fixed SG&A, we did not host any event during the fourth quarter of this year compared to holding an event in the prior year period. I will touch on this in a moment, but please note that given an event calendar shift we are hosting three events during the fiscal first quarter of 2019, which is out of the norm. As a result, we expect to have an elevated level of SG&A that will reduce earnings in the upcoming quarter. Adjusted operating income was $3.7 million compared to $2 million in the prior year period. Adjusted EBITDA for the fourth quarter was $5.2 million compared to $3.3 million in the prior year period. Adjusted net income was $2.8 million or $0.20 per fully diluted share which is up from $0.04 in the prior year period. Adjusted net income benefited from a lower tax rate during the quarter reflecting the favorable effects of an amended tax filing that led to a refund of approximately $500,000 for the prior tax year. The company anticipates ongoing tax rate to be approximately 26% subject to other discrete and timing related variations. As I noted, all of the adjustments from GAAP to non-GAAP are spelled out in our earnings press release. Now, turning to the balance sheet, we ended the fourth quarter of fiscal 2018 in a strong financial position with $16.7 million of cash and $5.4 million of debt, which represents a $7.2 million increase in net cash from a year ago and a $3.3 million sequential increase in net cash. We continue to drive higher inventory turns with inventory decreasing $2.2 million from the end of the third quarter. Inventory turns on an annualized basis were 2.6 times in the fourth quarter, up from 2 times a year ago. Our long-term goal for inventory turns is approximately 3. During the fourth quarter, we generated $5.5 million of cash from operations, up from $2.9 million in the prior year period. For the full year fiscal 2018, we generated $13.3 million of cash from operations, up from $6.6 million in fiscal 2017. For fiscal 2018 we invested $4.6 million in capital expenditures, repurchased $1.5 million of common shares under our $5 million share repurchase program and paid down $2 million on our term loan. We anticipate our 2019 capital expenditures to return to historic levels in the $1 million to $1.5 million range. Turning to guidance, we expect to generate fiscal 2019 revenue in the range of $210 million to $220 million, which compares to the $203.2 million of revenue we reported in fiscal 2018. We anticipate diluted earnings per share in the range of $0.54 to $0.58. For the first quarter of fiscal 2019, let me reiterate that we expect to have an elevated level of SG&A as we are hosting three major events during the quarter. As such we would expect first quarter EPS to be well below the earnings level of the last few quarters. The first quarter is not expected to be an indicator of our quarterly earnings trend for the remainder of fiscal 2019. We do not expect to provide quarterly outlooks in the future, but want to highlight the abnormal timing of events in the upcoming quarter. Now, let me turn the call back to the operator to facilitate some questions. Operator?

[Operator:]

[Operator Instructions] And we will take our first question from Mr. Steven Martin with Slater Capital.

[Steven Martin:]

Hi guys. Congratulations on a great fourth quarter and hopefully a start to the New Year.

[Darren Jensen:]

Hi Steve.

[Steven Martin:]

Your revenue guidance given your current quarter it seems a little conservative, is there something about the next couple of quarters and sales that you need to disclose or talk to us about and related to that can you talk about China and how it’s progressing?

[Steve Fife:]

Yes. Let me take the guidance question fist. Again, so we are happy with how fourth quarter ended for sure and historically the fourth quarter is a seasonally strong quarter for us. We – as we looked at guidance, we look at the trends that we are on. We looked at historically our record highs for the company is roughly $214 million and so the guidance that we have provided is the mid-point of our guidance is above our record for the company. And we are trying to set some realistic expectations here coming out of the beginning of the year. We hope to be able to provide guidance during the year with our increases, but we also want to this level set and make sure that we don’t get carried away with ourselves here at the beginning of the year.

[Darren Jensen:]

Steve, this is Darren and on to your second question doing with China. I think you guys said on previous calls that Mainland China is a brand new model for us and we are about five months into it. And it’s really a slower build until we get the new model build in and we attract the right mix of social marketers. We are very excited about finishing the rollout of our Greater China launch which includes Taiwan. And when we look at Greater China at Hong Kong, Taiwan and Mainland and we launched Taiwan in late June and this remark it’s really worked together synergistically. And from what we are seeing the initial response is coming out of Taiwan, I have folks that by the end of fiscal ‘19 that, that market specifically will be tracking at probably our third largest market. So as a region, we are seeing good movement, but we are still trying to dial in that Mainland China piece right now.

[Steven Martin:]

As a follow-up on the first quarter you are having three events, does that mean revenues will be skewed up and expenses likewise?

[Steve Fife:]

Yes. I mean, we do generate revenue from our events. I would say offsetting that is that our first quarter is also a seasonally low quarter for us. So we have got benefit from the events to offset a little bit by seasonality and expenses will fairly be up because of the events.

[Darren Jensen:]

Also on that on our Japan events, it was also during the middle of a national disaster with the heavy rainstorms that they were having. So, that did affect the tender below 50.

[Steven Martin:]

Okay. Now if you have three in the first quarter, is there a flip comparison in the second quarter?

[Darren Jensen:]

What comparisons are – well, in the second quarter, we actually will be having our global convention. Our convention cycle right now we are on a 18-month cycle. So, during fiscal ‘18 we did not have a global convention, we had 3 Elite Academy, but in fiscal ‘19 we have added – we will have a global convention which has a higher cost to us and also higher revenue typically and also a couple of other events during fiscal ‘19 that were not held in fiscal ‘18.

[Steven Martin:]

Okay. You don’t specifically how many shares you bought back or if you bought back shares, do you think possibly you could include that in the press release going forward?

[Darren Jensen:]

Yes. So we purchased just over our right around $1 million of shares during the quarter, $1.5 million for the year. And we have disclosed that in our 10-K, I think it was about 300,000 shares for the year.

[Steven Martin:]

Okay. And now that you have had some more timing you know why I asked this question on a regular basis, what do you think given your guidance for the year, what do you think your target level inventory would be?

[Darren Jensen:]

Yes. We have got some new product launches. I mentioned that our target for inventory turns is 3, which takes us back several years to where we were kind of rocking and rolling. We have got some headwinds to hit that number, because we are launching some new products during the year and we are also expanding our current product line geographically, but we fully expect that by the end of the year we will be tracking close to that 3x turn.

[Steven Martin:]

Okay, thanks a lot.

[Darren Jensen:]

Alright. Thanks, Steve.

[Operator:]

Thank you. We will now take our next question from Jim Gallagher, Private Investor.

[Jim Gallagher:]

Good quarter. Thank you. My question in regards, if we see anything on the horizon that is going to help people understand what we are doing and that our products are different and so we are educating people. I mean, I don’t see any other products out there, Nerve 2? I don’t see another Jan [indiscernible] type thing. Is there anything that’s going to help us with the general public recognizing the benefit of our products?

[Darren Jensen:]

Jim, this is Darren. Let me answer that for you. Over the last, I probably say 5 months or 6 months we have been working with our distributor leadership councils. And in looking for ways to better tell the story in quick efficient way, much of our business now and the way that our distributors are prospecting is through social media is in the traction marketing through digital forms. And so they have been asking for an easy way to prospect and to explain about not just about Nerve 2 technology, but all of our technology. And I think just recently one of our major events in Anaheim, I don’t know if it was a month ago or so, we released a brand new video and animated video that we have worked with in conjunction with the field and so far and at least a lot of the test marketing we have had and the initial response from that has been very positive. And we have seen some good results with it. So, when you are asking before, we already released that as well as the continued rollout of our digital program that also offers additional tools for people to prospect and to communicate with people, that’s where we are at.

[Jim Gallagher:]

Okay. One last question is what is the success then on the new customers we are getting through the conversion of the RSL type of call-ins?

[Darren Jensen:]

Well, it’s been very good. As a matter of fact the success is being great. The main focus on that was not necessarily the customers per se, it was the directing of where those customers go and that they are sent to newer people in our business that are actively engaged and are growing their business, because we know that through doing statistical analysis of our distributor force that if somebody can get a customer early on in their business the retention rate and the life time value of that distributor shift as well as their potential to rank events decreases tremendously. And so that’s where this program becomes still effective at bringing in new customers and then as we re-route those to new emerging distributors and leaders within the field that has been very successful for us.

[Jim Gallagher:]

Thank you. I look forward to being there in Salt Lake to seeing the rollout of the new product.

[Darren Jensen:]

Thanks Jim.

[Operator:]

[Operator Instructions] And we will take a follow-up from Steven Martin with Slater Capital.

[Steven Martin:]

Yes. Guys, with respect to China and the methodology we are using for product distribution, how will that affect your active independent distributor count and your active customer count since you don’t really have distributors there?

[Darren Jensen:]

Well, Steve, this is Darren. Initially they would be included in our general usage numbers, active consumer numbers and in time as that area becomes more material we will break those out and give separate numbers.

[Steven Martin:]

Right. But if you have got an opinion leader who is driving people, customers to your website, okay, is the opinion leader going to be a distributor and the individuals be customers or they won’t be a distributor you will just have more customers?

[Darren Jensen:]

We don’t have any distributors within China, there are social influencers, social marketers, so they would be considered more of a customer.

[Steven Martin:]

Well, but again let me – I am trying to understand how I should expect these numbers to change over time, the social marketers aren’t going to be the customers, the customers are going to be the people who come directly to use the product?

[Darren Jensen:]

Correct. So what you will see is higher customer numbers.

[Steven Martin:]

Right, that’s actually what I was getting at. So but in Hong Kong and Taiwan you are actually had distributors, but in Mainland China you won’t have any distributors?

[Darren Jensen:]

Correct.

[Steve Fife:]

Hong Kong and Taiwan are on our standard network marketing model. China is on a cross-border e-commerce model, so they will be reflected as customers.

[Steven Martin:]

Okay, that’s what I was trying to get at. So when you are looking at these numbers it will skew your – it will mute your independent distributor growth even though China will grow in revenues?

[Darren Jensen:]

Correct. You will see higher customer numbers.

[Steven Martin:]

Right, okay. Thank you.

[Operator:]

Thank you. And that does conclude today’s question-and-answer session. I would like to turn the conference back over to Mr. Darren Jensen for any additional or closing remarks.

[Darren Jensen:]

Thank you. I want to thank everyone for joining us today. As you have probably recognized we are pleased with the business trends and are looking forward to an even stronger year in 2019 and we wish you all a great day. Thank you.

[Operator:]

Thank you. And that does conclude today’s conference. Thank you all for your participation. You may now disconnect.