LifeVantage Corporation
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Good day, ladies and gentlemen, thank you for standing by. Welcome to today's conference call to discuss LifeVantage's first quarter 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 and 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:]

Thank you and good afternoon, ladies and gentlemen. And welcome to LifeVantage Corporation's conference call to discuss results for the first quarter of fiscal 2018. On the call today from LifeVantage with prepared remarks are Darren Jensen, Chief Executive Officer; and Steve Fife, Chief Financial Officer. Before we begin, we'd 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 on 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 Form 10-Q and 10-K. These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Please note that during today's call, we'll 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've 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, November 8, 2017. LifeVantage assumes no obligation to update any forward-looking projections that may be made in today's release or call. Now I'd like to turn the call over to the Company's CEO, Darren Jensen.

[Darren Jensen:]

Thank you, Scott, and good afternoon everyone. I'm pleased to share our first quarter results with you today and brief you on many exciting initiatives underway at LifeVantage. Each of these initiatives are focused on driving revenue through geographical expansion, new products and adding distributors and customers. Fiscal 2018 is off to a solid start as we made progress on transformational plan for the year. As we detailed our initiatives in length on our fourth quarter call, I want to highlight the first quarter results and run through a brief update on our activities and then I'll turn the time over to Steve for a review of our financials. We generated 49.1 million in revenue for the first quarter, a modest decrease compared to the fourth quarter. We expected first quarter revenue to be relatively consistent with the fourth quarter given the seasonal softening of late summer. But we're also faced with some disruptions from the unfortunate natural disasters during the quarter that impacted four of our stronger markets including causing the delay of our official launch event for Protandim in Mexico due to the catastrophic earthquake in Mexico City. Turning to an update on our initiatives, during the fourth quarter conference call, we discussed our fiscal 2018 initiatives. We've eight key initiatives planned for this year. We've launched, implemented and made significant progress on six of these key initiatives thus far and anticipate the impact of these introductions building as the progresses. First, I'm pleased to report that we have commenced a commercial test of our new Mainland China business model. We're selling through a third-party e-commerce platform and assessing the system including order fulfillment from the e-commerce site, logistics and money flows. We just began initial training on the model last week at our Elite Academy event. How this works is, Chinese customers can visit the site and purchase and purchase products, which are shipped directly from the United States to their doorstep. They also have the opportunity to become social marketers. These social marketers are affiliated with the e-commerce site and compensated on the sales that they generate by promoting the product on the site. People outside of China can refer Chinese nationals to become social marketers and then be compensated for the training of these social marketers. Recall that this is not a direct selling model, but rather an e-commerce model powered by in-country social marketers. Initiating this model in China gives us a prime opportunity to test this new method of marketing without any disruption to our current markets. We believe that this model could be disruptive to sales channels already deployed in China and provide a testing ground for the future as we see the micro-entrepreneur business model evolve to one of social selling with e-commerce and enhanced technologies, providing long-term growth opportunities. Second, we are pleased with our success -- with the success of our Red Carpet program, which we accelerated during the first quarter and is already ahead of where we thought it would be. Recall that this program is designed to attract and incentivize experienced direct selling leaders to join the LifeVantage family. When we utilized this program in the past, we encountered strong revenue growth and return on investment. We are excited to reignite the program and now look to get these new sales leaders engaged. Another key initiative is to instill across our field bio-hacking culture, which we are building. At our successful Elite Academy event in Orlando last week, we introduced the tools and the training to support and incorporate our bio-hacking and nutrigenomic stories and technologies into our marketing materials. We are building a differentiated culture around this emerging trend. Turning to our product strategies, last week during the Elite Academy, we introduced Vitality Stack. Vitality Stack is a combination of our Activated Essentials line including our Protandim Nrf2, Protandim Nrf1, ProBio and our new Omega+ product, which is a comprehensive combination of Omega-3, Omega-7 and Vitamin D that was also launched at our Elite Academy. This stack and future additional stacks to be released will become the primary protocol to support the bio-hacking culture we are creating across the Company. The Vitality Stack provides our distributors and our customers, a superior solution that is un-rivals in the marketplace and should increase our average order size. During last week's event, we also launched the beta test of Phase I of our new LifeVantage app. This app is a platform we have developed in partnership with a technology company that is pioneering new ways for us to interact with our distributors and customers. This platform which we believe is the first of its kind in the direct selling space integrates artificial intelligence to onboard new distributors, assist them in finding new customers and tailor communications for them. This platform is available through a revolutionary app to create significant efficiencies for our distributors and simplifies processes for our preferred customers. Finally, touching on our sixth initiative, we're on track with the process of implementing and upgrade to our corporate ERP system deploying Microsoft Dynamics 365, we have made substantial progress and expect to finish this on a global rollout by the end of fiscal 2018. As you can see we've hit ground running on this year's transformational plan and look forward to updating you as more develops with each initiative. We'll continue to focus on positioning the Company to capitalize on the medical consumer trends that are driving the marketplace and the future for LifeVantage. With that, let me it over to Steve to run through the financial results. Steve?

[Steve Fife:]

Thank you, Darren, and good afternoon everyone. First quarter revenue was 49.1 million, representing a 3% decrease when compared to the fourth quarter of fiscal 2017. Revenue in the Americas decreased 6.6% sequentially to 36.2 million, while revenue in the Asia-Pacific & European region increased 8.7% sequentially to 13 million including 7% sequential growth in Japan. The gross margin during the first period remained relatively consistent at 82.2% versus 82.4% in the fourth quarter, while down from 83.9% for the prior year period. The year-over-year decline is a function of products and geographic mix and we anticipate that this trend could continue into Q2. Commissions and incentives expenses also remained relatively consistent as a percentage of sales and with our 48% target. Commissions and incentive expenses represent 47.6% of sales during the quarter compared to 47.4% in the fourth quarter and 47.9% in the prior year period. SG&A expense as a percentage of sales was 31.7% compared to 32% in the fourth quarter and 32.4% a year ago. On a non-GAAP adjusted basis excluding $44,000 of executive team recruiting and transition costs, 0.2 million of class-action litigation expenses and 0.1 million of other non-recurring legal expenses, SG&A expenses as a percentage of sales was 31.1%. As previously announced, the class-action shareholder litigation filed last year was dismissed with prejudice and is now concluded without payment of any financial consideration on our part. Operating income for the first quarter of fiscal 2018 was 1.4 million down from 1.5 million in the fourth quarter and 2 million in the prior year period. On an adjusted basis taking into account the aforementioned adjustments, non-GAAP operating income was 1.7 million. Adjusted EBITDA for the first quarter was 2.7 million compared to 3.3 million in the fourth quarter and 4.3 million in the prior year period. During the fiscal year of fiscal 2018, net income was 0.8 million or $0.06 per fully diluted share compared to 0.1 million or $0.01 per fully diluted share in the fourth quarter and net income of 1.2 million or $0.08 per fully diluted share in the prior year period. On adjusted basis which excludes the aforementioned costs net of tax, first quarter non-GAAP net income was $1 million or $0.07 per fully diluted share compared to $0.5 million or $0.04 per fully diluted share in the fourth quarter and $1.9 million or $0.13 per fully diluted share in the prior year period. Turning to the balance sheet, we ended the first quarter of fiscal 2018 with $12.3 million of cash and $6.9 million of debt, which represents a $1.3 million increase in net cash. We continue make improvements to our inventory position as inventory levels declined $1.2 million from the end of the fourth quarter to $15.4 million and are down $8.5 million year-over-year. We do anticipate a sequential increase in inventory during the second quarter as a result of the planned product launches. During the first quarter, we generated $2.5 million of cash from operations and invested $1.2 million in capital expenditures. For fiscal 2018, we are anticipating CapEx in the range of $4 million to support our digital and technology investments including upgrades to our core business systems to support our transformation efforts. Before I turn to guidance, let me highlight some changes you should begin to see in our distributor and preferred customer accounts over the coming quarters. Consistent with practices and precedence, we are seeing across the network marketing channel, we have begun reclassifying distributors that are not engaging in business activities, but are rather acting and joining LifeVantage as purchasers. This is the process that will occur over the coming quarters as we correspond with distributors about the classification change to ensure each classification appropriately reflects the customers’ activities. As a result, you should expect to see a rebalancing of our distributor and preferred customer accounts through the remainder of the fiscal year. The reclassification of the distributor to preferred customer does not have an impact on sales. With that, let me close with a reiteration of our fiscal 2018 guidance. We continue to expect revenue in the range of $206 million to $212 million. We anticipate fully diluted earnings per share in the range of $0.40 to $0.50. Now, let me turn the call back to the operator to facilitate questions. Operator?

[Operator:]

Yes, sir. [Operator Instructions] And we will take our first question from Steven Martin with Slater Capital Management. Please go ahead.

[Steven Martin:]

So, we all expected this quarter and you reiterated your guidance for the rest of the year. It implies an acceleration over the next three quarters. Can you give us some of how you expect that to progress? And when we should see year-over-year increases?

[Steve Fife:]

Steve, this is Steven. As we talked about really in our last call, the initiative that we've laid out that are going to drive growth most immediately probably centered around our Red Carpet program, our product launches in China. And as each of those started to take traction during Q2 here, we do anticipate that there will be sequential growth the remainder of fiscal 2018.

[Steven Martin:]

But now on a year-over-year basis, 2017 second quarter was sort of your -- December quarter was your worst quarter, and I recognized it's a seasonal slow quarter. But should we expect that you're going to have -- you're going to show a year-over-year increase in the December quarter?

[Steve Fife:]

Yes, I would hope so. We -- our first quarter at 49 million, we would expect to build on that which would put us ahead of Q2 of '17.

[Steven Martin:]

Can you talk about couple of things, one is and I know this in re-classes going on, you just talked about distributors and preferred customers. If we -- when are we going to see a sequential increase on those metrics, because at the end of the day in order to grow your business, you're going to have to show sequential -- you're going to have to show year-over-year and sequential increases?

[Darren Jensen:]

Steve, this is Darren Jensen. With that primarily when I'm looking at the distributor numbers, the main driver to the flattening of those numbers have been -- I think you go back to last year to some of the policy changes that we had to take, that we had to put into place, and really some of our most aggressive distributor recruiters were affected the most by that program. And I believe that with the rollout of some of our products into our new markets as well as with the new China program that we have that, that we're already seeing is starting to reengage aggressively some of these groups. So, along with the increase in quarterly numbers, we would also begin to see increases in our in the number of distributors coming into the business.

[Steven Martin:]

Can you run through some of that -- you've announced a whole bunch of new markets over the last 12 months? Can you talk about some of the new markets and how they're progressing?

[Darren Jensen:]

I don't think we break those out per se, but typically from the -- the last three have been in Europe. Europe is -- so we have the UK, we've the Netherlands, and then just most recently Germany. This area is more of a slower built at least that's been my experience with most of Europe that the people there are very different when it comes to coming in as opposed to an Asian market where you have large numbers jump in at once. And -- but what I do like about the Europe team side of it is that they're very stable, they're more serious about selling products. They're not jumpers like some of the other groups in Asia are. So actually we've been seeing some very reasonable growth coming out of our European markets. And I would continue to -- and I would expect continue to see that growth, especially through our Red Carpet program, we've had a number of very good European leaders join the business, which I believe will continue to drive the increase in sales there. The only other new market that really we've announced that we're going into has been the cross-border e-commerce model into China, in that we’re at the commercial testing phase. And so we do limit the number of people that can participate into that model, right now.

[Steven Martin:]

Okay. And what about…

[Steve Fife:]

I would just to add that, so we’ve seen good sequential growth in the U.K., in Netherlands and Germany is obviously, it's just very early days on that.

[Steven Martin:]

Okay, in Mexico and Japan?

[Steve Fife:]

Both growing, sequentially.

[Steven Martin:]

Yes, because I know Mexico got very disrupted by the whole tax issue and the whole selling issue.

[Darren Jensen:]

Yes, we also had the earthquake down there that disrupted our Protandim launch, but the market has been very strong.

[Steven Martin:]

Okay. And Japan last?

[Steve Fife:]

Yes. Japan grew 7% sequentially.

[Steven Martin:]

Oh! That’s great. That’s great.

[Steve Fife:]

Yes, Japan is doing very well.

[Steven Martin:]

I’m sorry.

[Steve Fife:]

I said, Japan is doing very well.

[Steven Martin:]

I wanted to applaud for the continued reduction in the inventory. Now that you had a little more time there, where do you think the inventory settles out?

[Darren Jensen:]

Yes, I think we still have the opportunity, especially by the end of this year to get down, probably a couple more million dollars. I mentioned in my prepared remarks that I fully anticipate it’s going to go up at the end of Q2, as we build some raw and finish goods associated with new products that we’ve launched. But we would anticipate that most of the raw and the excess that we had during the big build a year ago that will continue to be depleted and by the end of the year, we should be a couple million dollars lower than we are currently today.

[Steven Martin:]

Okay. And one last one on SG&A, obviously part of it is variable and the G&A portion is a little more fix. Now that you have a little time, you've done with some of these launches. How do you expect the SG&A and more specifically the G&A portion to sort of shake out over the rest of the year?

[Steve Fife:]

I think it would fairly stable, there as you mentioned, there is some variability in that. But what I think you and I would consider of core G&A, I don't expect big changes to that.

[Steven Martin:]

Okay. So if we can get the sales increases over the next three quarters and hold the gross margin, we should be able to get some leverage at the G&A level?

[Steve Fife:]

That’s exactly right. And it goes back to your first question really around, the trending off of our Q1 number and our guidance. We do anticipate with the revenue growth will have incremental profitability coming through because of that leverage.

[Operator:]

Next question comes from Jim Galloway with Galloway Enterprises.

[Jim Galloway:]

Just a couple of questions. One is the gross margin on the China business. The way we’re structured now half of the revenue on sale goes to commissions, and I see we just added a couple of bonuses to people in higher ranks. Are we able to get a greater gross margin on this different distribution channel?

[Steve Fife:]

Sorry, Jim, could you repeat that, the last part of you…

[Darren Jensen:]

Yes, just the last part.

[Jim Galloway:]

On this new distribution channel in the China, are we able to get a higher gross margin?

[Darren Jensen:]

First let me answer the first part of that, Jim. We didn't add any bonuses to our higher level people. As you can see, if anything our commissions are holding consistent. From time-to-time we've had to make modifications of some of the rules due to regulatory reasons for instance coming out of the [indiscernible] case or urban life. But we have not made any massive changes that would -- I would say greatly impact our overall payout. Now moving on to…

[Jim Galloway:]

What I was talking about is the bonuses like 250,000 and 500,000 to these superior ranks, like the pro 11 and the pro 12 where I would have liked to seeing some of that money go to a dedicated fund for shareholders?

[Darren Jensen:]

So part of that is that when we build in because right now our models design to payout at 48%, and whenever we would do a bonus like that, we did that because we also made some other modifications for regulatory reasons. So overall, the payments -- the overall commission has remained steady, and we've seen that in the number. So, how we divide up that, that pie of money, I think isn't as material as the total amount that we're paying now of which is not increased. Now, moving over to China…

[Steve Fife:]

Specifically on the China gross profit question, we anticipate that our gross margin on the China business will be modestly higher than our existing gross margin, but it should be accretive from that standpoint.

[Jim Galloway:]

Now, big bullet contention I've had with you guys for years-and-years, within the last hour I opened the package containing over $400 worth of products, and there was absolutely zero promotional content in there. There was nothing to tell me about the products. I didn't buy and we keep talking about customer retention, and at times, we've talked about having inserts along with shipments. But how does it go that I get $400 worth of products and no promotional information?

[Darren Jensen:]

What we're doing has been obviously by putting some flyers insider of packages and we do put a lot of materials inside of these packages, but we've found that it is not the best way of marketing for us. Where we've been making better inroads and better returns have been through cross selling, through grouping of our products in packages and in systems, we call them stacks as well as in marketing through social media and some of the close circles that we have within our distributor groups and providing greater training. So we found these to be a lot more effective than simply just putting in a paper into the packages, when they're shipped out.

[Jim Galloway:]

Can you give us some information on the Elite Academy? How many people showed up in Orlando this time? Because we've been hovering at 5,000 for many, many years, are we growing?

[Darren Jensen:]

Yes. With that, it really depends on the location in which we hold the meeting as to what the attendance is. We have -- for instance, typically our lowest attended area in the country is Orlando, I don't know why that is. Typically, our highest attended area is more around Nashville or around the center of the country. We booked these venues out typically three years in advance. So, we are changing around the mix of where we hold this Elite Academy, our Orlando Elite Academy had around 4,000 people at it, which is pretty good for the Orlando area for us. We also have begun new programs to attract more people to come to the Elite Academy. I don’t have the exact number, but when I left the Elite Academy just this last week, we had well over 2,000 already enrolled and paid for, to go to our next Elite Academy which is in -- I think it’s in February up in Indianapolis, which is going to be -- isn’t the best time a year for Indianapolis, but we fully expect and plan to have upwards of potentially 4,000 people already enrolled for that by the end of this week is what our goal is. So we expect that went to be a lot higher, part of this comes to pricing strategies giving and promoting the advance better at the event. So I think we're getting it dialed in a lot better now.

[Operator:]

We’ll go and take our next question from Diane Donovan with [Vantage].

[Unidentified Analyst:]

When can I expect to see less decrease and some increase in the stock price per share?

[Darren Jensen:]

Okay. Repeat that one more time. When can you see a higher stock price?

[Unidentified Analyst:]

When do you think we're going to stop seeing this down trend of the price per share for LifeVantage and start seeing up trend?

[Darren Jensen:]

Well, with that a lot of it depends -- I mean there is a lot of factors that affect the price of stock. And when I look at typically, direct selling, it’s really driven by revenue, and that's where it comes down to, I don't know if you're a distributor, but if you're a distributor, it really comes down to you. We’re simply messengers for the Company. So as our distributors drive the business and expand and grow become more successful that in turn drives the price of our stock up. And I think that's probably the main factor in the growth of the stock.

[Unidentified Analyst:]

At some point, we had a reverse split. I don’t know when that was, but it hasn’t even come back from that. So I don’t know because of the reverse split I think began with the 10-K or the…

[Darren Jensen:]

No, actually, it has come back. When I started with company a few year ago, right around the time of the reverse split, we were at five -- I think the reverse split, at least when I joined the Company, the price of the stock was like $0.48. So 48 times seven would be about 350, and so I mean we're higher than what we were at that time. So I mean I don't know where we ended today, we were at five something. But that's -- any other questions on that?

[Operator:]

And ladies and gentlemen that does conclude today's question-and-answer session. I'd like to turn the conference back to Darren Jensen for closing remarks.

[Darren Jensen:]

Thank you everyone for joining us today. I hope that you all share our excitement about the transformation happening at LifeVantage. We've made excellent progress against our 2018 initiatives to better position the Company for the future. We look forward to updating you on our next call. And have a wonderful day. Thank you everyone.

[Operator:]

Thank you ladies and gentlemen. That does conclude today's conference. We thank you for your participation. You may now disconnect.