LifeVantage Corporation
Q4 2017 Earnings Call Transcript

Published: 7 Feb 2018

[Operator:]

Good day, ladies and gentlemen, thank you for standing by. And welcome to today's conference call to discuss LifeVantage's second 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, Melinda. Good afternoon, ladies and gentlemen. Welcome to LifeVantage Corporation's conference call to discuss results for the second 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. By now everyone should have accessed to the earnings release that went up this afternoon at approximately 4.05 PM Eastern Time. If you did not have received release, the release it’s available on the Investor Relations portion of LifeVantage’s at www.lifevantage.com. This call is being webcast; a replay will be available on the company’s website as well. 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 the company’s, current expectations of the Company's management and involve inherent risks and uncertainties, including those identified as Risk Factors in LifeVantage's most recently filed Forms 10-Q and 10-K. 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, February 7, 2018. LifeVantage assumes no obligation to update any forward-looking projections that may be made in today's release or call. Now I would 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 join you today and share our second quarter results and update you on the progress we’re making on our fiscal 2018 initiatives. During the second quarter, we generated $49.5 million in revenue, representing both sequential and year-over-year increases. Although we have not seen significant sequential growth yet, we have begun to see the green shoots of opportunity materialize from our initiatives. These early indicators have yet to materialize on our P&L. They give us confidence in the initiatives we’ve undertaken. I’m very pleased with the continued solid trends in Japan. As you may recall we have focused on turning around the sales in Japan over the last year and have made several enhancements to our leadership team and product offering. During the second quarter revenue in Japan was up 12.9% year-over-year in local currency and I’m confident that we have the right management team in place, good alignment between management and field leadership; we have reengaged our distributors and have continued to launch new products in the market. Japan is our second largest market and I’m appreciated of the work and support of our dedicated distributors and customers as well as our management team. Turning to an update on our initiatives. We continue to make progress against each during the second quarter and achieved some recent milestones early in the third quarter. Our key initiatives are focused on three goals, geographical expansion, distributor and customer acquisition and increasing average order size. First, to support our geographical expansion efforts, I’m very pleased to report that we have concluded our commercial test of our new Mainland China business model and formerly launched in China on February 1st. As you can imagine we are excited for the launch and we believe we are utilizing an innovative model that is on trend with the growth of e-commerce and social selling in China. Recall that this is not a direct selling model, but rather a model deployed through a third-party e-commerce platform and powered by in-country social marketers. Our distributors outside of China can refer Chinese nationals to become social marketers and then be compensated for the training of these social marketers. We have seen interest across field leadership looking to participate in this new opportunity and business model and we look forward to reporting on the development of this new market as business builds. This is a new business model and it is very early that we are cautiously optimistic about the future impact this could have on our company. Based on the success of this model, we plan to evaluate its potential use in future markets where there are inherent barriers to traditional network marketing. Further supporting our geographical expansion and customer acquisition strategies as early as late March we expect to announce our global customer acquisition program. This is an initiative designed to expand the number of countries where preferred customers can purchase and use our products for personal consumption only. We plan to leverage existing infrastructure in regional warehouses to support these markets, limiting the need for additional investment to support this program. We believe this will allow us to enter these markets at a very low cost and allow our distributors to leverage their international relationships outside of their home countries. We planned to initially launch in seven markets and to expand to additional markets over coming quarters. To drive customer acquisition, we are rolling out a new customer program whereby the company can direct, where the company can directly acquire new customers, leveraging on marketing and public relation investments such as our sponsorship with Real Salt Lake. We will be opening up lifevantage.com such that new customers can come directly to LifeVantage to shop for our products. Today, new customers are sourced only through our distributors and there is an way for a potential new customer to simply order directly from us. After the initial order, these new customers will be assigned to distributors or ongoing support. This program will provide consumers easier access to our innovative products and referrals to our distributor force. Furthering these customer acquisition initiatives, we continue to build on our Red Carpet program. Red Carpet is designed to attract new distributor leadership by identifying experienced leaders who are in transition and attract them to the LifeVantage platform. A key aspect of our product strategy is to drive increased average order size. As we announced a couple of weeks ago, we launched Vitality Stack Packets, this completes the second phase of our Vitality Stack launch combining four of our daily used products into packets for ease of use and improved affordability. The Vitality Stack Packets include our Protandim Nrf2, our Protandim NRF1, ProBio and Omega+ products. This stack and stacks that we plan to release in the future will become the primary protocol to support the biohacking culture we are creating across the company, while increasing average order size and further diversifying our sales mix. The Vitality Stack launch event was held via a cybercast and where we had 120,000 views. We will continue the Vitality Stack launch at our Elite Academy in Indianapolis next week. We expect to see a building conversion of our order volume to this stack as we build upon the initial cyber launch. We have also made good progress developing our nutrigenomic story and the biohacking culture we’ve been building with distributors and customers. Biohacking is becoming the underlying message for our field, leveraging our core competencies and existing products and is supporting our unique position in the market. We are on the edge of this; we’re on the leading edge of this trend, are focusing on it across our field communications and marketing material and have additional marketing in media assets and development to promote the story. The recent launch of Vitality Stack is a key component to supporting this story and providing nutrigenomic product solutions, so leveraging this growing movement. Next week we will begin rolling out the next phase of our LifeVantage digital platform to our top field leadership and expect to complete the rollout in mid March. The new LifeVantage app is a custom developed platform that will pioneer new ways for us to interact with our distributors and customers, integrating artificial intelligence and machine learning to onboard new distributors, assist them in finding new customers and tailor communications for them. This new platform is designed to support our customer acquisition goal and simplify all aspects of our distributors into actions with customers. To sum it up, I’m pleased with our achievements against our key initiatives this year and look forward to seeing the impact of these initiatives on our revenue trends as the year progresses. 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. Second quarter revenue was $49.5 million representing a 1.1% increase year-over-year and 0.7% sequential increase. Revenue in the Americas decreased 1.9% to $36.9 million, while revenue in Asia Pacific and Europe increased a 11% to $12.6 million including a 9.3% increase in Japan all year-over-year. On a sequential basis revenue in the Americas increased 2%, while revenue in Asia Pacific and Europe reached a decreased 3%. The gross margin during the second quarter was 81.6% down from 84.7% a year ago. This decline is a function of product and geographic mix, the impact of free shipping to support our product bundling efforts and an increase in obsolete inventory associated with the evolution of our products. Commissions and incentive expenses continue to remain relatively consistent as a percentage of sales at 47.3% compared to 48.1% in the prior year. This variance reflects the timing of incentive and promotions from quarter-to-quarter. SG&A expenses as a percentage of sales were 29.6% compared to 35.2% a year ago. On a non-GAAP adjusted basis SG&A expenses as a percentage of sales were 29.2% compared to 31.3% in the prior year. This decline to a large extent relates to reduced compensation related expenses and general corporate cost reductions. Operating income for the second quarter of fiscal 2018 was $2.3 million up from $0.7 million last year. On an adjusted basis non-GAAP operating income was $2.5 million compared to $2.6 million in the prior year. Adjusted EBITDA for the second quarter was $3.7 million compared to $3.9 million in the prior year. As many of you have seen or will see as other public companies report December quarter financial results, many U.S. companies will be taking a one-time non-cash re-measurement adjustment of their deferred tax assets and liabilities. As a result of the new federal corporate tax rates signed into our, in December. Accordingly, we booked a $1.2 million one-time non-cash revaluation expense of our deferred tax assets during the second quarter. Additionally, we anticipate that the recently enacted lower corporate tax rate will favorably impact our fiscal 2018 non-GAAP adjusted earnings per share by approximately $0.04. Second quarter net income on a GAAP basis was $0.3 million or $0.02 per fully diluted share consistent with the prior year. On an adjusted basis second quarter adjusted non-GAAP net income was $1.6 million of $0.11 per fully diluted share which is consistent with the prior year. All of these adjustments are spelled out in our earnings press release. Turning to the balance sheet, we ended the second quarter of fiscal 2018 with $12.8 million of cash and $6.5 million of debt, which represents a $1.1 million increase in net cash during the quarter. As anticipated there was a sequential increase in inventory to $16.8 million from $15.4 million to support new product launches including Vitality Stacks and the introduction of our current product lines into existing global markets. During the second quarter, we generated $2.2 million of cash from operations and invested $0.9 million in capital expenditures. For fiscal year 2018, we continued to anticipate 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. With that let me turn to our fiscal 2018 guidance. We are reiterating our non-GAAP adjusted earnings per share guidance of $0.40 to $0.50 for fiscal year 2018. Based on the first half revenue and the timing of the revenue impact of our initiatives, we are now, we now expect to be at the lower end of our prior revenue forecast guidance range or about $206 million. This guidance assumes some early success generating revenue in China during the second half of the fiscal year. As Darren noted, we are in the early days of our full launch in China, which is a difficult market to forecast especially given the new business model we are rolling out. However, we have encountered interest and enthusiasm around the opportunity, so we are cautiously optimistic. As we have discussed previously, we are in a transformational year and we are confident with the initiatives in place to drive growth. The timing of the revenue impact of these initiatives is of course a challenge to predict, however even if the revenue impact of these initiatives takes longer than we would expect, we remain confident in our EPS guidance for fiscal 2018. Now let me turn the call back to the operator to facilitate the questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And we will go to Steven Martin with Slater.

[Steven Martin:]

Hi guys.

[Darren Jensen:]

Hello Steven.

[Steven Martin:]

I know you said you are going to comment at the low end of revenue guidance and I guess I’m going to ask the same question I have asked before which is you’ve launched new products, you’ve launched new countries, you’ve got Japan sort of heading in the right direction yet on a year-over-year basis. And you’ve gotten passed all those registration problems you had a year ago, year and a half ago. And on a year-over-year or sequential basis you are still sort of roughly flat. Tell me when we should expect forgetting China that the company is going to do more than $200 million of revenue?

[Darren Jensen:]

Thank you, Steve. I mean when you look at the revenue that we’re having right now, you do see that it somewhat flat and I would say that the initial impact of our initiatives that we’ve been taking, have been helping to offset some challenges that we’ve been having in other course of our business. For instance we’re behind where we thought we would be in Mexico, because we’re seeing some competition there that it impacted our sales level. In China, given the length of our commercial trial we’re little behind on the launch where we wanted it to be. So considerably forecasting that in an unforecastable market has been rather difficult, also with our Red Carpet program that’s really based on the availability of leaders that are in transition. So this is, as also been a challenge to forecast. Additionally, Germany did not ramp quite as quickly as what we were anticipating. So really some of the, some of our the initiatives that we’ve been taking have been helping us to grow slightly in this year-over-year, but not to the extent that we wanted, really where we’re seeing a lot of improvement have been especially what’s retention and increased basket size. So, we see good things happening in some spots that are offsetting some others that really, I mean when are we going to get off to $200 million side of it, a lot of that’s tide into China and our efforts there as well as into our Red Carpet program and the recent launch with our Vitality Stacks. But as you know as we said between now and the next couple of quarters, we’re being conservative and saying we’re coming towards to the low end.

[Steven Martin:]

Okay, in the Americas you are active independent distributors was down year-over-year, when is that going to reverse and at least be flat or is that not a possibility?

[Darren Jensen:]

Well it’s always a possibility for sure to grow and that’s why one of our main focus is has been to drive additional customers and as well as distributors. I would say the part of the challenge there one where still experiencing some of the impact from the changes that we made in our review from last year. But also important behind it, there were also some changes that were made that we’ve made multiple changes that we’ve made to our compensation plan that were required by changes within the FTC that I think is over, that has also had an impact on the number of distributors that come in as well as customers. So, a lot of our efforts are focused on driving this number up and will continue to focus on it until we get it moving in the direction we wanted to go. But I can’t say though that we are, that is being offset tremendously by our increased retention levels of those distributors that we have.

[Steven Martin:]

So, in China are you going to have active independent distributors and you are going to have preferred customers or is everyone just going to be a preferred customer?

[Darren Jensen:]

In China we operate on a retail basis that we -- what we call it is a cross-border e-commerce opportunity. So we do not have any distributors per se in China because we sell our products through a partner platform. And what we work with are social influencers there that then go out and attract customers and drive them to a partner Web site in order to purchase the product. So it's not necessarily distributors in the classical way that you think of them.

[Steven Martin:]

Right. How is your business in China going to be if I look at the three tables. Okay, revenues, active independent distributors and active preferred customers. Where is China going to show up there?

[Darren Jensen:]

So in the short term, Steve, the product is going to be shipped directly from the U.S. to customers in China. So initially it will be included in U.S. -- America's revenue. As that business grows and it becomes more material we will be breaking that out as a separate segment it's a different business, it's not a direct selling business like the rest of LifeVantage. So both from a geographic standpoint as well as just a core business model. It's different and we'll be breaking that out. And there are going to be some differences in terms of the rest of the P&L model that accompanies that business from margins down to our operating income. Again, if that becomes more material we'll break that out in our disclosures.

[Steven Martin:]

Okay. Let me ask one more question. You did a good job of controlling your SG&A and that was sort of a low -- a very good low number. Can I -- in modeling is 14.6 down from I guess about 16 or 15.5, is that a good number to use going forward?

[Steve Fife:]

Yes. It's reasonable. The one thing that that influence of our history SG&A expenses is when we have them, we have higher costs coming through in those quarters. We did have an event this last quarter. In November, we had an elite academy in Orlando. We have an event in Indianapolis next week. So in quarters where there are events that's probably a reasonable rate and maybe a little higher but in quarters where there aren't events that should be lower than that.

[Steven Martin:]

And one last one. Gross profit, you explained why it was down a little this quarter. What should we expect of that for the balance of the year?

[Steve Fife:]

Yes. I expect that that's going to increase slightly during the rest of the year. A lot of that is predicated upon our geographic mix of revenue and our product mix. But as I look at our forecast I'm anticipating that's going to increase slightly in the second half of the year.

[Steven Martin:]

Okay.

[Darren Jensen:]

Thanks Steve.

[Operator:]

We will next go to Dave Manovich, DNS Investments.

[Dave Manovich:]

Hello to everyone this afternoon.

[Darren Jensen:]

Hey, how are you doing Dave?

[Steve Fife:]

Hi, Dave.

[Dave Manovich:]

Good. We're on the other side of the table now for the first time in one of these calls, so this will be -- it will be fun.

[Darren Jensen:]

Welcome.

[Dave Manovich:]

Let me dovetail a little bit on the questions, so the questions that were asked by the previous caller and particularly in light of his focus on the growth of U.S. distributors. And also Darren your comment with regard to the focus that's there with regard to the red carpet program and how instrumental that can be for you bringing new leadership and new distributors into LifeVantage that coupled with the substantial focus that we have that you've articulated about our geographic growth that we're expanding in Europe that we have had a lot of effort that's been placed into Japan that effort that's been placed into Mexico in building up the business there. And now also, certainly a large initiative that goes into China that I think it's safe to say that a good deal of our focus is with regard to geographic development that is outside of the United States. Is that kind of a fair statement? And with that we find that that through the last number of years that America is continue to be flat and as one of the individuals that is a Board member that was there when we initially authorized the Real Salt Lake sponsorship, the question that I have is, are you considering or looking at continuing with that very expensive sponsorship on Real Salt Lake, when it appears that it had virtually no impact positively with regard to the Americas. Certainly isn't going to impact, I don't think the growth of distributors and certainly has because of its focus in the U.S. no impact on geographic areas outside of the U.S. Are you looking at continuing with the -- that the Real Salt Lake sponsorship that expense and if so why?

[Steve Fife:]

Hi, Dave. This is Steve. I guess first of all, we really evalue our relationship with Real Salt Lake. They've been good partners with us. And this last quarter in particular, but last year we've spent a fair amount of time evaluating that relationship. And went so far as to retain an independent company to do a survey on the financial benefits and direct and indirect that came through our relationship with Real Salt Lake as well as looking at what we could do both as LifeVantage and/or RSL to further activate or enhance the benefits to the company. And through that discussion over the last quarter, we feel like both -- when we received benefit but we have a real opportunity to increase the benefit that comes through that relationship. One of the primary focus points that Darren talked about is a customer pool program where we will be opening up our Web site to customers who want to purchase our product. And one of the -- we view one of the primary opportunities to take advantage of that is, is that relationship with Real. It's a primary kind of advertising tool that the company has. Clearly kind of a dominant presence here on the Wasatch Front in Utah. But, we also have a presence in it -- in all of the major or all of the cities where MLS has teams. And so we believe that we get a benefit from that relationship and through some of the additional work that we've done over the last quarter. We think we can further enhance that. And I'll tell you that if we feel like we're not getting the financial return at the end of this next season, we'll continue to re-evaluate that relationship. And make a decision that's clearly in the best interest of our shareholders as it relates to that relationship.

[Dave Manovich:]

Yes. Because that is over the five year period is a relatively expensive spend in the neighborhood of 12 plus million dollars. And what sort of just, I just heard that over a timeframe like that with the other initiatives particularly geographic that are well outside of the U.S. that we don't have any other place that we will be more impactful to generating revenue growth to utilize that money as it is then on the Jersey and then the stadiums for Real Salt Lake?

[Darren Jensen:]

Dave, this is Darren. As we evaluate where to spend all of our marketing and sales dollars. Obviously, we're looking at getting maximum impact. And I mean at the beginning where you were talking about the importance of the United States and how it has been relatively flat for a while. That also as you know has been a concern of ours ongoing and where we've made a change that's made it different this year is that our focus on driving additional customers and distributors to the company. As Steve pointed out with the customer pool program in previous years with Real Salt Lake where we had a challenge was, as we direct Web traffic into advertisements we were -- we had a very low conversion rate because there was a requirement for them to make a purchase or to sign up completely through a distributor. So typically we couldn't convert any of that advertising power and turn that into new customers. So we have been in negotiations and discussions with our distributor leadership on having the company collect those allowing the company to bring in those orders directly from our Web site, so we can run a much higher conversion rate and then drive those customers back into the distributor field as customers and distributors because as we look at the engagement of our distributors, we know that one of the most important milestones for them in determining their business productivity and their retention within our business is the first dollar that they've make with us. We call it the first dollar principle. So that's been a big focus of ours and we believe that this program that we have that we are running this year during the RSL season that's where we're going to be testing it and engaging as to whether or not it's effective. So this is a very important year for us both on customer acquisition pushes especially in the United States and really leveraging that relationship the way that it should be.

[Dave Manovich:]

Okay. In closing I'd just say that of all the investors that I've spoken to of late in the evaluation of our revenue gains and where we see investment being made would no one would agree that the Jersey sponsorship would be continued. That would be the feedback that I give you from myself and others that are shareholders that I spoke to. I suggest you do spend some time talking directly with your shareholders and get their opinion on this particular marketing endeavor.

[Darren Jensen:]

Well, thank you, Dave. And luckily over this last little while we have had the opportunity to actually speak with thousands of them on outbound call. So it's something that we do and especially those with concerns we've been able to explain our strategy and I would say the vast majority would agree that it's a very sound strategy. So thank you for your feedback.

[Operator:]

And we will next go to [Eric Weisenberger] [ph], Private Investor.

[Unidentified Analyst:]

Yes. I just had a question about the Vitality Stack. Could you give us some pricing of that? And when it's available and how it's delivered because I looked at the Web site and I couldn't really find anything specifically on that Vitality Stack?

[Darren Jensen:]

Thanks Eric. Actually it comes in two forms with this, one form we launched about three months ago and that's where it would come in individual bottles for individual bottles that in the United States is priced at $149. And it gives you a monthly supply. The new one that we just launched a couple of weeks ago which is where the product is packed in individual packet. That product is $151. So that's the price what was the other -- what was the other questions related to that?

[Unidentified Analyst:]

No, that was it. I just couldn't find any price and it's available now I assume and those the prices preferreds will pay?

[Darren Jensen:]

Yes. Those are the prices that preferred customers as well as our distributors pay. All right. Well, thank you.

[Unidentified Analyst:]

Thank you.

[Operator:]

And that concludes our question-and-answer session. I would now like to turn it over to Darren Jensen for any additional or closing remarks.

[Darren Jensen:]

Thank you everyone for joining us today. I hope you all share our excitement about the transformation we are having at LifeVantage. We have made excellent progress against our fiscal 2018 initiatives, better positioning the company for the future. We look forward to updating you on our next call and have a wonderful day.

[Operator:]

And that does conclude today's conference call. We thank you all for joining us.