Nautilus, Inc.
Q3 2017 Earnings Call Transcript

Published: 31 Oct 2017

[Operator:]

Good day, and welcome to the Nautilus, Incorporated Third Quarter 2017 Earnings Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to John Mills with ICR. Please go ahead, sir.

[John Mills:]

Thank you, James. Good afternoon, everyone. Welcome to Nautilus' Third Quarter 2017 Conference Call. Participants on the call from Nautilus are Bruce Cazenave, Chief Executive Officer; Sid Nayar, Chief Financial Officer; and Bill McMahon, Chief Operating Officer. Our earnings release was issued earlier today and may be downloaded from our website at nautilusinc.com on the Investor Relations page. The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures. Remarks on today's conference call will include forward-looking statements within the meaning of the securities laws. These include statements concerning financial projections, operating trends, anticipated growth and profitability, anticipated new product introductions, planned capital expenditures and anticipated results of new product and business development initiatives. Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from these statements. For more information about these risks, please refer to our most recent annual report on Form 10-K. Nautilus undertakes no obligation to update or otherwise publicly release any revision to forward-looking statements to reflect new information, events or circumstances after they were made or to reflect the occurrence of unanticipated events. All information and comments regarding our operating results pertain to our continuing operations. And with that, it's my pleasure to turn the call over to our CEO, Mr. Bruce Cazenave. Please go ahead, Bruce.

[Bruce Cazenave:]

Thank you, John. Good afternoon, everyone, and thank you for joining our call today. I'd like to start by providing a general overview of our third quarter and then will turn it over to Sid Nayar to review our financials in more detail. Bill McMahon will then provide updates on the business segments as well as on product activity. Finally, I will provide some closing remarks before we open up the call for your questions. We generated 9% top line growth in the third quarter and this was driven primarily by strong sell-in and placements of both new and existing products in traditional and e-commerce retail. We also achieved a slight increase in our direct channel as our recently launched Bowflex Hybrid Velocity Trainer, or HVT, got off to a positive start to help partially offset the expected decline in TreadClimber sales, as this mature product shifts into a different marketing strategy with less TV and media support. The third quarter provided a more scalable testing environment than the second quarter, and we used this quarter to continue to refine messaging and media positioning around our HVT line as we prepare for the important holiday season from November through January 2018. Bill will provide more insight into this process in a few moments. Operating income increased over 60% due to our strong retail sales results and a few onetime benefits recognized during the third quarter. This enabled us to generate approximately $15 million of EBITDA during the quarter, which compares to $10.2 million for the same period last year. Given the visibility we have into the retail sales pipeline and early learning’s from the HVT launch activity to date, I will provide additional color on the full year performance expectations after Bill's comments. Now I'd like to turn the call over to Sid.

[Sidharth Nayar:]

Thank you, Bruce. Good afternoon, everyone. I'd like to provide an update on our financial results for the third quarter of 2017. Net sales for the third quarter totaled $88.1 million, an increase of 9% as compared to the same period in the prior year, reflecting strong growth in the retail segment. For the first 9 months of 2017, net sales were $278.4 million, a decrease of 0.7% over the same period last year as lower sales in the direct channel offset growth in the Retail segment. Third quarter gross margins decreased 220 basis points in the Direct segment to 63.5% and were up 60 basis points in the Retail segment to 35.7% when compared to the same quarter last year. On an overall basis, total company gross margins for the third quarter 2017 decreased by 160 basis points to 46.9% versus the same period prior year, reflecting the shift in channel mix to an increased percentage of Retail segment revenues. Year-to-date 2017 gross margins of 50.8% are 180 basis points lower than 2016 year-to-date gross margins as the shift in mix to increase retail sales and lower direct channel gross margins more than offset the improved margins in the Retail segment. Total operating expenses for the third quarter of 2017, as a percentage of net sales, decreased to 31.7% from 38.4% in the same period last year, primarily reflecting lower sales and marketing expense. Total operating expenses for the first 9 months of 2017 as a percentage of sales were 40.1% as compared to 40.4% for the same prior period. Sales and marketing expense for the third quarter of 2017 were $18 million or 20.5% of net sales as compared to $21.4 million or 26.5% net sales in the same period last year. The reduction in dollar spending primarily reflects the favorable impact on finance fees of $2.1 million, resulting from amendment of financing agreement effected during the quarter, which included onetime retroactive adjustments, coupled with a onetime favorable impact of $1 million resulting from a contract indemnity settlement, partially offset by higher media spend. The decrease in sales and marketing as a percentage of sales reflects the same factors. For the first 9 months of 2017, sales and marketing expenses totaled $79.3 million or 28.5% of net sales compared to $81.3 million or 29% of net sales for the same period in the prior year as lower finance fees were partially offset by higher media spending. General and administrative expenses were $6.3 million or 7.2% of net sales for the third quarter 2017, which compares to $6.2 million or 7.6% of net sales in the same period last year. The increased dollar spending in G&A primarily reflects higher legal expenses, partially offset by lower incentive reserves and expenses related to the Octane integration that were incurred in the prior year. General and administrative expenses for the first 9 months of 2017 were $21.1 million or 7.6% of net sales as compared to $21.6 million or 7.7% of net sales for the same prior period, reflecting lower incentive and compensation-related expenses and Octane integration costs, partially offset by higher legal cost. Research and development costs in the third quarter of 2017 were $3.6 million or 4.1% of net sales compared to $3.4 million or 4.3% of net sales in the same period last year. The dollar increase reflects our continued investment in the engineering and design resources required to continue to innovate and broaden our product portfolio. Research and development expenses for the first 9 months of 2017 as a percentage of net sales totaled 4% as compared to 3.7% for the same prior period. Operating income for the third quarter of 2017 increased to $13.4 million as compared to operating income of $8.2 million in the same quarter last year. The increase reflects higher revenues, coupled with the lower spend in sales and marketing. Operating margin for the third quarter of 2017 increased to 15.2% compared to 10.2% for the same period last year. EBITDA from continuing operations in the third quarter 2017 was up 49.7% to $15.3 million versus $10.2 million for the same quarter of the prior year. For the first 9 months of 2017, operating income was $29.9 million or 10.7% of net sales, a decrease of 12.3% over the same period last year. Year-to-date EBITDA from continuing operations totaled $36.4 million versus $39.8 million in the same period last year, a decrease of 8.5%. Income from continuing operations for the third quarter of 2017 was $8.3 million or $0.27 per diluted share as compared to $7.8 million or $0.25 per diluted share for the same period last year. For the first 9 months of 2017, income from continuing operations was $19.1 million or $0.61 per diluted share, a decrease of 17.4% over the same period last year. The effective tax rate for the third quarter of 2017 was 36.8% compared to 1.9% in the same period last year. Tax expense in the prior year quarter was favorably impacted by the release of previously unrecognized tax benefits associated with the completion of the deregistration process for certain foreign entity. Total net income, including discontinued operations for the third quarter of 2017, was $8.2 million or $0.27 per diluted share, which includes a $0.1 million loss, net of taxes, from discontinued operations. This compares to the third quarter last year where we reported total net income, including discontinued operations, of $7.6 million or $0.24 per diluted share, which included a net loss from discontinued operations of $0.3 million. Year-to-date net income for 2017 totaled $17.8 million or $0.57 per diluted share versus $22.6 million or $0.72 per diluted share for the same prior period. Turning now to our segment results. Net sales in the Direct business totaled $34 million for the third quarter of 2017, a 0.8% increase over the same quarter last year. Direct segment sales grew with the introduction of the HVT product, but this growth was offset significantly by continued declines in TreadClimber sales. Media metrics remained challenged as the continued decline in TreadClimber sales, coupled with slower than anticipated traction of the HVT product launch, are the key drivers of the shortfall. Year-to-date sales of $147.8 million are down 7.6% year-over-year, reflecting these same factors. Gross margin for the Direct business declined to 63.5% for the third quarter of 2017 compared to 65.7% in the same quarter last year due to higher discounting of TreadClimber products and lower standard margins for the new HVT and Results Series introductions relative to Max Trainer or TreadClimber. Operating income for the third quarter of 2017 in our Direct business was $5.3 million compared to $2.6 million in the same quarter prior year. Operating income was favorably impacted by lower financing fees applied retroactively, resulting from amendment of a financing agreement. Year-to-date 2017 operating income for the Direct segment totaled $23.1 million or 15.7% of net sales compared to $31.3 million or 19.5% of net sales in the same prior period. Net sales in our Retail segment for the third quarter of 2017 were $53.5 million, an increase of 15.8% compared to $46.2 million in the third quarter of last year. The increase in retail net sales reflects strong growth in the organic Retail business, driven by key new product placements, offset by weakness in specialty retail and timing-related shortfalls in commercial. Gross margins for the Retail business improved by 60 basis points to 35.7% in the third quarter of 2017 as compared to 35.1% for the prior period, mostly due to improved product mix. Year-to-date 2017 gross margins for Retail totaled 34.2%, up 130 basis points versus the same period in the prior year, primarily driven by the same factors. In the third quarter of 2017, operating income for the Retail business totaled $12.1 million as compared to $9.2 million in the same period of last year. The increase is attributable to the higher revenues and gross margins, along with the previously mentioned contract indemnity settlement received. Year-to-date 2017 operating income for the Retail business totaled $20.4 million versus $17.2 million for the same period in the prior year. Now turning to the consolidated balance sheet. Cash and investments totaled $77.8 million as of September 30, 2017, with $52 million of debt. This compares to $79.6 million in cash and investments with debt of $64 million at December 31, 2016. Inventories were $57.6 million as of September 30, 2017, compared to $47 million at December 31, 2016, and $49.2 million at September 30, 2016. The increase in inventory versus year-end 2016 relates to the seasonality of the business while the increase versus September 30, 2016, reflects a significant amount of in-transit inventory in the current year period versus same period in the prior year. Trade payables were $62.1 million as of September 30, 2017, compared to $66 million at the end of 2016, reflecting seasonality of purchases. Capital expenditures totaled $2.7 million for the 9 months ended September 30, 2017, with spending primarily on product tooling, IT assets and facility infrastructure. We anticipate full year CapEx to be in the range of $4.5 million to $5.5 million. At this time, I would like to turn it over to Bill McMahon, our Chief Operating Officer, who will provide additional insights into our business and key products. Bill?

[William McMahon:]

Thank you, Sid. Good afternoon, everyone. I'd like to provide further background on the results and provide some commentary on our full year 2017 outlook. Starting with our Direct segment. We were pleased to return to a revenue growth environment in this channel, but the modest growth we achieved was below our overall expectation. The Q3 sales increase versus prior year was primarily driven by the introduction of the Bowflex HVT and the Bowflex Results Series of cardio products, partially offset by continued decline in our Bowflex TreadClimber sales. As we have said on previous earnings calls, we've adjusted downward our direct media investments in TreadClimber as a category, and we are cascading the product into other channels of the business. This step, while prudent, negatively impacted direct channel revenue. We currently expect our fourth quarter Direct segment sales to achieve higher year-over-year growth rate when compared to the third quarter growth rate as these new products gain traction. During Q3, we began testing, modifying and improving the optimization of media surrounding the early stages of Bowflex HVT. We're encouraged by the early performance of HVT in several key areas, including consumer response rate and lead generation efficiency, and we've made some gains in the important area of conversion, which was a problem outlined in our Q2 earnings call. But we're not yet fully optimized. HVT is gaining traction slowly, and we need to continue to make improvements in performance. Due to strong buyer reviews and customer satisfaction, we remain optimistic about HVT. And we'll have a better read on the potential of this product and the media performance in general during the important holiday peak season, which for the Direct segment is from November of this year through January of next year. Meanwhile, the Bowflex Max Trainer continued to deliver the majority of sales in our Direct segment during Q3. Max Trainer sales overall are up for Nautilus, Inc. and helped drive growth in our Retail segment during the quarter, but sales of this product were slightly down in Direct. To continue to grow Max overall, we're getting more creative in delivering what our customers want with product personalization. A great example of this is our limited-edition collegiate-branded Bowflex Max Trainer M5, which we're testing this fall. The direct channel continues to deliver growth in the strength category. Both selectorized weights and home gym sales grew in the third quarter, and we believe this growth in the strength category represents a continuing participation trend, where consumers are seeking strength training solutions to add to their existing cardio regimen. Further growth in our direct channel will, as always, be driven by product innovation. Our next major direct product launch is on track for Q2 2018 and involves a cardio modality that is new to the consumer market. We'll provide more information on this product in our next earnings call. Additionally, we spent time over the past year of evaluating unique offerings under the Schwinn brand. Schwinn is best known for quality and ease of accessibility for everyone, from beginners to even the most experienced, hard-core participants. In late Q4 and early Q1 2018, we'll begin marketing, first in Direct and then later in Retail, a new and unique cycling product under this iconic brand. This upright bike will marry the rich heritage of the Schwinn brand, a compelling industrial design and modern technology to deliver a fun and engaging fitness experience. We intend for this product to be a surprise to the market, and when consumers see it, we hope they'll be as excited about it as we are. Turning now to our Retail segment. Our Q3 revenues were up approximately 16% year-over-year, and those results were driven by strong sell-in and broad replacements of both existing and new products in traditional bricks-and-mortar as well as in e-commerce retail. We were pleased with the strong growth in these traditional channels, and that performance did exceed our expectations. However, this growth was somewhat offset by lower sales in specialty fitness, which was primarily related to continued turbulence in that channel as well as some order timing in the commercial segment. We are now approaching the 2-year anniversary of our acquisition of Octane Fitness. Overall, it's fair to say that the acquisition has not performed to our original level of expectation, and this is primarily due to the macro level external shifts that we've occurred in the specialty fitness market. Despite this, it's important to remember that Octane has been accretive to the Nautilus shareholder in terms of profitability delivered and in revenue diversification opportunity. We believe there's significantly more value to be unlocked at Octane, and we will continue to evolve the business to adapt to the changing specialty fitness environment while pushing further into commercial and international markets. Our confidence in the long-term value of Octane is reinforced by the talented team of professionals based in Brooklyn Park, Minnesota who are now deeply embedded in the Nautilus family. In terms of product performance, Retail sales in the third quarter were helped by growth in several categories, including Max Trainer, treadmills, Schwinn bikes, Bowflex SelectTech, Schwinn Airdyne Pro and the Octane Zero Runner ZR8000. In our prior earnings call, we outlined in detail several Retail product launches for the third and fourth quarter of 2017. These products, more than 20 new-to-market SKUs, span a variety of modalities and price points. The vast majority of these new products have now launched and are either currently placed with Retail accounts or will be shortly, in time for the fitness season. For those products placed, we're seeing encouraging early performance at point of sale, especially so in the case of the Bowflex Results cardio series. Lastly, in terms of commercial club-rate products, we just launched the new Octane ZR7000, which is a second machine at our full commercial club-rated Zero Runner line. We're very pleased with our continued floor expansion with key major Retail partners, which is being achieved while not slowing our growth with our online partners as well as with our ongoing point-of-sale performance. As we look forward to the fourth quarter, we expect continued year-over-year growth in Retail. But please do remember that seasonal sell-in that occurs in the second half of this each year occur primarily in Q3 of this year as compared to last year. We currently do not anticipate achieving the same year-over-year growth rate in the fourth quarter as we did in the third quarter of 2017. As always, we evaluate performance of our organic Retail business over the second half of the year versus individual quarters. And on that basis, we anticipate that the organic retail channel performance for the back half of 2017 will reflect strong gains and market share on a global basis. Regarding our inventory and supply chain, we feel that our inventory balance is appropriate, both at our current Retail partners and within our distribution centers. We believe we're well positioned as we head into peak fitness season over the coming weeks. Finally, though we outlined in the call today the multiple new product introductions occurring now, please keep in mind that we also have a very robust multiyear product road map in place, and we are already preparing for new product launches in 2018 and beyond. At this point, I'd like to turn the call back over to Bruce for his closing comments. Bruce?

[Bruce Cazenave:]

Thank you, Bill. I'd like to make a few final comments before we open up the call for questions. Since early in the year, we communicated how we saw the year unfolding with a slow first half followed by stronger growth in the back half. Our internal projections were based on double-digit revenue growth for the business in the second half with Retail growth skewed heavier in the third quarter and Direct growth coming more so in the core fourth quarter holiday season. The good news is, we achieved top line growth of 16% in the third quarter in the Retail segment, driven by strong sell-in and placement of new products into our organic retail channel, as Bill mentioned. Despite a very challenging overall market environment, we continue to gain market share with traditional and e-commerce retail customers and are expecting that our recently introduced new Octane-branded products will help drive growth in our commercial and specialty retail locations as well. On the Direct side of our business, however, we are taking a more conservative outlook based on several factors that emerged during the third quarter. First, in-market test of creative messages and media approaches on the HVT product suggest that this product will be -- have a more deliberate growth trajectory, and we have modified our near-term forecast accordingly. Second, media efficiency metrics remain challenged. This is partially due to HVT awareness building efforts, but nevertheless. Did not meet our overall expectations when compared to the third quarter last year. And third, continued likely declines in the TreadClimber sales for a few more quarters provides an added drag on both direct revenues and margins we need to consider. While these product and media dynamics can change once we enter the peak season in late November, just as they have done in the past. We feel level-setting expectations for lower than previously guided year-over-year growth rate for our Direct business in Q4 is prudent at this time. Therefore, given these headwinds and lower-than-previously-guided growth rates expected in both the Direct and Retail businesses, coupled with additional investments we plan to make to support strategic growth areas and to create momentum for HVT, we are revising our full year guidance on the total company revenue to be in the range of $405 million to $410 million. This does reflect expected revenue growth in the fourth quarter, although lower than anticipated in prior full year guidance and is roughly flat to the prior year on a full year basis. Full year operating income expected to be in the range of $44 million to $46 million, which is a 13% to 18% decrease over prior year. While the near-term outlook is pointing to a full year results that are clearly disappointing and not what we had planned, we remain excited about the stepped-up cadence of new products launching this year and those coming in 2018 across all channels of distribution. Importantly, our fundamental strategy centered around continuing to invest in new product innovation, building brands, channel diversification and achieving additional market access points remains intact and we intend to stay the course while adapting tactics as necessary. The company is in a strong position, both in the marketplace and financially, to take advantage of growth opportunities that we can create or that are presented to us, including whether they be organic or through acquisition of new assets. As is always our standard operating mode, we move simultaneously along parallel past of strengthening the core business and processes while exploring worthy, incremental growth opportunities that fit our strategic initiatives. In closing, I'd like to thank all of our dedicated employees, who are instrumental in our successes and help make the company stronger every quarter was result of their efforts and initiatives. That concludes our prepared remarks. Now I'd like to open up the call for questions. Operator?

[Operator:]

Thank you [Operator Instructions] And we'll take our first question today from Michael Swartz with SunTrust Robinson Humphrey.

[Michael Swartz:]

Hey. Good afternoon, guys.

[Bruce Cazenave:]

Hi, Michael.

[Sidharth Nayar:]

Hey, Mike.

[Michael Swartz:]

Hey, just maybe for Bill, first question, just around HVT. Could - maybe you could provide us a little more color about the launch there, what you've learned over the past quarter or two. And then I think you made comments about just awareness and maybe not being as strong out of the gates as you thought. I guess give us a sense of how do you know it's awareness versus something else?

[William McMahon:]

Yes. Hi, Michael. On HVT, what we're seeing, there's really 3-key elements of success in a Direct product. Number one is what's your efficiency in being able to generate interest in the product, meaning your cost of response. Number two is can you -- people who do respond, do they buy and at what rate do they buy? And of course, number three, very important is are they satisfied with the purchase and are they going to say good things about it. So on HVT, we have two of the three boxes checked. So our media performance in terms of creating response for HVT, I'd say, is good for this point in a product launch for a new direct product. And the customer satisfaction remains extremely strong for this product, highest that we've seen really in any direct product launch today. But we are still having challenges in terms of driving higher conversion, and that, in turn, is not delivering the performance we would like to see as of yet with the product. So conversion is about testing price points. It's about testing messaging to see those who do respond, what is it that isn't clicking for them when they do come in and increasing that rate. So while we're getting some improvement, we're not getting the improvement we'd like to see as of yet. Does that help?

[Michael Swartz:]

Yes - no, that's great. And I guess just as a practical matter. When you're trying to improve the conversion rates, I mean, what - I guess what are the levers you have to attack that specifically?

[William McMahon:]

I think the biggest thing you do is you go back and you look at, so what is the obstacle to purchase. And in our case, we have some proprietary research we've done that gives us feedback on those who are responding, why is it they then, at that point, made the choice not to buy. Just as much as for those who did buy, why did they buy and what was it that clicked for them. And it's the art of learning those factors and then deciding is there a way we can position the product or, otherwise, get in front of people that makes sense to them to lower the barriers to that purchase. And you're going to see some more testing in that regard with us. Sometimes it's about trying different price points and bundled combinations. Other times, it may have to do with other things that we say about the product along the way. We know we have a strong product here and that the customers who have bought it really love it. It's just closing the gap on how do we get more people to experience that joy that those who bought are receiving.

[Michael Swartz:]

Okay, great. And just second -or maybe third question here. I think - Sid had mentioned something about, I guess, the higher in-transit inventory. I'm just wondering what that's about. And then is that related to some of the timing in commercial sales that you had also referenced?

[Sidharth Nayar:]

Yes, Mike. This -- it's actually -- obviously, inventory was up significantly quarter-over-quarter and, really, 3 key drivers. Number one was the in-transit inventory. Last year, we had about $4 million of inventory in transit at the end of the quarter compared to $11 million this year. So it's a big chunk of that change, and some part of it is timing. We had more orders that were shipping in early October last year versus it going out in late September this year. But there were a couple of other factors. Clearly, the shortfall in Q3 sales also explains maybe a couple of million dollars' worth of that increase. And finally, I should say that Bill talked about 20 new SKUs. So just in terms of having them backfilled. Stock positioned as we launch these new SKUs, that added a little bit to the overall inventory numbers as well. I would say that we feel that we're in a good position, certainly through this holiday season to be back in fairly normalized inventory ranges. It'll be a little higher than we were in prior years.

[Michael Swartz:]

Okay. Thanks. That’s it from me.

[Bruce Cazenave:]

Thanks, Michael.

[Operator:]

Next, we hear from Eric Wold with B. Riley.

[Eric Wold:]

Thank you. Good afternoon.

[Bruce Cazenave:]

Hi, Eric.

[Sidharth Nayar:]

Hi, Eric.

[Eric Wold:]

A couple of questions. I guess one follow-up on the questions around HVT. I guess with the lower-than-expected conversion you're seeing initially on that, maybe talk about what you're currently now anticipating in terms of marketing spend in Q4 versus maybe where you stood on the Q2 call.

[William McMahon:]

I think - Eric, good question. We will continue to invest in HVT as we go into the peak season, and we will invest more than we did in Q3. But reflective in the guidance, we'll be investing less than we would've anticipated in Q2. And that's because we want to see some more positive traction before we're willing to go to the highest spend levels that we had prior planned.

[Eric Wold:]

Okay. And then with the planned launch of the Schwinn upright bike launch, is that a move kind of into the subscription recurring revenue segment ala Peloton in kind of how you described it? Or how are you thinking about your opportunity to get into something like that as well?

[William McMahon:]

Two answers to that. One, this specific Schwinn product will not be a subscription group x model, and we think it has a very unique take. We do -- we'll have more to say about that in the next call. Certainly, you'll see it in market around the beginning of the year, and we think it's a very interesting product that should do well. In terms of our thoughts on subscription models and going forward, it's definitely something we're exploring. And I think in our long-range product road map, it's the type of an environment that I think we'll continue to explore and perhaps have some products that address that down the road.

[Eric Wold:]

Perfect. Thank you.

[Bruce Cazenave:]

Thanks, Eric.

[Operator:]

Frank Camma with Sidoti has our next question.

[Frank Camma:]

Good afternoon, guys.

[Bruce Cazenave:]

Hi, Frank.

[Sidharth Nayar:]

Hi, Frank.

[Frank Camma:]

I know you spent a lot of time on this, so I want go a little deeper on the media spend because I guess I don't understand. I totally understand the HVT dynamic there. But what I don't understand is, like last year, you're comping against your difficult placements with media in general because of the presidential campaign. So let's start with that. And the second part of the question is, when you look at the percentage of spend on advertising and promotion, especially when I adjust it for sort of $1 million, it looks like it's pretty sharp decline. So maybe you can add some commentary on the Bowflex Max Trainer component and why that would be down.

[William McMahon:]

Yes. Frank, a couple of things. On the selling and marketing, we did have a onetime benefit that came on the -- we renegotiated a finance company partner contract and received a onetime benefit as well as some ongoing savings in the future in terms of cost of financing. So that, in the single quarter, did have an impact on what you're seeing as a comparison. Overall, prior year, indeed, should have been a comp that was easier to pass. The differences are, there was some TreadClimber spend in the prior year. That spend went away. We had anticipate putting that spend into HVT did -- ended up for the reasons we've discussed, did not put it into HVT. Max Trainer spend was essentially flat year-over-year, perhaps slightly less. What we're finding with Max is still a great performer for Direct, still very profitable ROIs. But in the off-season, it's - Max is not supporting an increased spend at this time, though we think by going into some personalization and some updates to Max, that we can also return to a growth path and Max for Direct. So it's more about timing of we originally anticipated that we'd be able to increase that media spend, primarily on the back of HVT, and we just simply were not able to do it in Q3, so we're making the assessment we do. We felt the optimal profitability position was to back off of that, so we did it.

[Frank Camma:]

Okay. On the TreadClimber, given the results and the trends, Bruce, I think you said a couple more quarters of that. But -- like what time do you actually like stop selling that? Or is it a competitive product in the retail environment, do you feel?

[Bruce Cazenave:]

Yes. We -- it is going to continue for a few more quarters, we said, Frank. The -- it's never going to go away. It's a very viable product. There's a lot of appeal to it. And the awareness we built over 12 years of that product, there's still going to be a long tail of that. We are getting successes in Retail as it's been cascaded into Retail. But we know that it's - there's a certain type of retailer that can sell it best, and those are folks that normally have a pretty knowledgeable sales force on the floor selling it to answer questions about the product and to give people a fair chance to get on it and understand it. Those that don't have that level of assistance on the floor have more trouble selling TreadClimber. So not unlike the - and I think Bill has made this comment in the past. Not unlike we continue to sell home gyms over 20 years after the fact it was launched only in Direct. We plan to continue to have TreadClimber in the line. And it's still -- even at a discounted rate, it's still -- it's a good margin product that has a large appeal as we mentioned earlier.

[Frank Camma:]

Okay. And last question for me. Can you talk at all specifically about the recent launch of the Modern Movement devices, given their price point?

[William McMahon:]

Sure. The Modern Movement products, Frank, thanks for bringing that up, are -- they're launching now -- or will ship shortly and they should be in retailers within the next two months to, well, maybe 30 days. Modern Movement, we're pretty excited about. So it's our foray into shelf fitness. We have some pretty unique modalities there. And we tied technology, meaning apps, to the M-Board, for example. So you have an engaging environment where you're using them app to help you use a balanced product. Those who have tested the product and those who have seen it are pretty excited about it. We expect to have media coverage on this and give guides and otherwise coming up shortly. So it's a good foray for us into this area. We feel it's pretty fruitful and an area we haven't touched yet. But we need to prove it out like with every other product introduction. If it works, we'll - we have some ideas on how to continue to expand the product line.

[Frank Camma:]

What's the retail price for that?

[William McMahon:]

It ranges from about $69 up to about $120 at the most.

[Frank Camma:]

Thank you.

[Bruce Cazenave:]

Thanks, Frank.

[Operator:]

Our next question comes from Andrew Burns with D.A. Davidson.

[Andrew Burns:]

Good afternoon. Just a follow-up on the timing of new Direct products. Is the idea behind the late 4Q, early 1Q Schwinn launch to perhaps capture some of the peak season demand? Or will that still be in sort of testing mode early on in its cycle? And then with the other cardio launch into 2Q '18, is that expected to be so much of HVT where you sort of test 2Q, 3Q for a 4Q impact?

[William McMahon:]

Yes. Thank you, Andrew, very good points made. On the Schwinn product launch, it'll be primarily digital marketing. So we'd like to capture that at the peak of the season, as you said. And I think this is going to be the type of product that when you see it will explain itself. On the next Direct big product launch, television product launch for Q2 of '18, yes, that we would launch in that time frame for the same reasons of HVT, is to give us some runway to test the product prior to the next fall season.

[Andrew Burns:]

Okay. Thanks. And then what are your high-level thoughts on the specialty channel, given the weakness and consolidation in that space? What is your commitment to maintain that distribution channel? And how does Octane need to evolve considering how the specialty channel is changing? Thanks.

[Bruce Cazenave:]

Yes. This is -- I would say that as we commented in the script here, that the -- there are still a number of dynamics that are happening, purchases, more M&A activity going on and so forth. The channel is definitely under pressure, but we see it as still a viable channel going forward. Keep in mind, Andrew, that it has two aspects to it. One is part of it is servicing the vertical markets, things like corporations, small hotel chains, et cetera. And that part of the market has actually done fairly well and continues to do well and is growing as a category within specialty. It's more of the consumer products that are sold within specialty that are being challenged by e-commerce and some other factors that are going there. So that part of it is where, I think, we have to adapt. And we have product plans that will help us navigate through those challenges that we might have in the specialty retailers, but it's still something - honestly, if you ask me back in January of 2016, we would have said that we've got about 6 to 9 months of turmoil in this industry. Now it seems like it's going into almost its third year. And there's still more, let's just call it, stabilization that needs to happen. But it's still - I would talk about it earlier, they do provide a value added, particularly to high-discretionary income folks who are looking to buy almost commercial-grade product. And they can't find it elsewhere in e-commerce or in bricks-and-mortar outlets, so they go to specialty. And so we think that's a viable market because it fits very closely into what Octane stands for. So we're still in it. We just have to navigate some of the changes that are affecting us within the various retailers and who's going to carry us.

[Andrew Burns:]

Thanks. And then one last one. Just curious, as you look at the upcoming holiday season as it relates to Retail, in past years, you've done some mall pop-ups, you test shop-in-shops and main line sporting goods. Is there any new strategies you'll be testing out this holiday season at Retail?

[William McMahon:]

Yeah, we'll continue to do some in-store testing with certain partners retail this year, Andrew, and what - though we aren't going to do any of the mall kiosk testing. Currently, we find that our strategic partnerships we have in place give us the opportunity to do that right on the floor and continue to expand in that area. We've had some pretty good results with some dedicated help inside the stores.

[Andrew Burns:]

Thanks very much.

[Bruce Cazenave:]

Okay. Thanks, Andrew.

[Operator:]

[Operator Instructions] And we have one last question from George Kelly with Imperial Capital.

[George Kelly:]

Hi, guys. A couple of questions for you. So first, wondering, in your prepared remarks, you commented that Octane has - there's significant value to be unlocked. I'm wondering if you can be more specific. You've owned it now for a couple of years. So wondering if there's anything, maybe it's in 2018, that unlocks that value.

[William McMahon:]

Yes. Thanks, George. I think Bruce commented on our commitment to the specialty market. We think we just need to evolve to match that. But I think Octane's future is -- Octane is a strong brand in the commercial space as well. And I think unlocking through additional modalities and new innovation. We have the opportunity to take that brand to even more places in the commercial space and on the international stage. So we think we have a tremendous asset here in the brand and the people involved with innovation at Octane and, certainly, some headwinds in specialty, but so many more markets we can go to with that brand and continue to expand.

[George Kelly:]

And can you remind me the time line of the international kind of development with integrating Octane in your legacy brands? Where are we?

[Bruce Cazenave:]

Yes. '18 is really the year we've targeted for that. There's a lot of systems work that needs to be done. There's some consolidation of inventory and certain warehouses, particularly in Europe, third-party logistics warehouses. So those kinds of things are well underway. And that would be part of what Bill alluded to in terms of unlocking some of the value, will be to leverage some of those capabilities, both for the Retail business, in particular, internationally. The other part of it is we still are in the works, and '18, you'll start to see products that are being sourced from other factories. So let's just say dual source from other factories. That, potentially, could provide us some better cost than what currently is being experienced there. So that's another, they call it, phase 3 of the 3-phase integration that happens in 2018.

[George Kelly:]

Okay. That's helpful. And then a couple of questions about the Direct segment. I believe -- did you say that you expect growth in the fourth quarter to be higher than it was in the third quarter?

[William McMahon:]

Yes. We currently project Q4 growth to be higher than Q3's modest growth.

[George Kelly:]

Okay. And is - what are you seeing in regards to the specific products in that category that give you confidence that you can accelerate growth? Because the comp seems more challenging than the third quarter.

[William McMahon:]

Yes. It is more challenging than the third quarter. As you know, George, we don't report out on individual product-specific performance. I can't say we'd anticipate some continued benefit with HVT, another quarter of TreadClimber comping against a lower prior year, and then we do anticipate good performance from Max Trainer in the fall. Lastly, the Results Series products in Direct are performing quite well, especially the Bowflex treadmill. So while Direct, historically, is not focused on traditional cardio products, we are seeing strong consumer response in that area as well, and that'll contribute.

[George Kelly:]

Okay. And then last question on approvals, credit approvals in the third quarter.

[William McMahon:]

Credit approval was up in the third quarter to 53.7% overall. That's up from 47.9% prior year. The vast majority of that improvement was from our Tier 1 provider, which, combined with the improved financing fees, is a favorable headwind going forward for Direct. I would note that in terms of payment mix in Q3, Direct was slightly more credit card than financing, but essentially in line with our normal payment mix.

[George Kelly:]

Thank you.

[Bruce Cazenave:]

Thank you, George.

[Operator:]

That will conclude today's question-and-answer session. I would now turn the conference over to Mr. Cazenave for any additional or closing comments.

[Bruce Cazenave:]

Thank you. Thanks, everyone, for your interest in Nautilus and joining our call today. We look forward to providing another update on the business in our Q4 and full year earnings call next year. Have a great rest of the day. Thank you.

[Operator:]

That does conclude today's conference call. Thank you for your participation. You may now disconnect.