Nautilus, Inc.
Q3 2016 Earnings Call Transcript

Published: 1 Nov 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Nautilus Third Quarter Fiscal Year 2016 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. John Mills, Partner at ICR. Please go ahead, sir.

[John Mills:]

Thank you. Good afternoon, everyone. Welcome to Nautilus' third quarter 2016 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 for the most directly comparable GAAP measure. The remarks on today's conference call may include forward-looking statements within the meaning of the Securities Laws. These statements include statements concerning the company's current and future financial and operating trends, factors affecting our future operating results including channel mix, segment margins, long-term growth and profitability targets, anticipated new product introductions, anticipated capital expenditures, available supply of certain products, the anticipated impact of variation in the effectiveness, availability and price of media time over the near term, planned and anticipated results of new product and business development initiatives, and anticipated benefits and costs of the acquisition of Octane Fitness. 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 annual and quarterly reports filed with the SEC as well as the Safe Harbor statement in today's press release. Nautilus undertakes no objection to update publicly any forward-looking statements to reflect new information, events, or circumstances after they were made; or to reflect the occurrence of unanticipated events unless otherwise indicated. All information and comments regarding our operating results pertain to our continuing operations. And with that, it is my pleasure to turn the call over to Bruce. 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 results and then we will turn it over to Sid Nayar to review our financial results in more detail. Bill McMahon will follow providing details on each business segment as well as updates on product activity. I will close with some summary remarks before we open up the call for questions. In the third quarter, we generated increases in every key financial aspect of our business. Total revenue increased 14%, operating income increased 29% and EBITDA increased by 42% over the same period of the prior year. This operating performance improvement was driven by another strong quarter for our retail business including double-digit growth in both the organic and Octane Fitness segments. Our direct business in the quarter was however impacted by a decline in sales reflecting weak consumer response to our media investments and the resulting strategic decision we made to defer a significant portion of our planned advertising media spending during the quarter. Bill will further explain the rationale for this decision given the continued challenging consumer response environment that we referenced on our Q2 earnings call. At this time, we still believe the situation to be temporary and primarily media related, but recognize that other factors such as weakening consumer confidence, product lifestyle management and creative are all additional issues that may be at play. We have made the appropriate adjustments to our direct strategy and remain hopeful that conditions become more normalized when heavier, seasonal media spending occurs later this year. Despite these challenges in the direct business, the strong organic retail and Octane Fitness sales growth combined with improved gross margins in each business and disciplined cost management enables us to generate significant operating leverage and report another quarter of profit growth well in excess of double digit revenue growth. Now, I’d like to turn the call over to Sid to revenue our financials in more details. Sid?

[Sidharth Nayar:]

Thank you, Bruce. I would like to review the details of our financial results for the third quarter of 2016. Net sales for the third quarter totaled $80.8 million, an increase of 14.3% as compared to the same period in the prior year. For the first nine months of 2016, net sales were $280.3 million, an increase of 23.7% over the same period last year. Third quarter gross margins increased 140 basis points in the direct segment to 65.7% and were up 950 basis points in the retail segment to 35.1% when compared to the same quarter last year. On an overall basis, total company gross margins for the third quarter of 2016 decreased by 270 basis points to 48.5% versus the same period prior year, reflecting the shift in segment mix to increased retail segment revenues. Year-to-date 2016 gross margins of 52.6% are 70 basis points lower than 2015 year-to-date gross margins as the shift in mix to increased retail sales more than offset the improved margins within each segment. Total operating expenses for the third quarter of 2016 as a percentage of net sales decreased to 38.4% from 42.2% in the same period last year, reflecting lower sales and marketing expense and reduced reserves for performance related incentive programs partially offset by higher amortization expense related to the Octane Fitness acquisition and increased spending in product development. Total operating expenses for the first nine months of 2016 as a percentage of sales were 40.4% as compared to 41% for the same prior period. Sales and marketing expenses for the third quarter of 2016 were $21.4 million or 26.5% of net sales as compared to $21.7 million or 30.8% of net sales in the same period last year. The reduction in dollar spending primarily reflects lower media spending and finance fees, partially offset by the inclusion of expenses related to the Octane Fitness. The improvement in sales and marketing expenses as a percentage of sales reflects the same factors. For the first nine months of 2016, sales and marketing expenses totaled $81.3 million or 29% of net sales compared to $70.2 million or 31% of net sales for the same period in the prior year, with higher media spending being the main driver coupled with variable expenses related to third party consumer financing as well as the addition of Octane Fitness selling expenses. General and administrative expenses were $6.2 million or 7.6% of net sales for the third quarter of 2016, which compares to $5.5 million or 7.8% of net sales in the same period last year. The increased dollar spending in G&A primarily reflects the addition of Octane Fitness as well as higher amortization expense that was also related to the acquisition, partially offset by lower performance related incentive reserve requirements and a legal settlement. General and administrative expenses for the first nine months of 2016 as a percentage of net sales totaled 7.7% as compared to 6.8% for the same prior period, reflecting the addition of Octane Fitness and amortization expense related to the acquisition. Research and development cost in the third quarter of 2016 were $3.4 million or 4.3% of net sales compared to $2.6 million or 3.6% of net sales in the same period last year. The dollar increase reflects continued investment in resources required to continue to innovate and broaden our product portfolio coupled with the addition of incremental product development resources at Octane Fitness. Research and development expenses for the first nine months of 2016 as a percentage of net sales totaled 3.7% as compared to 3.2% for the same prior period. Operating income for the third quarter of 2016 increased to $8.2 million as compared to operating income of $6.4 million in the same quarter of last year. The increase reflects higher net sales in the retail segment, coupled with increased gross margins as a percent of sales in both segments, partially offset by higher acquisition related expenses of $0.9 million, which includes the increased amortization expense of $0.8 million and an inventory step up charge of $0.1 million. Operating margin for the third quarter of 2016 increased to 10.2% compared to 9% for the same period last year. EBITDA from continuing operations in the third quarter of 2016 increased by 42.4% to $10.2 million versus $7.2 million for the same quarter of the prior year. For the first nine months of 2016, operating income was $34.1 million or 12.2% of net sales, an increase of 22.1% over the same period last year. Year-to-date EBITDA from continuing operations totaled $39.8 million versus $30.0 million in the same period last year, an increase of 32.5%. Income from continuing operations for the third quarter of 2016 was $7.8 million or $0.25 per diluted share as compared to $3.9 million or $0.12 per diluted share for the same period last year. For the first nine months of 2016, income from continuing operations was $23.1 million or $0.74 per diluted share, an increase of 36.4% over the same period last year. The effective tax rate for the third quarter of 2016 was 1.9% compared to 39.8% in the same period last year. The lower effective tax rate resulted from the company realizing a non-recurring tax benefit of $2.7 million or $0.09 per diluted share related to the release of previously unrecognized tax benefits, upon us completing the de-registration of a non-U.S. entity. Total net income including discontinued operations for the third quarter of 2016 was $7.6 million or $0.24 per diluted share, which includes a $0.3 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 $3.7 million or $0.12 per diluted share, which a net loss from discontinued operations of $0.1 million. Year-to-date net income for 2016 totaled $22.6 million or $0.72 per diluted share versus $16.9 million or $0.53 per diluted share for the same period. Turning now to our segment results, net sales in the direct business totaled $33.7 million for the third quarter of 2016, a 21.4% decrease over the same quarter last year. Direct segment sales were impacted by challenging media conditions and lower awareness metrics during the quarter, resulting the company intentionally scaling down media spending which in turn further impacted lead generation activity. Bill will provide more color on our actions and outlook for this segment in his comments. Year-to-sales of $159.9 million are up 0.8% year-over-year. Gross margin for the direct business improved to 65.7% for the third quarter of 2016 compared to 64.3% in the same quarter of last year. Gross margin improvement was primarily due to favorable product mix driven by higher sales of the Max Trainer M7 product as well as lower discounts and allowances. Operating income for the third quarter of 2016 in our direct business was $2.6 million compared to $5.4 million in the same quarter prior year. Operating income was negatively impacted by the lower net sales and gross margins dollars in the third quarter of 2016. Year-to-date 2016 operating income for the direct segment totaled $31.3 million or 19.5% of net sales compared to $30.1 million or 19% of net sales in the same prior period. Net sales in our retail segment for the third quarter of 2016 were $46.2 million, an increase of 79.6% compared to $25.7 million in the third quarter of last year. The improvement in retail net sales reflects strong double digit growth in excess of 16% across both the cardio and strength components of the organic retail business coupled with improved international sales year over year. The addition of Octane Fitness also added incremental sales to the retail category and this category saw a robust sales growth of 23% year-over-year. Gross margins for the retail business improved by 950 basis points to 35.1% in the third quarter of 2016 as compared to 25.6% for the prior period. Organic retail gross margins were favourably impacted by improved product and channel mix, improving by over 600 basis points while the inclusion of Octane Fitness products which generates higher gross margins helped to further drive the margin increase. Year-to-date 2016 gross margins for retail totaled 32.9%, up 910 basis points versus the same period in the prior year, primarily driven by the same factors. In the third quarter of 2016, operating income for the retail business totaled $9.2 million or 19.8% of net sales as compared to $3.2 million or 12.5% of net sales in the same period of last year. The increase is attributable to the higher revenues and gross margins and the addition of the Octane Fitness business. Year-to-date 2016 operating income for the retail business totaled $17.2 million or 14.6% of net retail sales versus $5.9 or 9.2% of net retail sales for the same period in the prior year. We are particularly pleased with the improvement in retail operating margins during 2016 that reflect ongoing efforts to grow organic retail gross margins through improved product and channel mix. Now, turning to the consolidated balance sheet, cash and investments totaled $59.3 million as of September 30, 2016 with $68 million of debt. This compares to $60.8 million in cash and debt of $80 million at December 31, 2015. Inventories were $49.2 million as of September 30, 2016, compared to $42.7 million at December 31, 2015 and $35.6 million at September 30, 2015. The increase in inventory versus the year end 2015 relates to the seasonality of the business while the increase in inventory compared to September 30, 2015 primarily reflected the addition of Octane Fitness. Trade payables were $44.8 million as of September 30, 2016 compared to $61.7 million at the end of 2015, reflecting the seasonality of purchases. Capital expenditures totaled $3.2 million for the nine months ended September 30, 2016, with spending primarily on tooling, facility infrastructure and IT assets. We anticipate full year CapEx to be in the range of $5 million to $6 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 additional background on our recent results and the overall position of our business and discuss some of our new product activity. Starting with the direct segment, sales decreased 21.4% reflecting emerging softness in consumer response as well as our decision to defer media spending during the quarter to maintain a profitable media ROI and contribution margin in the direct segment. During last quarter’s call, we had discussed that we had begun to see some weakness in July corresponding with the distractions caused by election campaign in the Olympics. And such Olympics and election disruption is not uncommon every four years, however in the prior call we noted that these conditions were more pronounced than normal and if they continued lead generation and web traffic volume could be impacted. The weakness in consumer response did infact continue and remained consistently soft through the quarter. As Q3 progressed, we accessed several potential drivers to the response rate. Ultimately our conclusion was to prioritise profitability and accordingly adjust our media spend downward to levels which generated a better return on investment although this did further negatively impact revenue generation. For comparison purposes, our media spend in Q3 was 13.7% lower than the same period in 2015 reflecting those adjustments made during the quarter. Clearly the Q3 performance of our direct segment was not our planned outcome. We will manage through these conditions and are taking all steps to identify and address the causes of the recent downturn. We do have the flexibility to react to new learning and trends while continuing to manage profitability. To that end we are monitoring several key metrics in our business to help answer two key questions. First, is the recent downturn in performance driven by internal or external factors and second what actions can we take to optimize direct channel results given the environment. So the first question we know the decline in the direct channel performance can be attributed to weaker than expected consumer response to our advertising leading to less telephone and web traffic volume than we planned. This leads to the more important second quarter which is what can we do about that lower response. While there are multiple media reports of low television viewership in recent months, and soft consumer response rates among certain other consumer companies, our team always focuses on response factors within our control. And those factors are created which are the as an messages themselves, and the media placement patterns and network mix. First, we have launched new creative for our Bowflex Max Trainer product in October and the early returns are showing an improvement over the prior control. We will also launch a new Bowflex TreadClimber ad in November. Second, we are closely monitoring the changing trends in viewership patterns and have noted increases in cable news channel viewing for example, which is a potential opportunity for us to adjust to the extent that those trends hold. On the positive side, our credit approval rates remain solid and historically good at 47.9% which is on par with prior year Q3, 47.8%. For competitive reasons, we do not disclose our exact conversion rates, I will note though that our conversion rates for the quarter were good and were not a contributing factor to the lower revenue. Rather the short fall in top level consumer response was the challenge. Those who did respond converted to a sale as they rightly expected. These facts give us good confidence that our products themselves are not at issue. Overall, while we are seeing sales improvement in October, we still have some progress to make. We are hopeful that consumer response rates will improve post election and it’s important to note that Q4 direct performance has historically been heavily back loaded from Black Friday onward, so such a change would be quite beneficial if our seasonal pattern continues. That said, we are mindful that longer term macro factors could be impacting results and we all continue to closely monitor the metrics I mentioned earlier such as consumer credit approval rates and we’ll adjust as needed. Nautilus will continue to prioritize media spend for channel profitability versus spending up into what would be non-profitable media to drive higher revenue. As we move into fitness season, we believe we have sufficient inventory on hand to meet consumer demand and further we should be able to respond quickly to any bounce back in consumer behaviour in our direct channel. Regarding new products, as many of you know in September we hosted our annual product showcase event in New York City and unveiled several exciting new products. The event was well attended once again and we were pleased with the energy and enthusiasm attendees expressed about the products we unveiled. On the direct side, we debut the Bowflex HVT, this is the world's first fitness machine to offer Hybrid Velocity Training, a new approach to fitness that combines cardio and strength training into one of the fastest and most effective workouts ever designed. We’re very excited about the potential of the HVT and our research has indicated the Bowflex customers attracted to products that deliver quick results and the HVT is in line with current workout trend. We're planning to launch these products in our direct channel in the first half of 2017. Turning now to our retail segment, we're please to report strong retail sales growth which increase 80% compared to the prior year period primarily reflecting the inclusion of sales from Octane fitness. However we also continue to see strong organic growth of 17% from our sporting goods and online accounts which include contributions from both the cardio and strength products. This organic growth represents continued improvement in our retail presence and we have gain further market share at this fall. Additionally we saw a strong growth in all of Octane fitness segment particularly in commercial products reflecting the early acceptance of the commercial Zero Runner platform. While especially retail channel continues to face some headwinds overall, we believe the stream of new products is helping to return the segment to a long term growth trajectory. We do caution that soft consumer response behaviour spreads into the retail market during peak season; this could impact further revenue in the form of slower reordering by our retail partner. And finally as Sid mentioned we also achieve significant margin growth of 950 basis points reflecting improved product in channel mix as well as the benefit from inclusion of higher margin Octane products. Much of our retail business success has been attributable to our product portfolio expansion. At our September product event we unveiled the Nautilus 618 performing series. This series includes an Electric Recumbent Bike, UprightBike and a RunSocial app compatible treadmill. One of the key areas of focus for our product innovation in past few years is improving the technology of our products and offering our consumers the latest innovation for home fitness equipment. Our new products include the built-in Nautilus training programs to add a variety to an at home workout regime and by partnering with RunSocial users can be virtually transported to another part of the world offering outside motivation to power through their workout. The 618 performance series includes Bluetooth connectivity which allows you to share data through free Nautilus trainer app which in turn synchronizes with the growing list of popular fitness applications such as Apple HealthKit, Google Fit, Under Armour Record, MapMyRide, MapMyrun, MyFitnessPal and Endomondo. This product line up became available this month in variety of retailers. We're encouraged by the positive response from consumers, our retail partners and the fitness media to our newest product offerings. As we noted in a last call one of our key initiative as we look towards the future of Nautilus is to explore a more omni-channel approach to our business. We are pleased to have kick off our initiative with Dick's sporting goods to place the Bowflex Max Trainer M3 on floor for in-store only purchase. This initiative will expose Max Trainer to new consumers and further increase awareness of this key product platform. We're monitoring this effort closely and while the results during peak fitness season are the most important, we are already impressed with the partnership shown by Dick sporting goods team and representation of our products in store. In summary while we're encouraged by a year to-date accomplishments across all channels and very thankful for the efforts of our team around the world, we remain mindful of the near term challenges and direct and potential softness for consumer markets in general. The integration of the Octane fitness continues to meet our expectations and confirms our belief that our businesses are highly complementary. Our overall performance this quarter is a validation of our strategy to diversify our revenue streams to better position the company for future profitable growth. Our team continues to leverage our strong portfolio brand and we will continue our regular cadence of product launches for all business segments. And with that, I'd like to turn the call back over to Bruce for his final comments. Bruce?

[Bruce Cazenave:]

Thank you, Bill. I'd like to make a few final comments before we open up the call for questions. Both Bill and Sid's comments illustrate that we continue to execute well on the key areas of focus that have enabled us to achieve significant top and bottom line growth over the past few years. This is evidence first by the launch of truly innovative new products, some are shipping now and with more in the pipeline to be launched in the first half of next year. Recently introduce products also reaffirm our commitment to further broaden our portfolio and to drive the business for long term profitable growth via industry leading design and innovation including in areas where we previously were absent. Secondly, we made a major positive move towards expanding and diversifying our product portfolio with the acquisition of Octane fitness earlier this year. As Bill mentioned we are very pleased with how the integration of that business is progressing and the potential opportunities this acquisition will afford us in the future. Thirdly, international markets continue to be a vast untapped opportunity and we are now tracking along an accelerated growth path in most of these markets. Finally, our focus on gross margins and improving operating margins is institutionalized within the company and our team is continuously channelling itself to operate more efficiently and further leverage our strengths and infrastructure. All said, we are confident that strategic initiatives and priorities we have in place are working well and are the right ones going forward. Looking ahead we are very carefully navigating through the same challenges that emerged in Q3 related to the media conditions in general consumer response. While there were clear external factors creating uncertainty in the general consumer market and are hopeful that things will stabilize soon, we are proactively planning to operate in this environment will into 2017. I'm proud of our team's ability to quickly adapt to the changing conditions and adjust our media spending and other expenses accordingly in order to maintain healthy margins and profitability. We are maintaining our long range annual run rate targets for revenue growth and operating income improvement, but given the Q3 performance we anticipate slightly underperforming the long range run right target for organic growth of revenue growth up 10% to 12% in 2016. Also the EPS accretion from the Octane acquisition will likely to be in the $0.07 to $0.10 range this year which is lower than previously expected range of 10 to 15 due to market softness and one of Octane's channels of distribution. This range includes $0.06 of amortization expense for intangible assets as well as additional integration expense. The financial health of our company remained strong and we will continue to execute on strategies that are design maximum long term shareholder value. Finally, I'd like to take this opportunity to thank our dedicated team of employees around the world for all their hard work and to deliver the desire results and create a positive momentum we have in every corner of our company. That concludes our prepared remarks. Now, I'd like to open up the call for questions. Operator?

[Operator:]

[Operator Instructions] From SunTrust we'll go Mike Swartz.

[Mike Swartz:]

Hey, good afternoon, guys.

[Bruce Cazenave:]

Hey, Mike.

[Sidharth Nayar:]

Hi, Mike.

[Mike Swartz:]

I just wanted to maybe talk about the direct business that you had some commentary around, I guess you kind of call it consumer response versus conversion rates, can you just help flush that out little more, maybe tie those to factors [indiscernible], and then I guess in terms of how you're thinking about 4Q, should we still be expecting kind of down 20% rate in revenue growth in that business. It sounds like things in October get little bit, just trying to get a sense of magnitude there?

[William McMahon:]

Hi, Mike. Bill here. Great question. The first thing we look at in direct whenever we encounter something like this is the raw response of the top of the funnel, is that funnel getting filled with enough calls and web visits. And then once you have the traffic is it converting into expected rate, it’s kind of two different types of problems to look at. Clearly in this case we know that is raw response is what we're trying to address. We have seen some improvement in October. No, I would not anticipate at this time the direct would be down to the same level, but I would say we have some work to do to get back to positive and we're taking those steps right now.

[Mike Swartz:]

Okay. And then just the next question on Octane, I mean it sounds like Octane is a 20% plus in the quarter, sounds like a more back half loaded, just maybe the drivers of that – how much that would be any kind of stabilization improvement in specialty channel maybe versus the initial shipments of commercial Zero Runner?

[William McMahon:]

I'd say most of the improvement is been the new product which does help across all channels in effect. We're still looking to see some improvements in this specialty channel but the new product is helping us to gain share.

[Mike Swartz:]

Okay. And then just maybe a little more granularity on this international business in the quarter just maybe a sense, was that a double-digits organically?

[William McMahon:]

Yes. We can say it was up double digit organically and via Octane.

[Mike Swartz:]

Okay. Thanks guys.

[William McMahon:]

Thanks Mike.

[Operator:]

From D.A. Davidson we'll go to Andrew Burns.

[Andrew Burns:]

Thanks. Good afternoon. Understand the cautionary commentary given the uncertainty but the fact their conversions remain strong and credit approval rates are healthy. It seems like there is a good chance the largest factor here is the election noise and in that scenario what happens comes November 9th, do you steadily ramp media spend back up or do you press the gas and go back to the previous media game plan in terms of spending?

[William McMahon:]

Andrew, Bill again, I think generally it would be prudent for us to ramp on a controlled manner, usually stepped increases on a large scale could be little risky and I think while we are also helpful that the election is the primary driver here we have to be mindful of keeping an eye on all factors as we go through the quarter. Good news is that as we noted in the remarks the quarter is heavily back loaded normally on a historical basis, so we do have some runway to continue to show improvement.

[Andrew Burns:]

And how material changes could you make in terms of switching between network that you are seeing better returns from different channels?

[William McMahon:]

We can dramatically change our media profile and adjustment as needed and in fact we've done some of that since the middle of Q3.

[Andrew Burns:]

Thanks. In terms of Octane and the timing of products and new products has created bumpy results here year to date in addition to the specialty, should we be thinking about to the fourth quarter has being sort of a good natural run rate for the business or is there still going to be some new product timing that influences the fourth quarter, and just trying to gauge when we can take a look at the underlying business, so to think about it we move into 2017? Thanks.

[William McMahon:]

Yes. Thanks, Andrew. We do anticipate continued growth over time in Octane thanks to the new products that we're launching. Q4 specifically though we would caution, last year there were two new product launches in that quarter that were up magnitude, we're not comping those same launches this year. So in the short term Q4 might be a little challenging on the comp basis for Octane.

[Andrew Burns:]

Thanks and good luck.

[William McMahon:]

Thanks Andrew.

[Operator:]

We'll go to Frank Camma with Sidoti.

[Frank Camma:]

Good afternoon, guys.

[William McMahon:]

Hey Frank.

[Frank Camma:]

Will it be possible for you guys just to call out the Octane numbers since you're going to have to report anyway, assuming your [Q] [ph], I mean I think it would help maybe in this case. Just trying to get, I mean you kind of looking back into it, but would you be willing to state those numbers – the revenue numbers at least?

[Sidharth Nayar:]

Yes, it was $16.2 million for this quarter, Q3.

[Frank Camma:]

Yes, that’s what I thought. And now, so and given Bill’s comments there about Octane fourth quarter difficult comp, I mean it sounds like year-over-year for Octane you are going to see revenue decline. And is that a fair statement, given like the number you gave out at the beginning of the year, I mean I don’t know if you can comment about that or not, but that kind of back of the envelope, that’s kind of what looks like you are projecting now.

[Sidharth Nayar:]

Yes, it’s projected to be down or flat or down a little bit, yes.

[Bruce Cazenave:]

And that was mostly from the first half of the year. Certainly Q3 with double digit increases year-over-year helped, but not enough to make up for what was the first half of the year particularly because of the speciality channel.

[Frank Camma:]

Okay, that’s fine. I just wanted to make sure I had that right. My only other question is just sort of a little more color on the Dick's sell in, was there – because I know they really haven’t, they really start to go hard there I guess on Black Friday, right. But was the revenue in the quarter, in the September quarter or because it shipped then or was it more spill over into the October, I’m trying to figure that out, like...?

[Bruce Cazenave:]

Frankly it’s sort of spanned across both late September and early October.

[Frank Camma:]

Okay, okay. All right, thanks guys.

[Bruce Cazenave:]

Thank you Frank

[Operator:]

We’ll hear from George Kelly with Imperial Capital.

[George Kelly:]

Hi guys, a couple of questions from me. First on credit trends it sounds like in the quarter things were better than they were last year. Can you say anything about what you’ve seen since the quarter ended?

[Bruce Cazenave:]

We continue to see favourable credit conditions for us no changes, if anything we’ve seen improvements in tier 1 approvals overall which is helpful to us from a cost perspective. So we are pretty pleased with the credit environment right now.

[George Kelly:]

Great. And then on the direct segment just listening to your commentary and it seems like on the previous call you pointed out that the election in the Olympics, but this time it seems like you are less – you are more noticing just a general kind of weakness in consumer, have you done a lot of tests around what’s driving the, I think you went through some of them, but just wondering how you can kind of determine where some of this is coming from if it’s the election or just general consumer sluggishness?

[William McMahon:]

I think you're hitting on the most important question, George, unfortunately we don't have an exact way to answer that. We do hope that the election is the primary driver of distractions out there and we wouldn't be the first one to speculate that. But I will say the team does a great job of sticking with the analytics and saying this is what we see. Our decision to reduce media spend was primary based on just low response and low viewership for whatever the cause, we needed to get our balance back in place so that we could deliver the profit that we were seeking. If those conditions change or begin to lessen then we can adapt to that as we go. I can say that as we noted in our remarks things are looking a little bit better in October already.

[George Kelly:]

Okay. And in the quarter was the impact on your key products at direct equal, did you see one product fall off more than the other?

[Bruce Cazenave:]

No. I would say, it was across the board weakness at the top end to that conversion funnel and the wrong [ph] was down on all product interest.

[George Kelly:]

Okay. Last question on Dick's, do you expect in 2017 or is there anything you can say about this sort of expanded relationship, do you expect to bring more direct products through Dick's?

[Bruce Cazenave:]

I would say that we intent to bring more products through Dick's and we've gained additional share with that account this year. In terms of more direct products it’s a great question. We want see how this test goes together and I'm sure they want to see how it does as well. And I will say early on I'm impressed with how easy they are to work with and how well they are representing our products on the floor.

[George Kelly:]

Great. Thank you.

[Bruce Cazenave:]

Thanks, George.

[Operator:]

[Operator Instructions] And at this time I would like to turn the conference back over to Bruce Cazenave for any additional or concluding remarks.

[Bruce Cazenave:]

Thank you all for joining our call today and your interest in Nautilus. We look forward to updating you on our year-end results on our next call in February. Hope everyone has a great afternoon. Thank you.

[Operator:]

And that does conclude today’s presentation. We do thank everyone for your participation.