LifeVantage Corporation (LFVN) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to today's conference call to discuss LifeVantage's first quarter and fiscal 2018 financial results. [Operator Instructions] 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.

Thank you, and good afternoon, ladies and gentlemen, and welcome to LifeVantage Corporation's conference call to discuss results for the first quarter of fiscal 2018. On the call today from LifeVantage, with prepared remarks, are Darren Jensen, Chief Executive Officer; and Steve Fife, Chief Financial Officer. Before we begin, we would like to remind you -- remind everyone that our prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of LifeVantage's most recently filed Forms 10-Q and 10-K. These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Please note that during today's call, we will discuss non-GAAP financial measures, including results on an adjusted basis. Management believes these financial measures can facilitate a more complete analysis and greater transparency in LifeVantage's ongoing results of operations, particularly when comparing underlying operating results from period to period. We've included a reconciliation of these non-GAAP measures with today's release. This call also contains time-sensitive information that is accurate only as of the date of this live broadcast, November 8, 2017. LifeVantage assumes no obligation to update any forward-looking projection that may be made in today's release or call. Now I would like to turn the call over to company's CEO, Darren Jensen.

Thank you, Scott, and good afternoon, everyone. I'm pleased to share our first quarter results with you today and update you on many exciting initiatives underway at LifeVantage. Each of these initiatives are focused on driving revenue through geographical expansion, new products and adding distributors and customers. Fiscal 2018 is off to a solid start as we made progress on our transformational plan for the year. As we detailed our initiatives in length on our fourth quarter call, I want to highlight the first quarter results and run through a brief update on our activities. And then I'll turn the time over to Steve for a review of our financials. We generated $49.1 million in revenue for the first quarter, a modest decrease compared to the fourth quarter. We expected first quarter revenue to be relatively consistent with the fourth quarter given the seasonal softening of late summer, but we are also faced with some disruptions from the unfortunate natural disasters during the quarter that impacted 4 of our stronger markets, including, causing the delay of our official launch event for Protandim in Mexico due to the catastrophic earthquake in Mexico City. Turning to an update on our initiatives. During the fourth quarter conference call, we discussed our fiscal 2018 initiatives. We had 8 key initiatives planned for this year. We have launched, implemented and made significant progress on 6 of these key initiatives thus far, and anticipate the impact of these introductions building as the year progresses. First, I'm pleased to report that we have commenced the commercial test of our new Mainland China business model. We are selling through a third party e-commerce platform and assessing the system, including order fulfillment from the e-commerce side, logistics and money flows. We just began initial training on the model last week at our Elite Academy event. How this works is, Chinese customers can visit this site and purchase products, which are shipped directly from the United States to their doorstep. They also have the opportunity to become social marketers. These social marketers are affiliated with the e-commerce site and compensated on the sales that they generate by promoting the product on the site. People outside of China can refer Chinese nationals to become social marketers, and then be compensated for the training of these social marketers. Recall that this is not a direct selling model, but rather an e-commerce model powered by in-country social marketers. Initiating this model in China gives us a prime opportunity to test this new method of marketing without any disruption to our current markets. We believe that this model could be disruptive to sales channels already deployed in China, and provide a testing ground for the future as we see the micro entrepreneur business model evolve to one of social selling with e-commerce and enhanced technologies providing long-term growth opportunities. Second, we are pleased with our success -- with the success of our Red Carpet program, which we accelerated during the first quarter and is already ahead of where we thought it would be. Recall that this program is designed to attract and incentivize experienced direct selling leaders to join the LifeVantage family. When we utilized this program in the past, we encountered strong revenue growth and return on investment. We are excited to reignite the program, and now look to get these new sales leaders engaged. Another key initiative is to instill across our field the biohacking culture, which we are building. At our successful Elite Academy event in Orlando last week, we introduced the tools and the training to support and incorporate our biohacking and Nutrigenomic story and technologies into our marketing materials. We are building a differentiated culture around this emerging trend. Turning to our product strategies. Last week during Elite Academy, we introduced Vitality Stack. Vitality Stack is a combination of our Activated Essentials line, including our Protandim Nrf2, Protandim Nrf1, ProBio and our new Omega+ product, which is a comprehensive combination of omega-3, omega-7 and vitamin D that was also launched at our Elite Academy. This stack and future additional stacks to be released will become the primary protocol to support the biohacking culture we are creating across the company. The Vitality Stack provides our distributors and our customers a superior solution that is unrivaled in the marketplace and should increase our average order size. During last week's event, we also launched the beta test of Phase I of our new LifeVantage app. This app is a platform we have developed in partnership with the technology company that is pioneering new ways for us to interact with our distributors and customers. This platform, which we believe is the first of its kind in the direct selling space, integrates artificial intelligence to onboard new distributors, assist them in finding new customers and tailor communications for them. This platform is available through revolutionary app that creates significant efficiencies for our distributors and simplifies processes for our preferred customers. Finally, touching on our sixth initiative, we are on track with the process of implementing an upgrade to our corporate ERP system deploying Microsoft Dynamics 365. We have made substantial progress and expect to finish this on a global roll-out by the end of fiscal 2018. As you can see, we have hit the ground running on this year's transformational plan and look forward to updating you as more develops with each initiative. We will continue to focus on positioning the company to capitalize on the mega consumer trends that are driving the marketplace and the future for LifeVantage. With that, let me turn it over to Steve to run through the financial results. Steve?

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

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

So we all expected this quarter, and you reiterated your guidance for the rest of the year. It implies an acceleration over the next 3 quarters. Can you give us some idea of how you expect that to progress? And when we should see year-over-year increases?

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

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

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

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

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

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

I don't think we break those out per se, but typically, from the last 3 have been in Europe. Europe is -- so we have the U.K., we have the Netherlands and then just most recently Germany. This area is more of a slower build, at least that's been my experience with most of Europe that the people there are very different when it comes to coming in as opposed to an Asian market where you have large numbers jump in at once. And -- but what I do like about the European side of it is that they're very stable, they're more serious about selling products. They're not jumpers like some of the other groups in Asia are. So actually, we've been seeing some very reasonable growth coming out of our European markets. And I continue to -- and I would expect continuing to see that growth. Especially, through our Red Carpet program, we've had a number of very good European leaders join the business, which I believe will continue to drive the increase in sales there. The only other new market that really we have announced that we're going into has been the cross-border e-commerce model into China. And that we're at the commercial testing phase. And so we limit the number of people that can participate into that model right now.

And Steve, I would just add to that. We've seen good sequential growth in the U.K., in Netherlands and in Germany as obviously, it's very early days on that.

You mentioned Mexico and Japan?

Both growing.

Sequentially.

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

Yes. We also had the earthquake down there that disrupted our Protandim launch, but the market's been very strong.

Okay. And Japan last?

Japan, Japan grew 7% sequentially.

Well, that's great. That's great. And I want to -- I'm sorry.

I said Japan is doing very well.

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

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

Okay. And 1 last one on SG&A. Obviously, part of it is variable and the G&A portion is a little more fixed. Now that you had a little more time, you've done some of these launches, how do you expect the SG&A, and more specifically, the G&A portion to sort of shake out rest of the year?

I think it will be fairly stable. As you mentioned, there is some variability in that, but what I think you and I would consider as core G&A, I don't expect big changes to that during the year.

Okay. So if we can get the sales increases over the next 3 quarters and hold the gross margin, we should be able to get some leverage at the G&A level?

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

The next question comes from [ Jim Galloway ] with [ Galloway Enterprises ].

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

Sorry, [ Jim ], could you repeat that?

The last part of....

Yes, just the last part.

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

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

What I was talking about is the bonuses like $250,000 or $500,000 to the superior ranks like the Pro 11 and the Pro 12 where I would have like to see some of that money go to a dedicated fund for shareholders.

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

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

Okay. Now big bone of contention I've had with you guys for years and years. Within the last hour, I opened a package containing over $400 worth of product. And there was absolutely 0 promotional content in there. There was nothing to tell me about the products I didn't buy, and we keep talking about customer retention. And at times, we've talked about having inserts along with shipments. But how does it go that I get $400 worth of product and no promotional information?

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

Okay. Can you give us some information on the Elite Academy? How many people showed up in Orlando this time, because we have been hovering at 5,000 for many, many years? Are we growing?

Yes, with that, it really depends on the location in which we hold the meeting as to what the attendance is. We have, for instance, typically, our lowest attended area in the country is Orlando. I don't know why that is. Typically, our highest attended area is more around Nashville or around the center of the country. We book these venues out typically 3 years in advance. So we are changing around the mix of where we hold these Elite Academy. Our Orlando Elite Academy had around 4,000 people at it, which is pretty good for the Orlando area for us. We also have begun new programs for -- to attract more people to come to the Elite Academy. I don't have the exact number, but when I left the Elite Academy just this last week, we had well over 2,000 already enrolled and paid for to go to our next Elite Academy, which is in, I think, it's in February up in Indianapolis, which is going to be -- isn't the best of the year for Indianapolis, but we fully expect and plan to have upwards of potentially approximately 4,000 people already enrolled for that by the end of this week, is where our goal is. So we expect that going to be a lot higher. Part of this comes the pricing strategies giving -- and promoting the events better at the event. So I think we're getting it dialed in a lot better now.

We'll go and take our next question from [ Diane Donovan ] with LifeVantage.

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

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

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

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

Well, at some point, we had a reverse split. And I don't remember when that was, but it hasn't even come back from that. So I don't know, the cause of the reverse split, I think began with the 10-K or that -- come...

No. Actually, it has come back when I started with the company a few years ago right around the time of reverse split, we were at -- I think the reverse split, at least when I joined the company, the price of the stock was at like $0.48. So 48 x 7 would be about $3.50. And so I mean, we're higher than what we were at that time. So -- I mean, I don't know where we ended today, we were at $5 something. But any other questions on that?

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

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

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