LifeVantage Corporation (LFVN) Q4 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 Fourth Quarter and Full Year 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'd like to turn the conference over to Mr. Van Winkle. Please go ahead, sir.

Great. Thank you, and good afternoon, ladies and gentlemen, and welcome to LifeVantage Corporation's conference call to discuss results for the fourth quarter and full year fiscal 2018. On the call today from LifeVantage will be -- with prepared remarks are Darren Jensen, Chief Executive Officer; and Steve Fife, Chief Financial Officer. By now, everyone should have access to the earnings release, which went out this afternoon at approximately 4:05 p.m. Eastern time. If you've not received the release, it's available on the Investor Relations portion of Lifevantage's website at www.lifevantage.com. The call is being webcast, and a replay will be available on the company's website as well. Before we begin, we'd like to remind everyone that our prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risk and uncertainties, including those identified in the Risk Factors section of Lifevantage's most recently filed Forms 10-Q and 10-K. Please note that during today's call, we'll discuss non-GAAP financial measures including results on an adjusted basis. Management believes these financial measures can facilitate a more complete analysis and greater transparency into Lifevantage's ongoing results of operations, particularly when comparing underlying operating results from period to period. We've included a reconciliation of these non-GAAP measures with today's release. This call also contains time sensitive information that is accurate only as of the date of this live broadcast, August 15, 2018. LifeVantage assumes no obligation to update any forward-looking projection that may be made in today's release or call. Now I will turn the call over to the company's CEO, Darren Jensen.

Thank you, Scott, and good afternoon, everyone. I'm pleased to join you today to discuss our fourth quarter results. We ended the fiscal year on a strong note with accelerated sales growth, improved profits and most importantly, what I believe is sustainable momentum. The fourth quarter was our strongest quarter of the year in terms of sales, earnings, active member counts and revenue growth. We also increased retention rates, average order size and subscription rates. We had a very strong response to our most recent digital rollout, and there is still more to come. Everyone at LifeVantage worked hard over the last year to implement the 8 key initiatives that we believe are driving and transforming our business. I would like to thank everyone in the LifeVantage family who has worked diligently towards the transformation we have undertaken and contributed to our improved financial performance. With that said, we are not done yet. We have a plan in place for fiscal 2019 to further build upon the recent momentum, doubling down on key initiatives and further strengthening our foundation. Before I discuss our goals for 2019, let me recap what we've accomplished thus far, which is evident in our fourth quarter results. During the quarter, we generated $54 million of revenue, up 6.7% year-over-year and up 6.9% sequentially. We produced good growth domestically and across our international markets. We reported $0.20 of adjusted EPS in the fourth quarter and exceeded the high end of our full year earnings guidance range. Recall that our key initiatives in 2018 were focused on increasing average order size, geographical expansion and distributor and customer acquisition. During the fourth quarter, our average order size increased 11.9% from the prior year, driven by the success of our stacking initiative. Stacks represented 17% of sales during the fourth quarter, up from 16% in the third quarter and above our initial year-end target of 12%. To date, we have rolled out Vitality Stack and Beauty Stack, and we'll continue to roll out these Stacks to additional international markets. We also have more innovation in the pipeline to expand on our stacking success and to further the biohacking culture we have developed at LifeVantage. Moving to geographical expansion, we launched in Germany at the beginning of the year and have executed our greater China strategy over the last 6 months. In February, we entered mainland China with an innovative new business model utilizing e-commerce and social marketers and at the end of June, we opened Taiwan. We saw tremendous interest in our Taiwan launch, and our existing business in Hong Kong allows us to hit the ground running. We are encouraged by the performance to date across greater China and look to build a long-term opportunity across this key region. Many of our 2018 initiatives were focused on distributor and customer acquisitions, which along with improved retention rate, led to an increase in our total active members. Total active members, which include both distributors and customers, increased 3.5% to 179,000 at the end of the fourth quarter compared to 173,000 at the end of the third quarter. Distributor retention, measured by first-year activity, increased to 48.48% at the end of the fourth quarter, up from 41.8% a year ago, and customer retention increased to 50.9%, up from 45.6%. In addition, approximately 80% of our total active members are on a monthly subscription program. With higher retention rates, improved access to new customers through the recently launch of -- through the recent launch of our global customer acquisition and auto-assigned customer programs and the success of Red Carpet, we believe we have the foundation in place to improve growth rate of our active members. Red Carpet has been a significant contributor to our recent growth, coupled with our Pacesetter Program, which is focused on distributor leadership advancement, these initiatives have improved retention rate and driven higher total active member counts. Red Carpet is designed to attract new distributor leadership by identifying experienced leaders who are in transition and attract them to LifeVantage. The Pacesetter Program is designed to encourage all of our distributors to engage quickly into the business and advance. As we look to 2019, our key initiative is focused on continuing our improved growth trajectory. Among these initiatives, we will be doubling down on our Red Carpet program, international expansion and product strategies, including our plan to launch an additional product category at our Global Convention in October. We also plan to add next-level functionality to the LifeVantage and digital program to include machine learning that is designed to turn a distributor's smartphone into a powerful productivity tool. We look to strengthen current markets and to continue to promote our biohacking culture. At the corporate level, building upon the success of our recent ERP upgrades, we are evaluating our key enterprise systems and developing an IT roadmap to enhance distributor-facing technologies. Our goals for 2019 are to drive our global business with a launch of new products, expanded availability of our existing products internationally and new market development. We will focus on continued growth in total active member counts, retention rates and average order size, while leveraging Red Carpet and Pacesetter to enhance our distributor leadership, supporting our global growth opportunities. We will continue to roll out of our digital initiative, layering in new -- powerful new tools with the goal of improving distributor productivity and success. We believe that these are the key metrics to measure our performance, and we look forward to updating you on our progress. With that, let me turn it over to Steve to run through the financial results. Steve?

Thank you, Darren and good afternoon, everyone. I am pleased to report our fourth quarter results. We generated another quarter of an improved revenue growth and good margin performance that is driving stronger earnings, EBITDA and cash flow. Let me run through the results for you, and please note that I will be addressing and discussing our non-GAAP adjusted results. You can refer to the GAAP to non-GAAP reconciliation in today's press release for additional detail. Fourth quarter revenue was $54 million, representing a 6.7% increase year-over-year and a 6.9% sequential increase when compared to the third quarter of 2018. Revenue in the Americas increased 4.7% to $40.5 million, and revenue in Asia/Pacific and Europe increased 13.3% to $13.5 million, all year-over-year. Both regions also reported growth on a sequential basis, with revenue in the Americas increasing 6.6% and revenue in Asia/Pacific and Europe increased 7.8%. Adjusted gross margin was 38 -- sorry, 83.5%, which includes the benefit of a change in estimated accrued import liabilities. This compares to 82.4% for the fourth quarter of fiscal 2017 where there were no adjustments to gross margin. The increase was driven by reduced costs associated with inventory obsolescence, the benefit of a price increase and changes to product and market mix. Commissions and incentive expenses as a percent of sales increased 274 basis points to 50.1% compared to 47.4% in the prior year period. Commission and incentives expense was higher this quarter due to the success of our Red Carpet program and Pacesetter promotion during the fourth quarter as well as the typical variations that occur based on revenue mix each period. Our target for commissions and incentive remains 48%, which can fluctuate based on the timing of promotion and incentive programs. Adjusted SG&A as a percent of sales were 26.6%, compared to adjusted SG&A as a percent of sales of 31.2% a year ago. In addition to sales leverage, on our relatively fixed SG&A, we did not host an event during the fourth quarter of this year compared to holding an event in the prior year period. I will touch on this in a moment but please note that given an event calendar shift, we are hosting 3 events during the fiscal first quarter of 2019, which is out of the norm. As a result, we expect to have an elevated level of SG&A that will reduce earnings in the upcoming quarter. Adjusted operating income was $3.7 million compared to $2 million in the prior year period. Adjusted EBITDA for the fourth quarter was $5.2 million compared to $3.3 million in the prior year period. Adjusted net income was $2.8 million or $0.20 per share -- per fully diluted share, which is up from $0.04 in the prior year period. Adjusted net income benefited from a lower tax rate during the quarter, reflecting the favorable effects of an amended tax filing that led to a refund of approximately $500,000 for the prior tax year. The company anticipates ongoing tax rate to be approximately 26%, subject to other discrete and timing-related variations. As I noted, all of the adjustments from GAAP to non-GAAP are spelled out in our earnings press release. Now turning to the balance sheet, we ended the fourth quarter of fiscal 2018 in a strong financial position with $16.7 million of cash and $5.4 million of debt, which represents a $7.2 million increase in net cash from a year ago and a $3.3 million sequential increase in net cash. We continue to drive higher inventory turns with inventory decreasing $2.2 million from the end of the third quarter. Inventory turns on an annualized basis were 2.6x in the fourth quarter, up from 2x a year ago. Our long-term goal for inventory turns is approximately 3x. During the fourth quarter, we generated $5.5 million of cash from operations, up from $2.9 million in the prior year period. For the full year fiscal 2018, we generated $13.3 million of cash from operations, up from $6.6 million in fiscal 2017. For fiscal 2018, we invested $4.6 million in capital expenditures, repurchased $1.5 million of common shares under our $5 million share repurchase program and paid down $2 million on our term loan. We anticipate our 2019 capital expenditures to return to historic levels in the $1 million to $1.5 million range. Turning to guidance. We expect to generate fiscal 2019 revenue in the range of $210 million to $220 million, which compares to the $203.2 million of revenue we recorded in fiscal 2018. We anticipate diluted earnings per share in the range of $0.54 to $0.58. For the first quarter of fiscal 2019, let me reiterate that we expect to have an elevated level of SG&A as we are hosting 3 major events during the quarter. As such, we would expect first quarter EPS to be well below the earnings level of the last few quarters. The first quarter is not expected to be an indicator of our quarterly earnings trend for the remainder of fiscal 2019. We do not expect to provide quarterly outlooks in the future, but want to highlight the abnormal timing of events in the upcoming quarter. Now let me turn the call back to the operator to facilitate the questions. Operator?

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

Your revenue guidance, given your current quarter, is a -- seems a little conservative. Is there something about the next couple of quarters and sales that you need to disclose or talk to us about? And related to that, can you talk about China and how it's progressing?

Yes. Let me take the guidance question first. Yes. So we are happy with how the fourth quarter ended for sure, and historically, the fourth quarter is a seasonally strong quarter for us. We -- as we looked at guidance, we looked at the trends that we're on, we looked at -- historically, our record high for the company is roughly $214 million, and so the guidance that we've provided is -- the midpoint of our guidance is above our record for the company and we're trying to set some realistic expectations here coming out at the beginning of the year. We hope to be able to provide guidance during the year where that increases, but we also want to just level set and make sure that we don't get carried away with ourselves here at the beginning of the year.

Steve, this is Darren. I'll answer your second question, dealing with China. I think I've said on previous calls that Mainland China is a brand-new model for us, and we're about 5 months into it and it's really a slower build until we get the new model dialed in, and we attract the right mix of social marketers. We are very excited about finishing the roll out of our Greater China launch, which includes Taiwan, so when we look at Greater China, it's Hong Kong, Taiwan and Mainland. And we launched Taiwan in late June, and these 3 markets really work together synergistically. And from what we're seeing, the initial responses coming out of Taiwan, I have hopes that by the end of fiscal '19 that, that market specifically will be tracking as probably our third largest market. So as a region, we're seeing good movement but we're still trying to dial in that Mainland China piece right now.

As a follow-up on the first quarter, you're having 3 events. Does that mean revenues will be skewed up and expenses, likewise?

Yes. I mean, we do generate revenue from our events. I'd say offsetting that is that our first quarter is also a seasonally low quarter for us. So we've got benefit from the events offset a little bit by seasonality, and expenses will clearly be up because of the events.

We also on our -- also on that -- on our Japan event, it was also during the middle of a national disaster with the heavy rain storms that they were having. So that did affect attendance a little bit.

Okay. Now if you have 3 in the first quarter, is there a flip comparison in the second quarter?

A what comparison? Sorry. Flip -- well, in the second quarter, we actually will be having our global convention. Our convention cycle right now, we are on a 18-month cycle. So during fiscal '18, we did not have a global convention. We had 3 Elite Academies. But in fiscal '19, we have added -- we will have a Global Convention, which has a higher cost to us and also a higher revenue, typically. But -- and also, a couple of other events during fiscal '19 that were not held in fiscal '18.

Okay. You don't say specifically how many shares you bought back or if you bought back shares. Do you think possibly you could include that in your -- in the press release going forward?

Yes. So we purchased just over -- right around the $1 million of shares during the quarter, $1.5 million for the year. And we've disclosed that in our 10-K, I think it was about 300,000 shares for the year.

Okay. And now that you've had some more time, and you know I ask this question on a regular basis, what do you think -- given your guidance for the year, what do you think your target level inventory would be?

Yes. I -- we've got some new product launches. I mentioned that our target for inventory turns is 3x, which takes us back several years to where we were kind of rocking and rolling. We've got some headwinds to hit that number because we are launching some new products during the year, and we are also expanding our current product line geographically. So we fully expect that by the end of the year, we'll be tracking close to that 3x turn.

We'll now take our next question from [ Jim Galloway ], private investor.

My question regards, if we see anything on the horizon that is going to help people understand what we're doing, in that our products are different and so we're educating people. I mean, I don't see any other product out there, Nrf2. I don't see another [indiscernible] type thing. Is there anything that's going to help us with the general public recognizing the benefit of our products?

Jim, this is Darren. Let me answer that for you. Over the last, I'd probably 5 months or 6 months, we've been working with our distributor leadership councils and -- in looking for ways to better tell the story in a quick, efficient way. Much of our business now, in the way that our distributors are prospecting, is through social media, using attraction marketing through digital forms. And so they've been asking for an easy way to prospect and to explain about not just about Nrf2 technology but all of our technology. And I think just recently at one of our major events in Anaheim, I don't know if it was a month ago or so, we released a brand-new video, an animated video that we worked with in conjunction with the build. And so far, at least a lot of the test marketing we've had and initial response from that has been very positive, and we've seen some good results with it. So what you're asking for -- we already released that as well as the continued rollout of our digital program that also offers additional tools to people, the prospect and to communicate with people. So that's where we're at.

Okay. One last question is, what has the success been on the new customers we're getting through the conversion of the RSL type of call ins?

It's been very good, as a matter of fact. The success has been great. The main focus on that was not necessarily the customers per se, it was the directing of where those customers go in that they are sent to newer people in our business that are actively engaged and are growing their business, because we know that through doing statistical analysis of our distributor force that if somebody can get a customer early on in their business, the retention rate and the lifetime value of that distributorship as well as their potential to rank advance increases tremendously. And so that's where this program becomes so effective at bringing in new customers and then as we reroute those to new emerging distributors and leaders within the build, that has been very successful for us.

[Operator Instructions] And we'll take a follow-up from Steven Martin with Slater Capital.

Yes. Guys, with respect to China and the methodology you're using for product distribution, how will that affect your active independent distributor count and your active customer count? Since you don't really have distributor today.

Well -- Steve, this is Darren. Initially, they would be included in our general usage numbers -- active consumer numbers. And in time as that area becomes more mature, we break those out and give separate numbers for them.

Right. But if you've got an opinion leader who's driving people, customers to your website, okay, is the opinion leader going to be a distributor and the individuals be customers? Or there won't be a distributor, you'll just have more customers?

We don't have any distributors within China. There are social influencers, social marketers. So they would be considered more of a customer.

Right. But again, Let me -- I'm trying to understand how I should expect these numbers to change over time. The social marketers aren't going to be the customers, the customers are going to be the people who come directly to you for product.

Correct. So what you'll see is higher customer numbers.

Right. That's what I was getting at. So you -- but in Hong Kong and Taiwan, you'll actually have distributors. But in Mainland China, you won't have any distributors?

Correct. Hong Kong and Taiwan are on our standard network marketing model. China is on a cross-border e-commerce model. So they will be reflected as customers.

Okay. That's what I was trying to get at. So like looking at these numbers, it will skew your -- it will mute your independent distributor growth even though China will grow in revenues?

Correct. You'll see higher customer numbers.

And that does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Darren Jensen for any additional or closing remarks.

Thank you. I want to thank everyone for joining us today. As you have probably recognized, we're pleased with the business trends and are looking forward to an even stronger year in 2019, and we wish you all a great day. Thank you.

Thank you. And that does conclude today's conference. Thank you all for your participation. You may now disconnect.