LifeVantage Corporation (LFVN) Q3 2019 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 third quarter fiscal 2019 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.

Thank you, and good afternoon, and welcome to LifeVantage Corporation's conference call to discuss results for the third quarter of fiscal 2019. On the call, today from LifeVantage, with prepared remarks are Darren Jensen, chief executive officer; and Steve Fife, chief financial officer. By now, everyone should have access to the earnings release, which went out this afternoon at approximately 4:05 p.m. Eastern. If you have not received the release, it's available on the investor relations portion of LifeVantage's website at www.lifevantage.com. This call is being webcast and a replay will be available on the company's website as well. Before we begin, we would 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 will 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. 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 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, May 1, 2019. 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. It's a pleasure to join you today to discuss our third-quarter results and increased earnings guidance for fiscal 2019. We had another start of the strong quarter continuing the sales momentum we have built over the last several quarters. Revenue of $56 million this quarter was among the top 4 revenue quarters in our company's history and followed our record second quarter, which included our global convention and initial launch of our TrueScience Hair Care System. Third-quarter revenue increased 11% year over year with strong growth reported across all of our markets. We saw accelerated growth of our active member count during the quarter with total members up 9% year over year, driven by 8% distributor growth and 10% customer growth. Our sales momentum translated into strong growth of adjusted EBITDA, which increased 18% year over year. As we progress in this fourth quarter, our confidence in continued growth remains robust, and we are on track to have the highest annual revenue in our company's history. We continue to see favorable impacts to our growth rate from each of the key initiatives we have implemented. We remain focused on increasing average order size, geographic expansion, product innovation and driving distributor and customer acquisition. Each of these effort is evident in our third quarter and year-to-date growth we have generated. Let me run through some of the highlights. During the third quarter, we had another strong contribution from our Red Carpet program, which is focused on distributor acquisition and contributed to the 8% year-over-year growth of independent distributors. We also launched direct selling operations in Spain with a well-attended launch event during the quarter. Spain is the promising direct selling market and marks our second European market launch this fiscal year. We continue to target launching in Belgium later in the fourth quarter and today announced the opening of our direct selling operations in Ireland. Our direct selling ops expansion in Europe follows the introduction of our customer acquisition program during 2018, which made our products available for purchase on a personal use basis in several markets. This initial experience with customer sales has enabled us to enter new markets with existing consumer demand. In February, we launched our most recent product innovation, PhysIQ prebiotic, as part of a refresh and relaunch of our enhanced PhysIQ Smart Weight Management System. The update reflects the evolving demand for biohackers, keeping us to the forefront of smart weight management. Initial response has been positive. Additionally, we will continue to roll out our recently launched hair care system to additional markets. We will begin launching in five of our largest international markets during the fourth quarter. We remain very pleased with the success of the TrueScience Hair Care System. Our Greater China strategy also continues to deliver accelerated recruiting and sales growth following our very successful launch in Taiwan in mid-calendar 2018. Our strength in Taiwan was the significant driver of the 25% revenue and 29% distributor growth in our Asia/Pacific and European region this quarter, along with significant double-digit gains in Australia, Thailand and across Europe. There's been lot of talking in the direct selling sector over the past several months around China's 100-day review and the impact of publicity on sales of other publicly traded direct selling companies. Recall that LifeVantage does not engage in traditional direct selling in Mainland China. Our model is based on e-commerce without in-country direct selling operations or distributors. And thus, we have seen no impact on our business. We also continue to experience strong adoption of our LV digital platform. During the third quarter, we launched the app in Japan and now have the app in use in three of our largest global markets. To close, I am pleased with our success thus far in fiscal 2019. We have driven our global business with the acquisition of new distributor leaders, launch of new and updated products, international rollout of existing products, new market development and by driving adoption of our LV digital platform. We look forward to a strong finish in the fiscal year and continuing to execute our global growth strategies. 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 also very pleased to report our third-quarter results. We generated another quarter of double-digit year-over-year revenue growth and remain confident in the momentum we have built so far this year. Please note that I will be discussing our non-GAAP adjusted results. You can refer to the GAAP to non-GAAP reconciliation in today's press release for additional detail. Third-quarter revenue was $56 million, representing a 10.8% increase year over year. Third-quarter revenue was our fourth largest revenue quarter in history, and we also are on track to generate our strongest full year revenue. Revenue in the Americas increased 6.2% to $48.4 million, and revenue in Asia/Pacific and Europe increased 24.8% to $15.6 million, all year over year. On a sequential basis, third-quarter revenue was about 4% lower than the second quarter, which was our highest quarterly revenue in history and benefited from both our global convention and the launch of the TrueScience Hair Care System. Gross margin was 83.4% compared to 82.4% in the prior-year period, reflecting the benefit of a price increase during the second half of fiscal 2018, reductions of inventory obsolescence costs and changes to product and market mix. Commissions and incentive expenses, as a percent of sales, increased 50 basis points year over year to 48.6%. The year-over-year increase is due in part to the success of our Red Carpet program and incentives, as well as other typical variations that occur based on revenue mix. Importantly, the commission and incentive expense rate will fluctuate based on the timing and magnitude of promotions and incentive programs, as well as investments in Red Carpet. Adjusted SG&A as a percent of sales were 30.5% compared to 29.3% in the prior-year period. The increased SG&A expense reflects the following: Increased stock compensation and employee incentive expense as a result of our stock price increase during the first half of fiscal 2019; year-to-date financial performance; and realignment of our corporate incentive program; as well as higher staffing levels, reflecting additions made in the second half of fiscal 2018. Since those additions, we have maintained our staffing levels. Adjusted operating income was $2.5 million, consistent with the prior-year period. However, adjusted EBITDA for the third quarter increased 18.2% to $4 million compared to $3.4 million in the prior-year period. Given the higher noncash stock-based compensation as well as an increase in our fully diluted shares, both resulting from our increased share price, we continue to believe EBITDA is a better reflection of our cash profitability growth this year. We anticipate approximately 15% to 20% growth in adjusted EBITDA during fiscal 2019. Adjusted net income was $2 million or $0.13 per fully diluted share, up from $1.8 million or $0.12 per fully diluted share in the prior year. As I noted, all of the adjustments from GAAP to non-GAAP are reconciled in our earnings press release. We ended the third quarter of fiscal 2019 in a strong financial position with $15.9 million of cash compared to $1.9 million of debt. During the third quarter of fiscal 2019, we generated $3.9 million of cash from operations, invested $1.4 million in capital expenditures and paid down $2.5 million on our term loan. We continue to anticipate CapEx to be approximately $2.5 million for the full year, which includes additional expenditures with our app development partner. Finally, during the third quarter, we used $200,000 in cash to repurchase approximately 15,000 common shares under our share repurchase authorization and remain committed to share repurchases. Turning to our outlook. We are narrowing our fiscal 2019 revenue guidance to a range of $224 million to $228 million compared to our prior range of $222 million to $232 million. We are increasing our adjusted diluted earnings per share guidance to $0.50 cents to $0.54 per share, up from $0.46 to $0.52 previously. Now let me turn the call back to the operator to facilitate questions. Operator?

Thank you [Operator instructions]. And we'll take our first question today with Steven Martin with Slater Capital Management.

So I guess the first question is sequential revenues. Let's talk about second to third and now what you're now expecting third to fourth?

What's your question?

Well, second quarter revenues were $58 million and third-quarter revenues were $56 million. And if I take the midpoint of your range for the full year, it looks like the fourth quarter is $56 million?

Yes. That's right. And so sequentially, second quarter to third quarter, I mentioned in my remarks, clearly, our second quarter benefited from our Global Convention, which in our last call, we talked about how successful that was as well as the hair care launch. We sold out both at the convention and then on our first inventory replenishment, we also sold that out in the quarter. So that demand, we were ecstatic about what we saw during the second quarter. And I think the third-quarter results we still saw improvement across a number of our international countries as well as in the U.S., year over year, 10.8% year-over-year growth we're quite pleased with. And then in terms of our implied guidance to the midpoint, your math is right. We were at the midpoint at $56 million. Honestly, we're always looking to try to exceed our guidance. During the fourth quarter, we do not have any events either in the U.S. or internationally. And so on that revenue, we fully expect to have higher EBITDA and EPS, similar to last year's fourth quarter. We did about $0.20 of EPS last year on $54 million of revenue. And so we are anticipating that quarter from an earnings standpoint this quarter.

So when you look at pluses and minuses of the markets, what market isn't performing going forward? Or given the flat sequential revenues, what market isn't growing?

Well, I think you're talking sequentially now?

Yes.

So again, year over year, all of our regions were up and in certain cases, quite substantially high double digits. Sequentially, again, I think we've set our guidance to a midpoint. And as I said, we target on exceeding our midpoint in our guidance range. So we don't see any drop-off in any of our markets. We expect some incremental benefit coming from the launch of Spain that we launched at the end of the quarter and then also Ireland, this month and Belgium. But it will be fairly nominal from those, especially Ireland and Belgium within the quarter. But I think it's setting a foundation for our growth in 2020.

That was going to be my next question. So when you look out to 2020, now you've got a year of history or not quite a year of history or you will have in Taiwan and Hong Kong and China. You've launched in a whole lot of new markets, and you've launched in a whole lot of new products. And it looks like you've got distributor growth heading in the right direction and customer growth heading in the right direction. So broad strokes, what should we expect in 2020? Or what are you thinking about preliminarily in 2020?

Steve, this is Darren. When you say what are we thinking about in what sense? I just want to make sure...

Top line growth, we could start with top line growth and then I'll get to some of the expenses.

Steve, obviously, at the end of this fiscal year when we come out with our guidance for next fiscal year. As I look at it from a business standpoint, as I see, I would look for continued growth within the United States. We've seen a lot of improvement in our Canadian and our Mexico market, which has been great producers for us and we're extremely pleased with the growth that we see coming out of Australia. Australia has just been fire for us, as well as over the last quarter, Thailand is just off the charts for us. As Steve mentioned, we're seeing strong growth. I mean in Europe, we are seeing a 50% year-over-year increase. So that's just initial, we continue to see additional growth now, as Steve had mentioned, before that we've launched some of additional markets like Spain and we just launched Ireland today, we've got Belgium. So I would continue to see the growth there and in Europe. It really continued strengthening within Taiwan. We're starting to see some good growth now or some beginning to great growth coming in within our Mainland China area. So I would still guess that we would see an overall business increase and growth in 2020. Where we're looking at guiding at that point, tune in, few months from now we will definitely release that…

I was just trying to get some broad strokes color for 2020. Again, let's talk about gross margin and more importantly, SG&A. We've talked about it in earlier calls, you talked about it today. You had year over year, you've had extra events, you had a lot of product launches, you had a lot of country launches, you added some people. When you look out, and again, broad strokes, 2020, what should we expect -- and I know you've not done your budgeting yet, but what should we expect on some of the expense line items?

So I think, Steve, we have a target P&L model out in our IR deck on our website, which is 84% gross margin, 48% commissions and incentives, 24% SG&A, which would translate to a 12% operating income, 14% EBITDA. And we're very close. We've made 100 basis points improvement year-over-year on our gross margin. I think we have opportunities to continue to improve that. And so we're very close to that target. We're close to our commissions and incentive targets where our leverage needs to come from is in SG&A. And we haven't done our full budget for the next year yet, but I can tell you that one of our key initiatives is going to be around supporting our revenue growth with while leveraging our G&A. In order to get to our 24%, we clearly have to generate that additional revenue with, I don't know if it will be flat, but it will not be not proportional growth in our SG&A. And based on some very top-down modeling that we've done, I think we can do that. We're definitely not going to be at 24% at the end of fiscal '20, but I think you'll see improvement there sequentially as we continue to ramp our revenue.

Now with respect to the share buyback, and you know where I stand on that. I was I guess a little disappointed that you only spent $200,000, your balance sheet is so much improved. I'm assuming you're going to pay off that last tranche of long-term debt if you haven't already. How about a little more aggressive buyback there to offset some of the share increase?

Yes. So over the last year or so since we've had the buyback program, we've been operating under a quarterly open window trading policy and we set parameters at the beginning of the each open window, right after we announce. And this last quarter, the parameters that we established, candidly the stock only dropped below that level three days during the open window and we bought in all of 3 of those days. And the decline in our price, in April unfortunately, we were in a blackout period and we could not execute any buybacks during that. We are clearly contemplating and putting in place a 10b5-1 plan that will allow us the ability to purchase throughout the quarter, not just limited to open windows.

And I'm happy to take some of your cash and buyback your stock for you if you guys can't?

I appreciate the offer.

With respect to that last tranche of long-term debt, is there any reason not to just pay it off?

Well. We balanced that with our share buyback to buyers. So we're playing both of those. That will be paid off our quarterly payments are $0.5 million a quarter. And so will be paid off by the end of next year, or even if we just pay in the schedule and we'll be looking at that versus the opportunity to buy back shares.

[Operator instructions] We'll now hear from Jim Galloway.

Thank you for taking my call. I remember when our total volume was based on Protandim. And now we have so many more products that I'm confused as to why the product growth has not turned into revenue growth. Can you give us a little breakdown on what percentage each of the products represents and what products are growing and what are stagnant? Because I don't know if people move from one product to another when the new one is released and then they don't have much emphasis again on the old one. But I would think Nrf1 and Nrf2 would be a certain percentage and we've got the hair care. Do other products fall back? Thank you.

Well. Thanks, Jim. Steve will give you the percentages of the various categories you're coming up. One of the strategies that we've been addressing previously in other calls has been our stacking strategy. And this has been -- the strategy is basically a bundling of our products to get our consumers as well as our distributors to be purchasing more products other than just the Nrf2, the Protandim. And roughly, that number when it comes to the total revenue that we have hovers around 20% or so of our total revenue. So that, that stacking strategy and bundling strategy that we've been deploying has been very successful. In addition, if you look at the most recent launch of our hair care product, that has been very successful for us. And even the updating that we just did of our PhysIQ Smart Weight Management, even though we remain focused on our hair care line, typically during the weight loss season, we still saw a 7% year-over-year increase in the volume of the PhysIQ smart weight system without our regular -- typically, we have a weight loss challenge that we have going on. So that new system is also being received very well. And Steve will go over some of the breakdown of our product categories.

So Jim, you're right that Protandim is still our predominant product. We have depending on how you look at it's about 65% to 70% of our revenue. And that percentage has stayed about the same over the last several years. And so, you could say that a lot of our revenue growth, especially over the last year or two has been as a result of both the introduction of new products as well as the expansion of Protandim into countries where it wasn't previously registered. An example of that it's clearly in Mexico where for up until, I think, about a year and a half go since I have been here, Protandim was not registered and so we're not selling directly into that country. And so even though that's generated some revenue growth, it's still within the same product family as Protandim. But it stayed about the same as our revenue has grown. So it's the other products that are really healthy to accelerate some of the growth that we're seeing.

Next, we'll hear from [Jillian Hoffman with Robeco].

Can you provide some more color just on the regional trends in terms of revenue, like previously you reported that Taiwan has become the third largest market? Can you provide an update there, and also on the trends in distributor and customer counts, particularly in Asia/Pacific and Europe?

So just addressing the distributor and member count first, in our press release toward the end, there's actually a table that shows that growth. And so from a distributor standpoint, we were flat year over year in the Americas, but we saw an almost 28% increase in Asia/Pacific and Europe. And candidly, on a country basis, we don't break out specifics there, but we saw growth across Europe, Taiwan, China, Australia and Thailand. So most of our regions showed meaningful growth, both from the distributor and customer standpoint, as well as from a revenue standpoint there's obviously a correlation there. And then from a customer standpoint, both the Americas and Asia/Pacific and Europe, the two regions that we publicly disclosed, both of them grew about 10% from a count, the distributor or customer count basis. So we mentioned that year over year, all of our regions grew from a revenue standpoint, and the same thing is true all of the regions grew for both a distributor and a customer basis year over year.

So in terms of preferred customers, in the Asia/Pacific and Europe region, the trend has been pretty flat, so on the 23,000 customers in the last couple of quarters?

Up 9.5% year over year, yes. And a lot of that may be based on whether it's a customer or a distributor count by region, really depends on the way that business is done in the various markets. Especially in North America, we've seen a shift toward more of online communication, especially through social media. We found that our distributors are bringing in a lot more customers, per se, initially than distributors. So you've seen some of that shift in the Americas. In Asia, they're still focused heavily on bringing in distributors. Not that they're not focused on that in the United States, but they use different communication methods quite often and not as much social media.

Thanks for clarifying. Indeed, I noticed the strong trends in Americans regions on customers and Asia/Pacific and Europe, the trend is stronger on the distributor side, so thanks very much and great progress so far.

Thank you. Appreciate that.

Thank you. That will conclude today's question-and-answer session. At this time, I'd like to turn the conference over to Mr. Jensen for any additional or closing remarks.

We'd like to thank you all for joining us today. We're pleased with the sales and business momentum and remain confident in our 2019 outlook. We will be presenting at the D.A. Davidson's second annual Consumer Growth Conference on May 30th in Chicago and at the LD Micro conference in Bel-Air on June 5th, and we hope to see some of you there. Have a great day. Goodbye.

That will conclude today's conference call. Thank you for your participation.