LifeVantage Corporation (LFVN) Q2 2020 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 Second Fiscal Quarter of 2020 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, Doug, and good afternoon, and welcome to LifeVantage Corporation's conference call to discuss results for the second fiscal quarter of 2020. 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 Time. If you have not received the release, it is 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'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 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, January 28, 2020. LifeVantage assumes no obligation to update any forward-looking projections 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 my pleasure to discuss our second quarter fiscal 2020 results with you today. We are very pleased with our second quarter growth and profit performance, on track with our 2020 guidance for both revenue and adjusted EBITDA, and are increasing our fiscal 2020 guidance for adjusted earnings per share, which Steve will discuss in a moment. Our second quarter growth was driven by gains in both the Americas and our Asia/Pacific and Europe regions. In the Americas, our launch of Protandim NAD Synergizer in the United States and Canada, along with the continued execution of our strategic initiatives, were the key contributors to growth. As we discussed last quarter, we have put considerable emphasis, preparation and focus on our launch of Protandim NAD Synergizer, and the results of our efforts are apparent in both our financial results for the second quarter and the trends we're seeing in the brand. Our customers have responded positively to the expansion of our flagship brand, and we believe we have assembled an unparalleled lineup of Protandim product solutions. You'll recall that Protandim NAD Synergizer is the first addition to our flagship Protandim line since 2016. And in combination with Protandim Nrf1 and Nrf2, we have developed a powerful combination of nutrigenomic products that have demonstrated significant synergy and are further solidifying LifeVantage's leadership with science-based efficacious products, each designed to support our biohacking culture. Let me begin with a quick overview of our second quarter and then discuss our recent launch and business activities in greater detail. Our year-over-year revenue increased approximately 5% during the second quarter compared to our previous record quarterly sales results in the second quarter of last year where we launched our very successful hair care offering. Further, on a sequential basis, second quarter revenue increased 9% over the first quarter of 2020. The Protandim NAD and Tri-Synergizer bundle launches were the primary driver of the growth in the Americas, and we saw strong growth in the Asia/Pacific region as a result of our strategic initiatives, which included the launch in New Zealand and continued growth in Japan. We also generated 82% year-over-year growth in adjusted EBITDA and a 138% year-over-year increase in adjusted earnings per share, the latter partially benefiting from a favorable tax rate. We are proud of not only our ability to continue to drive revenue growth but also margin expansion and significant cash flow that has further allowed us to reduce debt and execute share repurchases to drive increased shareholder value. Revenue growth reflected 4% year-over-year growth in the Americas and 8% growth in Asia/Pacific and Europe, including 5% growth in Japan. We are quite pleased with this broad-based growth particularly given that the launch of Protandim NAD Synergizer was limited to the U.S. market, along with not-for-resale availability in Canada during the quarter. Over the coming quarters, we plan to introduce Protandim NAD Synergizer and our Tri-Synergizer bundle in additional markets. We have begun the process of product registrations, localization where needed and other necessary approvals across our international markets, and we will provide updates on the timing of future launches. Our significant efforts earlier in the year ahead of our Protandim NAD launch were focused on distributor training and clinical research to set the stage for the successful launch. We worked closely with our field leaders in preparation, including teasing the product at our July Elite Academy in Kansas City, providing training and product to our field leaders so that they could test it and build personal experience ahead of formal launch in October. As a result, our field leadership was better prepared to educate our broader consumer base at launch, which drove a strong initial response and built early momentum. As I noted, we also focused on completing clinical studies, building marketing materials, presentations and promotional campaigns to drive consumer demand. Each of these efforts contributed to our successful launch. Protandim NAD Synergizer has been specifically formulated to target the nicotinamide adenine dinucleotide molecule, more commonly known as NAD. By increasing NAD levels, we also know we are positively affecting NAD-dependent pathways, specifically activating the family of proteins called sirtuins. Sirtuin activity, which declines as we age, has been linked to a host of health benefits, including supporting healthy longevity, improved mental focus and concentration, positive mood and motivation, boosting mental and physical energy, supporting a healthy inflammatory response and supporting a healthy cardiovascular system. We also note Protandim NAD Synergizer is more effective than the competition. Our studies have shown that it can significantly increase both NAD levels and sirtuin activity at exponentially higher rates than that of others in the marketplace and do it much more quickly. Further, our studies show significant synergies when Protandim NAD Synergizer is combined with our Protandim Nrf1 and Nrf2 Synergizers to further improve outcomes. As a result of the synergy and the sensorial effect of Protandim NAD Synergizer, we have seen a measurable increase across the entire Protandim line of products. The interest has materialized into strong sales of our Protandim Tri-Synergizer bundle, which combines all 3 Protandim products. We are now focused on converting this initial demand into increased subscription orders for this bundle as well as our more recently introduced Tri-Synergizer packet for ease of daily use and sampling. In future quarters, we expect this offering to be an increasingly important contributor to our initiative to drive overall subscriptions, increase average order size, improve our biohacking positioning while driving consumer demand and retention. In addition to the successful Protandim NAD Synergizer launch in the United States, we continued to make steady progress on each of our 2020 initiatives during the quarter, including the launch in New Zealand and the recent announcement of the introduction of free shipping. We formally launched our free shipping program to further support our subscription model. Free shipping is now available to our subscription consumers and non-subscription consumers who have orders over a minimum amount. We expect free shipping to drive both increased loyalty and higher average basket sizes. Variations of our free shipping program have been introduced into many of our international markets. Further, we have now begun our prelaunch for the introduction and training of our new consumer-friendly Protandim Nrf2 tablet size in Japan. This new easier-to-use product size directly reflects local market feedback and is tailored to deliver increased consumer acceptance of the Protandim offering. Our initiatives to attract and create biohacking influencers continue to progress, including support for our Red Carpet program, further expanding our geographic footprint during mid-calendar year 2020, driving further growth and synergy in our Greater China region, refining the cadence and volume of our distributor events and introducing a new series of meetings for influencers. We have already begun to execute the new event cadence, and we'll continue to drive Red Carpet sales as the year progresses. We launched New Zealand in November, and we're encouraged with the strong initial response. We are pleased today to announce that our planned new market launch in Asia later this calendar year will be Singapore, which is a strategically located market that will play a role in supporting additional expansion in Southeast Asia. We also continue to plan to further simplify business building with the goal of making it as easy to build at LifeVantage as it is to call an Uber. This includes a plan to introduce daily pay into our compensation plan, which is expected to roll out later this fiscal year; updating and enhancing our international compensation plan to further focus it on driving customer demand; and driving further penetration of the LifeVantage app. Finally, we will continue to focus on building and enhancing our foundation for future growth, including new programs to develop internal talent, enhance our cybersecurity and upgrade our customer-facing systems to improve convenience, remove friction and improve efficiencies, each of which were progressed during the second quarter. To close, we are pleased with our second quarter performance in both sales and earnings, have built new product excitement for the remainder of fiscal 2020 and will continue to execute on each of our strategic initiatives. 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 second quarter results. We generated a record quarter of positive year-over-year revenue growth while continuing our improvement in profitability. We are excited with the trajectory we have attained through the first half of fiscal year and are on track to meet our revenue and EBITDA guidance and now anticipate higher adjusted earnings per share. Please note that I will be discussing our non-GAAP adjusted results. You may refer to the GAAP to non-GAAP reconciliation in today's press release for additional details. Second quarter revenue was $61.2 million, representing a 5.3% increase year-over-year. Revenue in the Americas increased 4.3% to $44.3 million, while revenue in Asia/Pacific and Europe increased 7.8% to $17 million, all year-over-year. Growth in the Asia/Pacific and Europe region reflected continued robust performance in Asia/Pacific, including significant gains in Australia and New Zealand, including a very favorable reception to the introduction of our business opportunity in New Zealand during the quarter as well as strong 4.7% growth in Japan. The growth in the Americas reflected the launch of Protandim NAD Synergizer and Protandim Tri-Synergizer bundle, which drove considerable growth across the brand. Gross margin was 83.3% compared to 83.2% in the prior year period. The modest increase in gross margin was driven by lower inventory obsolescence and handling costs as well as changes to our geographic and product sales mix, with gross margin in line with our long-term target. Commissions and incentive expenses as a percent of revenue decreased 70 basis points year-over-year to 47.7%. The year-over-year decrease is due to timing of accruals for incentive and promotional programs as well as the current quarter level of activity in our Red carpet program. Just as a reminder, the commissions and incentive expense rate will fluctuate quarter-to-quarter based on the timing and magnitude of promotions and incentive programs as well as the inherent fluctuation in Red Carpet expenditures. We continue to target commissions and incentive expenses to be around 48%, fairly consistent with our second quarter performance. Adjusted SG&A as a percent of revenue was 29.3% compared to 32.8% in the prior year period. The decrease in adjusted SG&A expense as a percent of revenue primarily reflects decreased event expenses when compared to the prior year period, which included our October 2018 Global Convention as well as decreases in employee compensation-related expenses. These decreases were partially offset by increased depreciation expense associated with our investment in new technology that has been placed in service and increased payment processing fees related to our geographic revenue mix. Adjusted operating income was $3.9 million or 6.3% of revenue compared to $1.1 million or 1.9% of revenue in the prior year period. Adjusted net income increased 139% to $4.6 million or $0.31 per fully diluted share, up from $1.9 million or $0.13 per fully diluted share in the prior year. As you will note from our income statement, our second quarter adjusted EPS reflected a tax benefit during the quarter related to beneficial tax deductions versus book expense for prior stock awards that vested during the quarter. These vesting events are treated as discrete items and are accounted for fully within the period that they occur rather than adjusting for the differences on an anticipated annualized basis. As a result of the lower-than-expected tax rate during the first half of fiscal 2020, we now expect our full year tax rate to be approximately 17% compared to our prior expectation of 19% to 22%. Adjusted EBITDA for the second quarter increased 82.2% to $6 million compared to $3.3 million in the prior year period. Please note that all of the adjustments from GAAP to non-GAAP I discuss today are reconciled in our earnings press release issued this afternoon. We ended the second quarter in a strong financial position with $14.5 million of cash compared to just $500,000 of debt. During the quarter, we generated $9.2 million of cash from operations, up from $4.6 million in the prior year period. The improved operating cash flow primarily reflects a $3.5 million increase in GAAP net income and improvements in working capital. During the second quarter, we invested $900,000 in capital expenditures. And during fiscal 2020, we anticipate to continue to modestly have lower CapEx levels than in fiscal 2019 as our incremental investments in the LifeVantage app are moderating. In December of 2019, our convertible note receivable and accrued interest related to our mobile application development partner converted into an equity holding, which is now recorded as equity securities on our balance sheet. Finally, we paid down $500,000 on our term loan, which will be paid in full in March of 2020. Additionally, we used $2 million in cash to repurchase approximately 140,000 shares of common stock under our share repurchase authorization. As noted last quarter, we have a 10b5-1 program in place to facilitate our share repurchases. As of December 31, there remains $5.4 million available under the company's $15 million share repurchase authorization. Turning to our fiscal 2020 outlook. We are reiterating the guidance we provided for revenue and adjusted EBITDA when we reported fourth quarter 2019 earnings while raising our adjusted EPS guidance. We anticipate generating revenue in the range of $235 million to $245 million and adjusted non-GAAP EBITDA in the range of $20 million to $22 million. We now anticipate non-GAAP earnings per share in the range of $0.74 to $0.79, up from $0.62 to $0.71 previously. Our increased non-GAAP EPS guidance range reflects an increase in our estimated non-GAAP pretax income, a reduction in our estimated full year tax rate and a reduction in our forecasted fully diluted share count. Please note that our new full year tax rate estimate of approximately 17% assumes that our third and fourth quarter tax rate will be approximately 33%. Now let me turn the call back to the operator to facilitate questions. Operator?

[Operator Instructions]. Our first question comes from the line of Doug Lane with Lane Research.

A question on statement on the tax rate here, Steve, the 17% this year. Is this -- can we look at this as a new normal? Or is the 19% to 22% really more the center of gravity and the 17% is just unusually low this year?

Yes. I'd say, Doug, that the 17% is lower this year because of the high amount of equity that vested during this period that has translated to a much lower tax rate. I think going forward, I would expect our rate to be in the 25% range, plus or minus.

Okay. That's helpful. And then getting in the business here, Darren, I have to say that international business seems to be doing very well with the 8% growth on a pretty difficult comparison, and there's a lot of moving puts here. So I'd just like to drill down on that if I could because the Greater China had been a big part of the growth story before. And now I see that it was down 35% in the first quarter, and I'm sure, pretty sure probably wasn't much better in the second quarter. But meanwhile, we have Australia and New Zealand in the equation in a fairly big way that maybe wasn't there a year or two ago, at least not as far as being the growth contributors that they are. And then thirdly, the return to growth in Japan, how sustainable do you think that is. Just if you could give us some color on the moving parts in international.

Yes, I'd love to. Thanks, Doug, for the question. Let me start out with Japan. As we mentioned before, we saw a 4.7% increase in Japan. And is that sustainable? Over the years, we have completely changed management. We've been going through a lot of efforts to align ourselves and our field leaders together. And I think that's translated out very well into a growth in business. One of the main drivers that we have through the remainder of this year for Japan is the -- a resizing or a reduction in size of our Protandim Nrf2. And this is based on local market feedback that we're receiving that the size of pills in Japan is traditionally a lot smaller, so we're adjusting to that. And we think that, that will be very positively received. So is it sustainable? We have high hopes on that. And with the management in place and the field leadership that we have in place, very positive on that. Now looking at Australia and New Zealand. As a matter of fact, I traveled to Australia later this evening. We just have some great groups down there that are growing. They're working very well with our management. And the systems that they have in place, it seems like each month, they just continue to grow and grow. As a matter of fact, it was based on that growth and the demand that was coming from that area that we made the determination to expand into New Zealand. Originally, that was based on our customer acquisition model. We moved that over to full business in -- our full business model, and we've seen a very positive reception of that business model. Hong Kong, well, let's talk about Greater China. Still, we're working with Taiwan. It's a great contributor, still very strong for us. They're still more on a sprint, I would call it, in that they surge and then rest and then surge and rest. And we're trying to bring in more leadership so that we get more of a consistent monthly and quarterly output from them, and we've made great strides over the last quarter or 2 to do that. Right now, the political unrest that's going on in Hong Kong, I would say that, that is probably one of the greatest headwinds that we have. I mean most businesses in Hong Kong have been affected with it. So as all people, we pray and hope for a resolution in the situation there. And that's kind of the color that I have for those areas. Very pleased with the growth, Doug.

No, that's very helpful. And on the New Zealand rollout, is that -- was that a onetime event in December? Or is it sort of a rolling rollout, if you will, through the next few months?

Well, it was an introduction. Keep in mind that, that market, we had been doing -- that we had customers in before for at least, I think, at least a year in that it was part of our global customer acquisition model. And so when we converted that over to a full business model to allow people to look at it from a business opportunity standpoint, that even accelerated the sales and the growth that we're seeing there as more people joined and they were able to engage and bring in more customers. So it's been very positive.

And that launch occurred in the middle of November. So we have about 6 or 7 weeks in the quarter when it was officially launched on a business standpoint.

Very well received by both people in the U.S. -- by both people in Australia and New Zealand.

Yes.

Okay. Got it. And then turning to the U.S. where the growth was 4%, but it seemed like the product introduction was fairly major. And so I mean from the outside, it seems like I would have expected a bigger number. Is 4% about what you're looking for? Or is there something going on with the timing of that I should know about? Just what you're feeling on the new product launches.

Well, the new product launch was well received. And especially when -- right before the event when some of our clinical research was made available and we saw the synergies that were occurring between the various product lines, I mean between the various Protandim products, I would say -- so overall, the launch went well. I think that there were other factors that contributed to maybe numbers that might have been higher but would have reduced that number from where it could have been.

And just keep in mind that, that 4%, the prior year quarter was also our previously -- previous record high. We did over $58 million in that quarter when we launched our hair care system. So we were coming off a high comparable year-over-year. Sequentially, the U.S. actually grew over 10% from Q1 to Q2.

Okay. That's good color. And then with the bundling -- with the new products and the bundle that you're offering, how do you think that'll impact the percentage of your product that will be sold via bundles and also maybe how it might impact your percentage of product sold via subscription?

Well, looking at the various percentages, let's start the bundling. I mean looking at the product category itself, Protandim, we saw a 10% year-over-year increase in our Protandim line during the quarter and a 16% sequential increase in the use of Protandim, the family of products. So the bundling strategy has been successful. Typically, it ranges 18% to 20%, the bundling products of our revenue. When it comes to subscription, I think the driver behind that, more so than the Tri-Synergizer packets that we released or the bundling, I think a factor that will affect -- that will be the free shipping model that we're -- the free shipping that we just rolled out as well as the daily pay as we begin to transition into -- more into the gig economy and begin to reflect some of our other competitors outside of our channel. But what is commonly held -- I mean kind of the Amazonification of products, they expect free shipping along with that. So I think some of these changes that we've made will help make our subscription model even more attractive.

Okay. That's helpful. Just one last thing. You mentioned the Global Convention in the fourth quarter of 2018. Do you have any conventions of that size planned over the next 4 to 6 quarters?

Well, we do have -- over the last couple of quarters, we've been talking about a change to our event cadence. And part of that is a shift -- as we see younger people coming into the business, they're a little more focused on more experientialism, a little more -- having it be more of an experience than just sitting in an event. And so you see a change in our cadence coming up next month as we take our next Elite Academy and we've moved it to more of a location. We're going to be down in Cancun. And we see -- I see that as being one of the premier events that we have. So we're gathering everybody in Cancun in February. And then another thing that we've seen is that as younger people come in, they don't like to travel quite as much. So we've taken one of our Elite Academies this year, and we're shifting it and breaking it down into over 20 regional events where we take the meetings closer to our distributors. And we believe that the aggregate amount of the people attending those will even be higher than if we did one event itself. Then we've moved our Global Conventions over to an annual basis. And that -- so our Global Convention will be held each year and typically in the month of October. So this year, in October -- I should say, in this calendar year October, our Global Convention will be in Las Vegas.

[Operator Instructions]. Our next question comes from the line of Bill Sutherland with The Benchmark company.

Darren and Steve, the Tri-Synergizer bundle, it was available all quarter in the U.S.?

We rolled it out towards the beginning of October at one of our Elite Academies. So for the vast majority of the quarter, yes.

Yes.

So I'm just thinking about the incremental impact. I mean do you feel it was hot out of the gate? Or is this something that's going to be building as we get into the back half of the fiscal year?

Well, when I look at the introduction of any, I call it, a macro moving product, one of our flagship products that we released, initially, there's always a product sale where people are wanting to experience it, get it into their hands. So there's an initial interest. The part that we're on right now is translating that and moving our customer bases over to our subscription model. So right now, we're just driving awareness of it, promoting it. And so most of our marketing efforts as well as our event efforts are all focused on this pack. So that's just the stage we're in. It's been out for a quarter. That was more of the introduction phase. Now we're driving it into our subscription system.

And then we'll also see the expansion impact of Canada and the other markets in the coming quarters?

Yes. Canada is receiving it on a not-for-resale basis, so people would order from the United States there for their own personal consumption. And so it is limited to an extent where it's not -- it's mostly people just wanting to consume the product. I think as product is officially on the ground, then there will be an expansion of the demand for it obviously. And then as we roll it out throughout the world, again, and we mentioned that we're in the process of localization, reviewing the formulation by regions of the world, typically, as you move a product around the world, some countries don't allow the oddest things. Something that maybe seemed very normal, they may not allow. So we have to look at, how do we adjust it for that given market, keeping the number of formulations that we have available to the smallest number doing the appropriate testing. So it is a process. And over the coming quarters, as we have markets come online to receive the product, we'll make additional announcements and bring you up to speed on where the product will be available.

And Bill, one other thing that we did just a week or two ago was the introduction of the Tri-Synergizer packets. So when we launched the product in October, and I think we've talked about the science behind the benefits of taking all three of our Protandim products together, the individuals purchased three bottles of 30-day supplies. And we, just a week ago, announced kind of daily packets that contain 1-day dosage of each of the 3 Protandim products in one packet that is kind of an ease of use, but also, we anticipate that our distributors will be utilizing that as really a sampling tool for people that they come in contact with and talk to about the new product. So it's still very early to determine the success from that, but we see that as a growth opportunity in the second half of the year as well.

Okay. When you're looking at the launches in your pipeline, planned launches, are you thinking about across categories? Or is it more in the core as you've done with Protandim this year?

Well, I think as we look at new products, throughout the remainder of this year, our primary focus is on the Protandim NAD Synergizer as well as the bundling strategy and the Tri-Synergizer grouping or stack that we came out with. And when you launch something within your flagship, I think you'd do it a disservice if you immediately change course and begin focusing on something else. You really have to focus on getting that new product story out into that subscription model where people are consuming it on a daily basis. And that is really our focus right now. Now when it comes to other products, obviously, we do look at each category individually, from skin care to weight loss to pet products, and determine where there is the greatest demand and where we have the greatest upside on any type of expansion. Recently, we've been looking at -- we've released some limited-time offerings, so while supplies last. In the fall, we used that as part of our Black Friday and Cyber Monday promotions where we released a product within our TrueScience line, and it was very successful. So I think we'll -- we're always looking at what might be coming up in the future. But right now, our focus is on the NAD Synergizer.

And then last one for me. I just wanted to understand better the dynamic of the distributor and customer growth, the variance in the growth. And I guess it's been that way for some number of periods. I don't have that much history. But is that how we should think about it going forward? The distributors growing at a faster pace, I guess that's helped by your Red Carpet program. But how should we think about the customer attrition going forward?

I think sometimes it varies depending on the focus and the different group dynamics of people in the business. Last year, there was a greater focus on customers, and that shifted a little bit more to distributors. And that continues to kind of rotate back and forth depending on the various distributor groups. When you look at the most recent quarter, you're comparing -- as you look back into, I guess, '19, fiscal '19 for us, we were getting significant surges in customer enrollment through some of our Chinese groups that are based here in the United States, and that necessarily didn't replicate into this year. Additionally, we saw some short-term reductions in our social media-driven enrollment, which have been -- which were offset by higher average volume per customer. So as part of our ongoing efforts, we're expanding our education and training for our distributors to really more effectively market through social media. So it's just a process as we go back and forth and what groups are surging or growing at different points as to if it's more customers or distributors.

Okay. So it's not a steady state. Got it.

There are no further questions in the queue. I'd like to hand the call back to Mr. Jensen for closing remarks.

Thank you, everyone, for joining us today. We're very pleased about our results so far this year and are excited to see what the rest of fiscal 2020 has in store. We look forward to updating you on our next call and wish you all a wonderful day. Goodbye.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.