LifeVantage Corporation (LFVN) Q3 2023 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 2023 Results. [Operator Instructions] Hosting today's conference will be Reed Anderson with ICR. As a reminder, today's conference is being recorded. And now I would like to turn the conference over to Mr. Anderson. Please go ahead, sir.

Thank you. Good afternoon, and welcome to LifeVantage Corporation's conference call to discuss results for the third quarter of fiscal 2023. On the call today from LifeVantage with prepared remarks are Steve Fife, President and Chief Executive Officer; and Carl Aue, 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 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 involve inherent risks and uncertainties, including those identified in the Risk Factors section of LifeVantage's most recently filed Forms 10-K and 10-Q. 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 4, 2023. 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 Steve Fife, President and Chief Executive Officer of LifeVantage.

Thanks, Reed, and good afternoon, everyone. Thank you for joining us today. In January and on our second quarter earnings call, we publicly announced our major strategic initiative, a project we call LV360. As a reminder, LV360 is an all-encompassing business transformation. The holistic approach includes major program and experience updates for each of our primary business functions while also ensuring each of the updates fit together seamlessly. The overarching objective of LV360 is to stimulate growth through industry-leading experiences for both consultants and customers. We are extremely pleased with where we are today as our LV360 initiatives roll out and begin to take hold. The early momentum in Q2 continued to build in our third quarter, including accelerating trends on the top line as total revenue increased 7.5% year-over-year to $53.7 million and was up 10.4% and on a currency-neutral basis. Our Americas region was the key driver, with revenue up 18.2%, reflecting higher average revenue per account due to continued strong demand for our TrueScience Liquid Collagen product. Revenue in our Asia Pacific and Europe region was down 14.2%, which is made up of 9% from negative currency headwinds, primarily in Japan and 5% year-over-year change in active accounts. Ex currency revenue in Japan increased 5.8% in the third quarter. Our new innovative compensation plan Evolve plays a central role within LV360 in our future growth. Evolve is designed to support a consultant along a clear consultant path, which includes 3 progressive stages. The first stage, Share, incentivizes consultants to share our activating products with customers. At this stage, it is easily understood that as you share this, you get that, meaning consultants know exactly what their income potential is as they are building confidence and their own experience with LifeVantage products. The second stage, Build and Grow is where consultants balance their efforts between selling and sponsoring. Bonuses unlocked at this stage encourage mentorship and helping other consultants reach their goals. The final stage, Lead, is where consultants teach by example on how to build a successful LifeVantage business. This stage unlocks bonus matching and shares of the leadership pool to encourage shared success. With these stages guiding their experience, consultants have multiple pathways to building a strong, stable and predictable business through their hard work and efforts. Evolve rewards you for working in the way that fits your personality, lifestyle and goals. It's a model that allows you to reach your own definition of success. It's a plan that is appealing to both direct sales career professionals and individuals looking to simply supplement their income by sharing products they love with friends and family. Evolve is very attractive to individuals who are focused on leveraging their social media presence to drive affiliate type income because of how clear earnings potential is within the share stage. With Evolve, our business opportunity has a very compelling hourly earnings story, especially when compared to the potential hourly earnings from a typical customer-facing service job, such as a retail store or restaurant. And from the early results, the Evolve plan is transforming and modernizing our business. The Evolve compensation plan and other LV360 initiatives, including our customer loyalty program went into effect on March 1 in the U.S., Japan, Australia and New Zealand markets. We call this group of markets Phase 1. Subsequent phases are being developed now by a team dedicated to the strategy behind each market's LV360 rollout. We look forward to sharing details on these next phases on our next earnings call. As we look to future phases and have a team focus there, we also recognize the transformation of this magnitude will require continuous support. Our team has made a concerted effort to ensure that Phase 1 does not end with the launch of LV360 initiatives. There is a robust Phase I optimization plan that extends well into the next fiscal year. The plan includes consultant trainings, events, new product launches, a new consultant recognition program, incentives and promotions among other things. As we work to ensure we are building the right consultant behaviors with LV360. This optimization strategy allows us to lay a strong foundation for this transformation that will last for years to come. As part of our optimization strategy, throughout March, thousands of consultants attended in-person Evolve event held in Phase 1 markets. It was important that consultants come together to both celebrate and continue to be trained on the business building behaviors the innovative plan was built to support. At these events, we also announced our 2024 Global Incentive Trip. Consultants earn this incredible opportunity by demonstrating the business building behaviors Evolve support as well. The qualification period for this trip to the Hard Rock in Punta Cana in the Dominican Republic runs March through September, with travel happening in February 2024. Concurrent with the timing of the Australia and Japan Evolve events, TrueScience Liquid Collagen launched on March 3 in Australia, New Zealand and March 28 in Japan. Launch totals for these 3 markets exceeded $650,000 collectively and outperformed forecast by 131% in Australia, 55% in New Zealand and 42% in Japan. The success of liquid collagen in the U.S. is undeniable. Before I get more into the quarter 3 numbers of this transformational product, we are excited to announce that TrueScience Liquid Collagen was recently recognized as the recipient of a Bronze Stevie in the 2023 American Business Awards in the consumer products category. We issued a press release specific to this earlier today with those details. It's exciting news and the product remains a top performer and contributor to U.S. revenue gains. Customer penetration was 26% in Q3, up from 24.1% in Q2, and consultant penetration remained flat at 27%. On a blended basis, penetration was 26.2% on Q3 compared to 24.8% in Q2. Liquid collagen plus the Healthy Glow Essentials Stack, which bundles liquid collagen and Protandim Nrf2 Synergizer combined for $9 million or approximately 23% of Q3 revenue in the U.S. market. We are also encouraged by the reorder rate of Liquid Collagen. Liquid Collagen and the Healthy Glow Essential Stack continue to lead the product line and stickiness with second month order rates above 70%. We are excited to expand the momentum this product is driven in the U.S. to Australia, New Zealand and Japan and other international markets later this calendar year. Also on the product front, the Rise AM & Reset PM system as well as LifeVantage D3+ launched in January in the U.S., Australia, Japan and New Zealand at our Rock the Rhythm. Fat Burn launched in Mexico in February with a strong leader-supported campaign. In addition, average monthly revenue for Fat Burn and associated stacks was up 52.7% in the U.S. since our campaign promoting the product kicked off in Q2. New products weren't the only thing introduced internationally this quarter. We also expanded our regional leadership team with the hiring of Michael Allen as President and Director of LifeVantage Japan; and Jake Heinz as Vice President of the Asia Pacific region. Allana Hinks also joined as General Manager of Australia and New Zealand. Each of these talented individuals have broad and deep experience in international direct sales, and we are thrilled to have them on board at this exciting time. In summary, we are extremely pleased with our Q3 results. Our LV360 initiatives have been expertly rolled out and well received by our existing consultant base and are just starting to gain traction. Our team has a robust optimization plan designed to strengthen that hold. Liquid Collagen continues to drive robust sales in the U.S., and we are extremely excited about its potential in key international markets. Our product strategy and activation differentiation continue to position us well within the health and wellness space as well as the direct sales industry. We remain confident in our outlook and the trajectory of our business. This confidence is further demonstrated by the decision to increase our dividend this quarter. This approval was announced in our third quarter earnings release and a specific release as well issued today. To close, we are in a strong position to deliver significant improvement in growth and profitability over the next several years, and I look forward to sharing that success with each of you. Now let me turn the call over to Carl Aure, our Chief Financial Officer, to review our third quarter financial results. Carl?

Thank you, Steve, and good afternoon, everyone. Let me walk you through our third quarter financial results. Please note that I will be discussing our non-GAAP adjusted results. You can refer to the GAAP to non-GAAP reconciliations in today's press release for additional details. Third quarter revenue was $53.7 million, up 7.5% on a year-over-year basis and up slightly from the second quarter. Foreign currency fluctuations negatively impacted revenue by $1.5 million in the third quarter. Excluding the negative impact of foreign currency fluctuations, third quarter revenue was up $5.2 million or 10.4% compared to the prior year period. Revenue in the Americas region increased 18.2% to $39.5 million in the third quarter, including a 19.5% increase in the United States as compared to the prior year period. This increase was primarily driven by the continued success of our TrueScience Liquid Collagen product. Revenue in our Asia Pacific and Europe region decreased 14.2% to $14.2 million, driven by a 16.3% decrease in total active accounts and negative impact from foreign currency rate fluctuations. Excluding the negative impact of foreign currency fluctuations, third quarter revenue in our Asia Pacific and Europe region was down 5.1%. The foreign currency impact continues to be driven by fluctuations in Japan accounting for $1.1 million of this impact. Adjusting for this impact, Japan delivered a 5.8% growth on a constant currency basis in the quarter, driven by the successful launch of NAD earlier this year and TrueScience Liquid Collagen launched in March. Gross margin was 80.2% for the third quarter compared to 80.7% in the prior year period. The decrease in gross margin was primarily due to increased shipping expenses as well as shifts in geographic and product sales mix. We are now starting to recognize the positive impact of the cost savings initiatives across our supply chain identified and implemented in previous quarters. Commissions and incentive expenses in the third quarter increased $0.6 million year-over-year. As a percentage of revenue, commission and incentive expense decreased 210 basis points to 44.3% versus 1 year ago levels, which was the result of the timing and magnitude of various promotional and incentive programs. Non-GAAP adjusted SG&A expense was $17.7 million versus $14.7 million in the prior year quarter and was up 360 basis points as a percentage of revenue to 32.9%. This increase was driven by higher event and travel-related costs, higher employee compensation-related expenses as well as outside professional service fees related to company-wide initiatives, which launched in March as compared to the prior year period. Adjusted operating income was $1.6 million compared with adjusted operating income of $2.5 million in the prior year period. Adjusted net income was $1 million or $0.08 per fully diluted share in the third quarter compared to adjusted net income of $1.6 million or $0.12 per fully diluted share in the comparable period last year. We recorded tax expense of $600,000 in the third quarter of 2023 and 2022, respectively. For fiscal year 2023, we expect our full year effective tax rate will be approximately 37%. We -- the increase in our effective tax rate is primarily attributable to the negative impact of discrete items. Adjusted EBITDA for the third quarter was $3.3 million or 6.1% of revenues compared to $3.4 million and 6.8% in the same period a year ago. Please note that all of the adjustments from GAAP to non-GAAP I discussed today are reconciled in our earnings press release issued this afternoon. We ended the third quarter in a strong financial position with $19.5 million of cash and no debt. We also continue to maintain $5 million of availability under our revolving line of credit. We continue to evaluate our capital allocation strategy in order to maximize shareholder value. Our Board of Directors recently approved an increase in our dividend to $0.035 per share to be paid on June 15, 2023, to shareholders of record as of June 1, 2023. This represents a 16.7% increase in the dividend per share in comparison to prior quarters. We also continue to evaluate our stock repurchase program and may become more active in future quarters as market conditions allow. As of March 31, 2023, there was $27.7 million remaining under our existing stock repurchase authorization. Capital expenditures totaled $1 million in the third quarter. We anticipate total capital expenditures for fiscal 2023 to be approximately $3.3 million. Turning to our fiscal 2023 outlook. We anticipate our fiscal 2023 revenue will be in the range of $209 million to $212 million, adjusted non-GAAP EBITDA in the range of $11 million to $13 million with adjusted non-GAAP earnings per share in the range of $0.20 to $0.26 per share. The reduction in our earnings per share is primarily driven by the increase in our expected annual effective tax rate. And with that, let me turn the call back over to Steve for closing remarks.

Thank you for joining us today. In closing, I want to take this opportunity to thank all of our employees for their hard work and dedication as well as our outstanding team of independent consultants and loyal customers. We are very excited about this modernization of our company and remain focused on the opportunity that lie ahead. We hope you all are safe and healthy and look forward to updating you on our next call. Have a great day.

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Thank you. This concludes today's conference. You may disconnect your lines at this time.