Lifevantage Corp Q1 FY2020 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to today's Conference Call to discuss LifeVantage's First Fiscal Quarter of 2020 Financial Results. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up. Hosting today's conference will be Scott Van Winkle with ICR. As a reminder, today's conference is being recorded. And I would now like to turn the conference over to Mr. Van Winkle. Please go ahead, sir.

Thank you. Good afternoon, and welcome to LifeVantage Corporation's conference call to discuss results for the first fiscal quarter of 2020. On the call from LifeVantage with prepared remarks are Darren Jensen, CEO; and Steve Fife, Chief Financial Officer. By now, everyone should have access to the earnings release, which we announced 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. 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-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, October 30, 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 be with you again today to discuss our first quarter fiscal 2020 results. During the quarter, we are intensely focused on preparing for the launch of our most significant new product in recent years; Protandim and NAD Synergizer. This revolutionary product is the first addition to our flagship Protandim line since 2016, and we're very pleased with the initial sales and consumer response, which is meeting our robust expectations and shaping up to be one of the strongest product launches. We're in the early days of the launch, but anticipate that October could be among the best sales months in our history. We will continue to focus on building this product across our global footprint. Before I discuss our progress with Protandim NAD Synergizer, let me recap the first-quarter activity, which again was largely focused on preparation for this important launch. Our year-over-year revenue growth continued during the quarter as we generated a 1% increase, which significantly marked the improvement in margins, adjusted EBITDA, and net income. The revenue growth reflected strong year-over-year gains in Asia-Pacific and Europe, which increased by 10.4%, including 10% growth in Japan. In September, we held a highly successful Japan convention where we saw strong activity ahead of the event, as well as increased sales and improved distributor engagement and customer demand. Revenues in the Americas decreased by 2.2% on a year-over-year basis due to the timing of activities in our Red Carpet program and our focus on previewing and training our field on Protandim NAD Synergizer ahead of the October launch. We made good progress on our 2020 initiatives during the first quarter, with a primary focus on our initiative to become masters of biohacking subscriptions. This initiative is intended to drive the percentage of our customers that process a subscription order within their first 90 days, increase average order sizes, and drive retention. A key component of this initiative is the launch of Protandim NAD Synergizer. As I noted, throughout the first quarter we were focused on preparing for and building consumer excitement for the product launch. While these activities did not have an immediate impact on first-quarter revenue generation, each was designed to drive the success of our formal launch at the beginning of the second quarter. Our preparation for launch was comprehensive and intentional, and these efforts have paid off with strong initial sales. During the first quarter, we worked closely with our field leaders in preparation including teasing the product at our July Elite Academy in Kansas City, providing training and products to our field leaders so they could test it and build personal experience ahead of initial shipments in October. As a result, our field leadership was better prepared to educate our broader consumer base at the time of launch, driving a stronger initial response. We also invested heavily in clinical studies, building marketing material, presentations, and promotional campaigns to drive consumer demand. Each of these efforts reflect our confidence that Protandim NAD Synergizer will be a strong contributor to our growth and a key addition to our flagship Protandim line. Protandim NAD Synergizer has been typically formulated to target the nicotinamide adenine dinucleotide molecule, more commonly known as NAD. By increasing NAD levels, we also know we're possibly affecting NAD-dependent pathways, specifically activating a 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, improving 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 know Protandim NAD Synergizer is more effective than the competition. Our studies have shown 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. Furthermore, our study shows significant synergies when Protandim NAD Synergizer is combined with our Protandim Nrf1 and Nrf2 Synergizers to further improve outcomes. As a result of this synergy and the sensorial effect of Protandim NAD Synergizer, we have thus far seen a lower level of cannibalization and higher incremental sales than we would typically anticipate with a new product launch. In an effort to further capitalize on this synergy, we've also launched the Protandim Tri-Synergizer. The Tri-Synergizer combines all three Protandim offerings into a single stack which is being received very well across our consumer base. Protandim NAD Synergizer and the Protandim Tri-Synergizer stack should be important contributors to our initiative to drive subscriptions, increase average order sizes, improve distributor response, and grow consumer demand and retention. We also continue to evaluate implementing a three-shipping program to further support our subscription model and adapting our product offerings to meet consumer demand in regional markets, with the initial effort to offer a more consumer-friendly tablet size of our Protandim Nrf2 in Japan, which is slated for the second half of fiscal 2020. Our second initiative is to continue to attract and create biohacking influencers. This includes our efforts to support our Red Carpet program, expand our geographic footprint during fiscal 2020, drive growth and synergy in the Greater China region, refine the cadence and volume of our distributor events, and introduce a new series of meetings for influencers. We'll begin executing the new event cadence in the first quarter. We will continue to drive Red Carpet sales as the year progresses and we're on pace with our plan for a November launch in New Zealand and one additional new market in Asia-Pacific during fiscal 2020. Third, we plan to further simplify business building at LifeVantage with the goal of making it as easy to build a LifeVantage business 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 year, updating and enhancing our international compensation plan to further focus it on driving customer demand, and driving further penetration of the LV 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 consumer-facing systems to improve convenience, remove friction, and improve efficiency. To close, we had a productive first quarter and we're off to a good start in fiscal 2020. We're very pleased with the launch of Protandim NAD Synergizer and the Tri-Synergizer, and we believe we're on track to achieve our fiscal 2020 guidance. Now, before I turn the call over to Steve, I want to let our investors know that I have entered into a 10b5-1 program to sell a small portion of my life and each holding roughly 10% over the next year. This decision reflects my personal need to diversify, and I set them out at a modest percentage with my total holding and it spread plan sales transaction across the next year so that only a modest amount is sold each month. I continue to maintain a high percentage of my personal assets in the form of LifeVantage stock and thus remain aligned with my fellow shareholders. I felt it was important to be transparent and announce this prior to the first sale. With that, let me turn it over to Steve to run through the financial results.

Thank you, Darren, and good afternoon everyone. I am pleased to report our first quarter results. We generated another quarter of positive year-over-year revenue growth, while delivering significant improvements in profitability. We remain confident in the momentum we have built, and we plan to build upon this further as fiscal 2020 progresses. 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. First quarter revenue was $56.2 million, representing a 1.1% increase year-over-year. Revenue in the Americas decreased 2.2% to $40.2 million, while revenue in Asia-Pacific and Europe increased 10.4% to $16 million, all year-over-year. Growth in the Asia-Pacific and Europe region reflected continued strong performance across Asia, including strong growth in Japan of 10%. The modest decline in the Americas reflected our level of activity in preparation for the launch of Protandim NAD Synergizer, as well as lower Red Carpet activity which can fluctuate quarter-to-quarter. This also impacted the number of active distributors and customer accounts during the quarter. The impact of this change was partially offset by an increase in both our distributor and customer average order sizes. In addition, our year-over-year retention rates were consistent. Our gross margin was 83.7% compared to 83.5% in the prior year. 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. Commissions and incentive expenses as a percent of revenue decreased 235 basis points year-over-year to 47.6%. The year-over-year decrease is due to the 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 commission 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%. Adjusted SG&A as a percent of revenue was 31% compared to 30.8% in the prior year period. The modest increase in adjusted SG&A as a percent of revenue primarily reflects an increase in employee headcount and related compensation costs and increased depreciation expenses associated with our investment in new technology assets that have been put into service. Adjusted operating income was $2.8 million or 5% of revenue compared to $1.5 million or 2.7% of revenue in the prior year period. Adjusted net income increased 85.6% to $1.9 million or $0.13 for fully diluted share, up from $1 million or $0.07 for fully diluted share in the prior year period. Adjusted EBITDA for the first quarter increased 44.7% to $4.7 million compared to $3.3 million in the prior year period. Please note that we continue to expect fluctuations in our tax rate over the coming quarters as the first quarter effective tax rate of approximately 28% was above our full-year expectation of 19% to 22%. Specifically, our tax rate can fluctuate significantly based on the timing and magnitude of stock awards vesting from quarter-to-quarter due to differences in the book versus tax expense deductions. These vesting events are treated as discrete items and accounted for solely within the period that they occur rather than adjusting for the differences on an anticipated annualized basis. As I noted, all of the adjustments from GAAP to non-GAAP are reconciled in our earnings press release. We ended the first quarter in a strong financial position with $13 million of cash compared to $1 million of debt. During the first quarter of fiscal 2020, we used $3.5 million of cash from operations and invested $800,000 in capital expenditures. The operating cash flow reflected investments in working capital, including a $1 million increase in inventory in preparation for the launch of Protandim NAD Synergizer, the payment of fiscal 2019 bonuses, and increases in prepaid expenses associated with future distributor events. During fiscal 2020, we continue to anticipate a low-level of capital expenditures compared to fiscal 2019 as our incremental investment in the LV app moderates. Finally, we used $1.4 million in cash to repurchase approximately 111,000 common shares under our share repurchase authorization and we paid down $500,000 on our term loan which will be paid in full by the end of our third quarter. As noted last quarter, we have a 10b5-1 program in place to facilitate our share repurchases. As of September 30, there remains $7.5 million available under the company's $50 million share repurchase authorization. Turning to our fiscal 2020 outlook, we're reiterating the guidance we provided when we reported fourth quarter 2019 earnings. For fiscal 2020, we expect to generate revenue in the range of $235 million to $245 million and adjusted non-GAAP EBITDA in the range of $20 million to $22 million, with adjusted non-GAAP earnings per share in the range of $0.60 to $0.71. Our adjusted non-GAAP EPS guidance assumes a full-year tax rate in the range of 19% to 22% compared to our effective non-GAAP tax rate of 13% in fiscal 2019. Now let me turn the call back to the operator to facilitate questions.

At this time, we will be conducting a question-and-answer session. Our first question comes from Doug Lane from Lane Research. Please proceed with your questions.

Hi. Good afternoon, everybody.

Hi, Doug.

Hi. Just looking at the first quarter, really come in at least right in line with what I was expecting. And your tone is very positive on the early days of the new Protandim products. So, I just wondered what we're looking for here going forward. Is this new product sold in a monthly supply, so we’re waiting to see what sort of what the reorder pace is here? I just wondered why you wouldn't raise guidance or do you just think it’s too early?

Well, Doug, thank you. That's actually a very good question. We launched the NAD products right at the beginning of October, so we're still within our first month of selling the product. Initially, it appears to be doing very well. Part of what we had explained in our earlier statements is that what has been good about it is that we invested quite a bit in testing and other programs and part of the testing that came back showed a tremendous synergistic effect between the Protandim NAD, Protandim Nrf2, and Nrf1 products when used in conjunction with each other. That's why we're seeing what we believe is a lower cannibalization rate, because now there's a powerful story to show that all three should be used at the same time. So, we've created packages of those three products together called Tri-Synergizer, and the initial outlook seems to be very positive on those. As we continue to watch the development of this line and these packages, obviously just like what we did last year, we will begin to adjust our guidance if needed throughout the year earlier.

So, I mean, if you saw a lot in early October which is when you launched it. So, I guess you won't really begin to see the reorder pace for a couple of weeks now. So that makes sense. I get that. Did I hear you right that these three new products are going to be launched in Japan in the second half of the year?

What I mentioned about Japan is that we are currently adjusting the size of our Nrf2 product. Much of our consumer testing has shown that Japanese consumers prefer a smaller tablet size. Therefore, we are resizing that product for greater appeal, which will be the first thing launched in Japan. We are also evaluating the formulation of our NAD product and beginning to plan the global rollout, which we will announce in a future call.

Okay. Got it. Thanks. Now Steve, I'm looking at the margins which actually came in better than I was looking for. You've had 200 basis points of operating expansion on 1% growth in sales. So I'm wondering if we start to see the impact of the new products drive accelerated sales growth, then shouldn't we get at least that kind of margin expansion going forward? I mean, there is some built-in leverage here. Isn't there?

There is, and we fully expect that. I think our guidance, if you just take the midpoint of our annual guidance which would be $240 million, and the EBITDA associated with that at $21 million, that would be roughly a 6% revenue growth and a 15% EBITDA growth.

Correct.

So we fully anticipate leverage coming from our revenue growth. And that revenue growth will be driven through the adoption of NAD and continued success in our Red Carpet program.

Right, of course. Now, you mentioned free shipping, I think this is – I don't know if I've heard this before. What could be the impact on margins do you think with the move to free shipping here?

We believe that how we're structuring this, there will actually be a minimal impact to margins.

Okay, good. Last week, and again I don't want to dwell on the tax rate with regard to so much going on operationally, but with the 28% tax rate in the first quarter, I'm a little surprised it just picking between 19% to 22% for the full year. I guess you're telling me you can help me on the quarters, but what's the logic behind that? Why wouldn't you just take the 28% and say 19% to 22% for the remaining three quarters?

Well, if it were only that simple. I would ask you to look at our last year's quarterly tax rate, Doug, when you know last year in our Q1 we reported roughly a 22%, Q2 was a negative 103% tax rate, Q3 was 17%, and Q4 was 29%. And so that's the magnitude of fluctuation that we're talking about. At the end of the year, we're still fairly confident around that range of 19% to 22%, but it will fluctuate rather dramatically in Q2 and again back in Q3 as we look forward, kind of some similar magnitude, maybe not quite as big to what we saw last year.

Okay. Fair enough. Thanks, guys.

Thanks, Doug.

Our next question comes from Yurion Hoffman of Robeco. Please proceed with your question.

Hi. Good afternoon, gentlemen. Last year you had a very strong launch in Taiwan. This quarter, like Greater China sales were somewhat weaker. Can you just elaborate a little bit on the Greater China region?

Yes, sure. Thank you. The Greater China region's been a very interesting area. I'm sure for those of you that are watching the channel, initially there was a 100-day review that the Chinese government was conducting in Mainland, which affected many of our other members within our channel. However, due to our e-commerce efforts, there was very little effect on us. We're seeing some effect at least within Hong Kong, where the riots that are occurring have had widespread impacts on all businesses in that area. However, with Taiwan, Taiwan has been a bright star for us as it is still in the earlier days of growth in that market. As we develop more leaders there, the way that the Taiwanese leaders work is in sprints, and as we bring on more leaders, I think we'll see more stabilization in the revenue from a month-to-month basis. So, overall, what we're observing in Greater China is very positive when it comes to Taiwan. Right now, as with most businesses throughout the world, we're just watching the events that are occurring in Hong Kong, and we urge everyone that there is a resolution to these situations in the near future. Thank you.

Thank you.

We have reached the end of the question and answer session. I will now turn it back over to Darren for any closing remarks.

All right. Well, thank you everyone for joining us today. We're excited about the launch of Protandim NAD Synergizer and our early results following the launch. We look forward to what fiscal 2020 has in store and updating you on our next call. Have a great day. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.