Lifevantage Corp (LFVN) Q1 2022 Earnings Call Transcript

Good day, ladies and gentlemen. Thank you for standing by. Welcome to today’s conference call to discuss LifeVantage’s Third Quarter Fiscal 2022 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 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 2022. On the call today from LifeVantage with prepared remarks are Steve Fife, Chief Executive Officer; and Carl Aure, Chief Financial Officer. By now, everyone should have access to the earnings release, which went out this afternoon at approximately 4:05 PM 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 03, 2022. 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 Steve Fife, the Chief Executive Officer of LifeVantage.

Thanks, Reed, and good afternoon, everyone. Thank you for joining us today. With me is Carl Aure, our Chief Financial Officer, who will join me with prepared remarks before we turn the call over for Q&A. During the third quarter, the operating environment remained challenging, but we continue to take steps to strengthen our business and drive long-term value for shareholders. Our financial position remained strong with almost $18 million of cash, and we are proud to announce the company's first quarterly dividend of $0.03 per common share. This action underscores our commitment to enhancing shareholder value as well as confidence in our outlook for the future. Revenue for our third fiscal quarter was $50 million, down 3% year-over-year as the duration of COVID restrictions continues to weigh on distributors and customer engagement. Excluding the negative impact of foreign currency fluctuation, third quarter revenue declined less than 1%. Internationally, total active accounts grew by 4.3% and revenue increased 9.3%, or 17.3% when adjusted for the negative impact of foreign currency, but this was offset by declines in the Americas region. Despite the challenges, we made progress hosting some distributor events in the quarter. In February, we hosted an elite academy in Orlando, which was a kick-off event for many of our leadership groups. We offered both virtual and in-person attendance with strong messages, confirming our commitment to deepen the company by supporting product sales through both business opportunities and customer growth. At this Elite Academy, we announced our newest event, Activate 2022, which continues our ongoing company commitment and will be held in Salt Lake City in June. The leaders left Elite Academy in Orlando excited for the future. In March, we held a profile summit and welcomed some of our newest leaders to our global headquarters with two full days of training and inspiration; our profiles left with an energized commitment to LifeVantage. The training continues with a 90-day support push with pro 10 leaders, providing continuous insights and content that supports our profiles as they build to their next rank. In the Philippines, we continue to see consistent growth, which in turn is re-engaging leaders in other markets. We saw a new Elite Pro 9 in Australia, with a significant percentage of growth coming from the Philippines. We're also encouraged by the first meeting of our International General Managers since the pandemic to align and create a roadmap for next fiscal year. This has inspired many strong global programs and incentives that we are excited to share with our leaders at Activate 2022. The 120-day post-purchase program we mentioned last quarter produced encouraging results relative to our customer journey campaign, including a 7.8% conversion rate for non-subscribers moving to subscription, a 1.85% conversion rate for test product offers to subscribers, and a 20% improvement in attrition for distributors versus average enrollments. As we discussed last quarter, the direct selling business has been evolving to a model that is more agile, more inclusive, and creates multiple pathways to entrepreneurial success. Accordingly, our business has also been evolving, and our leadership team and board are fully aligned with our approach to this new paradigm. We are focused on three primary areas to position the company for accelerated growth and significant long-term value creation: people, product, and customer experience. On our call in February, I introduced the addition of two new members of our executive team, Julie Boyster as our Chief Marketing Officer and Rob Harris as our Chief Digital Officer. Julie, Rob, and the entire leadership team have been hard at work over the past quarter to ensure all cross-functional teams are focused and working together to enhance these three key areas. On the marketing front, Julie and her team have developed and introduced a new product strategy that establishes guardrails for future product line growth and sets a clear path for LifeVantage being known worldwide for products that activate healthy living. The strategy expands the revolutionary activation benefit found in our flagship product Protandim Nrf2 Synergizer and will allow us to develop future products and product lines rooted in the science of nutrigenomics. While the science behind our products remains at the forefront, other product elements that are demonstrable and delightful to consumers have been added to the strategy to better align with the product experiences consumers are demanding in today's world. As part of the new product strategy, additional investments are being made within the product team. The product and content teams are using a new marketing framework that ensures the consumer's wants and needs are addressed in all messaging and materials in an effort to increase consumer understanding of LifeVantage products while increasing customer wallet share. This approach also allows for our products to be more easily shared on various digital channels, including social media. A more comprehensive social media strategy has been built to strengthen our digital presence. I'll be sharing more on this in the future quarters. The digital team is also committed to delivering on our three core areas. Rob's recent focus has been on our mobile app and implementing enhancements that improve a distributor's ability to share LifeVantage branded content with their team and customers. We also added improved reporting capabilities to help distributors track and achieve incentive goals. In coming quarters, digital efforts around the shopping experience will intensify, refocusing homepages and site navigation on shopping and the discovery of LifeVantage products, as well as aligning the user experience across mobile platforms. We're also working to simplify mobile responsive subscription management online to make it easier to customize subscriptions. Consumer experience has also been enhanced through our sales organization and our ongoing distributor sales incentives. You've heard me mention our MVP incentive. This long-term incentive takes the simple approach of finding three distributors and helping them increase product sales. This latest MVP iteration has started to gain a lot of traction and saw a 37% increase after one month. We have doubled our training efforts, enhanced recognition at all levels, and are releasing several enhancements to MVP at our Activate 2022 event. Also on the incentive front, the qualification of our annual incentive trip will wrap up in June with an increased number of people within striking distance of our trip of a lifetime event in Croatia. Leaders are currently driving towards the rank of Pro 4 to help ensure they get to experience this amazing trip. As we expand on the ongoing company strategy, supporting entrepreneurs, and growing businesses in a myriad of ways, we are getting clearer on the key behaviors that predict success in our field. One of those critical activities that we have focused on this year is enrolling distributors that are excited about our products. Our data shows that if we can help a new person enroll a distributor in their first 60 days, we will see greater distributor enrollment and retention into our business. To support this, beginning in May, distributor enrollment packs will contain three shareable codes that new distributors can share with our prospects and consumers. I also want to go a little deeper into our new event, Activate 2022, and how it is contributing to our pillars of people, product, and consumer experience. At this event in June, LifeVantage distributors will meet in Salt Lake City for a weekend of vision alignment, announcement, incentive enhancements, and a new product. The event will consist of three general sessions: activate your business, activate your confidence, and your activation plan, providing a new template for future gatherings with an increased focus on aligned promotion and incentives, social experiences, and training enhancements. Activate 2022 sets up fiscal year 2023 for success and is designed to lead the organization to even more exciting alignment and growth at our global convention in October. In summary, energy levels are high, and we continue to make steady progress towards transforming our organization to drive accelerating growth in the future. We have a solid foundation with a large established base of loyal customers and distributors, and our strong financial position ensures we have efficient resources to execute our plan. Now let me turn the call over to Carl to review our third quarter financial results.

Thank you, Steve. 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 $50 million, down 3% on a year-over-year basis, and 4.2% sequentially from the second quarter. Foreign currency fluctuations negatively impacted revenue by $1.2 million in the third quarter. Excluding the negative impact of foreign currency fluctuation, third quarter revenue was down $0.3 million or less than 1%. Revenue in the Americas declined 8.2% compared to the prior year period to $33.4 million, primarily driven by a 10.7% decrease in total active accounts. Revenue in our Asia Pacific and Europe region increased 9.3% to $16.6 million, driven by a 4.3% increase in total active accounts and initial revenues associated with the launch of the Philippines. We continue to be encouraged by the positive results we are seeing in Australia and New Zealand due to continued distributor leadership development and advancement as well as continued momentum in Thailand and China. This was partially offset by lower revenue in Japan, which was attributable to the negative impact of foreign currency. On a constant currency basis, revenues in Japan increased slightly by 0.1%. Gross margin was 80.7% in the third quarter, compared to 82.9% in the prior year period. The decrease in gross margin was due to increased inventory obsolescence expenses, elevated shipping expenses along with shifts in geographic and product sales mix. Commissions and incentive expense in the third quarter declined by $1.9 million year-over-year. As a percentage of revenue, commissions and incentive expense declined 240 basis points to 46.4% versus year-ago levels, which was driven by changes in the timing and magnitude of promotional and incentive programs. Non-GAAP adjusted SG&A expenses slightly increased by $0.3 million compared to the prior year quarter and were up 140 basis points as a percentage of revenue to 29.3%. Adjusted operating income was $2.5 million compared with $3.2 million in the prior year period. Adjusted net income was $1.7 million or $0.12 per fully diluted share in the third quarter compared to adjusted net income of $2.8 million or $0.20 per fully diluted shares comparable period last year. We recorded income tax expense of $0.6 million in the third quarter, compared to tax expense of $0.1 million a year earlier. For fiscal year 2022, we expect our effective tax rate will be approximately 23%. Adjusted EBITDA for the third quarter was $3.4 million or 6.8% of revenues compared to $4.8 million and 9.3% 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. Despite facing unexpected challenges, we maintained our strong financial position, ending the quarter with $17.8 million of cash and no debt. We also continue to maintain $5 million of availability under our revolving line of credit. We used $1.7 million in cash during the third quarter to repurchase approximately 326,000 common shares under our share repurchase authorization. As of March 31, 2022, there remains $28.1 million available under the authorization. Capital expenditures totaled $0.4 million in the third quarter. We anticipate total capital expenditures for fiscal 2022 to be approximately $2 million. Revenues for fiscal 2022 are now expected to be in the range of $204 million to $207 million. Adjusted non-GAAP EBITDA is expected to be in the range of approximately $15 million, and adjusted non-GAAP earnings are expected to be in the range of $0.52 to $0.56 per share. And with that, I'll turn the call back to Steve.

As we close, we note the challenges of our current environment, but recognize the groundwork we are laying for the future. We are focused on our unique portfolio of high-quality innovative products supported by a large global base of distributors, along with the right management team, focused on the opportunities ahead. Additionally, we continue to focus on maintaining a strong financial position and increasing value for our shareholders. With that, let me turn the call back over to the operator for questions.

Our first question comes from Doug Lane with Lane Research. Please go ahead with your question.

Yes. Hi, good afternoon, everybody. Carl, can we start with the gross margins here? They're obviously very healthy, but they are the lowest they've been in recent quarters. So I'm wondering A, are you looking, or have you made any pricing initiatives on all your products just in general? And then, B, can you talk a little bit more about the inventory obsolescence specifically? What was written off there?

Sure, Doug, I'm happy to address a couple of those points. Regarding the inventory obsolescence, it was mainly tied to our personal care product line. We launched this line about a year ago, but the demand has not met our initial expectations, resulting in some additional write-offs recorded in the quarter for that line. We hope that this will be the last of it for that specific line, but we will keep monitoring it moving forward. As for your other questions about the cost of goods sold, we are facing similar pressures as many other companies in the current environment, particularly with shipping and fulfillment costs. To address this, we are considering alternatives, including potential price increases and re-evaluating other areas to help offset those costs. Discussions are ongoing, and we are currently exploring options to tackle these challenges.

Okay, great. Thanks. That's helpful. Can you remind me how many people typically attend the elite academy, how large the Activate 2022 event will be, and what you're expecting for the global convention in the fall?

Yes, Doug, this is Steve. At Elite Academy, all events will be hybrid. We had about 2,000 attendees at our Elite Academy in February in Orlando, and I expect the Activate 2022 event in June to have around 1,500 to 1,800 attendees due to the venue and timing. While in-person attendance may be slightly smaller, we anticipate a strong online presence, especially since we will be announcing a new product that is expected to generate significant excitement. Those unable to travel to Salt Lake in June will likely participate online. As for the global event in Phoenix this year, which is a change from our usual venue in Salt Lake City, it's still too soon to determine how many international attendees will participate in person. In the past, we had 5,000 to 6,000 attendees pre-COVID, but I doubt we will reach that number this time. It’s too early to predict participation since we have not yet opened registration. For now, we plan to continue using hybrid formats for all major meetings.

Okay. No, I understand. That makes sense. And let's can we talk a little bit about distributor trends? You held sequentially in the international at a pretty good elevated level, but the Americas, it was flat sequentially and it is down from where it was a couple of years ago. So what can we look for as far as getting distributor growth back in the Americas? Does this Activate 2022 specifically for that purpose? And can we look to see sequential improvement in fiscal 2023 or maybe just help me understand what we can do to get the distributor growth back in the Americas?

Yeah, it's a great question, and one that we recognized at the beginning of this fiscal year for us. We really established two primary goals, both of which are supportive of increasing our active member base. That first goal was on distributor enrollments, increasing the number of distributor enrollments. The second was on increasing the number of second orders placed, so that obviously is tied to retention but with a focus specifically on second orders. As stated in our press release, year-over-year, our distributors in the US or in the Americas are down, but what's encouraging to me is that it is flat from last quarter. I want to believe we've kind of bottomed on that front, and we're turning the corner. We've seen significant improvement in that second goal I mentioned, the second orders, and that's true both for our distributors as well as our customers. So it's really kind of an enrollment challenge that we've had. And with Q3, our distributor enrollments turned positive both over the prior quarter and prior year. So again, we're cautiously optimistic, as we say around the fact that we've now bottomed. The whole I mentioned MVP incentive is really geared to distributors to bring in and enroll three distributors and then encourage them to enroll three distributors. So it's kind of a three by three by three, and that's an incentive that we have right now, but it is not a short-term let's grab some revenue for the quarter. It is a longer-term build around kind of the right principles and behaviors that we want our distributors to be focusing on. I mentioned, just in the one month that we've had, we had a 37% growth in the achievement of a goal associated with that. So again, cautiously optimistic, but those behaviors that we're now reinforcing around distributor enrollments and retention are helping to turn this tide, in terms of both the distributor and then ultimately, the customers will come. We know that.

Okay. That's helpful. Thank you.

Our next question comes from Anthony Chiarenza with Key Equity Investors. Please proceed with your question.

Thank you very much. Good afternoon. My question is, I'm a new shareholder and obviously the fundamental issue here is the effectiveness of the product and the scientific data that you're able to demonstrate that the product works and is helping customers. Obviously there's one part that the customer reaction, and then there's another part that's, I don't know if it's a clinical analysis or clinical data, but can you take us through what the scientific support is with a product, and I'm assuming it's the NRF2 right now that's the main focus?

Yeah. Thanks, Anthony, and appreciate your call. So, you're right. Our flagship product is Protandim Nrf2 Synergizer. It's the product that really the company was founded on, and if you were to go to pubmed.org, sorry, and look at the research around Protandim and oxidative stress, there are over 30 clinical studies and peer-reviewed studies that associate Protandim with oxidative stress, and it's probably the best scientific resources out there for you to look at. It's what our distributors, we have a very highly educated distributor force with a lot of people from the medical profession, and that's what they rely on as they talk to potential distributors and customers around the science behind that. Much of the technology that is built into Protandim also exists in other products that we provide, including our skincare line. So I'd encourage you to look at pubmed.org and type in a few keywords to help you understand that a little bit further.

Okay. And now, is this an ongoing process now at this point that you continue to do studies, or do you continue to get customer satisfaction surveys? Because obviously, to the point that you can demonstrate, the more you can demonstrate that it's successful and people are happy, that obviously is going to feed the distributors and everything else in the whole system.

That's right, and we do especially when we introduce new products. I'm sure you picked up, I don't do a word count on the number of times we used the word activate in our prepared remarks, but that is a differentiator for LifeVantage in our products is that it activates what our bodies naturally do, and there is a synergistic benefit when you consume our Protandim Nrf2 product with Nrf1, and with NAD, so other products, and we do have studies around the incremental benefit that comes by consumption of not just Nrf2, but in tandem or in parallel with other products we have. That will continue to be the case as we introduce new products. There will be continued correlation between how a new product activates a pathway in the body, but also the benefits of utilizing it in tandem with Protandim Nrf2.

Okay. I was going to ask another question, the competition, who do you consider your greatest competition in this product in the field right now?

Well, we're in a unique situation where there's not another product out in the world that I'm aware of that has the patent and technology and the peer-reviewed studies that Nrf2 has.

Okay. In terms of antioxidants or people selling vitamins or calling them antioxidants or things that reduce free radicals and so forth, wouldn't that be a competition for you?

It is, but there's a big difference between activation and nutrigenomics, enhancing what the body naturally does versus supplementing what the body does.

Okay. Thank you very much, and best of luck.

Our next question is from Brock with QJR Partnership. Please proceed with your question.

Hello. Hey Steve. Hey, Carl. I am also a shareholder and I have a question relating to the dividend policy. My understanding is that it's now going to be a quarterly dividend, and I kind of love your capital allocation of buying back shares as a shareholder because I believe that the intrinsic value of your shares, when you look at free cash flow and free cash potential, is much lower than the current share price. So as a shareholder, I like the fact that you're using free cash flow to buy back shares because I think that does a better job of maximizing shareholder value. Secondly, I'm concerned; the reason I love this company is because of the potential for growth. And if you can increase the productivity of the productive distributor pool and identify those new distributors where you guys need to put the energy on to get them into that productive pool, the revenues will grow. If you can protect your margins, good things will happen for this company, and that will drive my confidence as a shareholder. My concern about the dividend is that it could be perceived as a negative signal for growth, that the company is now going into a new phase, and the new phase isn't all about growth; it's about dividend payments. Sometimes what will happen is shareholders will turn over and those seeking dividends will come, and you're locking yourself into a quarterly dividend. I know your thought process is it’s the comfort you're giving the shareholders the confidence that the dividends will be there, but I just kind of wonder whether your existing strategy of buying back shares and focusing on growth is the best strategy for shareholder maximization. So I'd like you guys to talk to me about that.

Yeah, Ron, this is Steve, and I appreciate your question and wondering if you might want a job at LifeVantage thinking through the revenue growth strategy because we've spent a lot of time, and I couldn't agree more with you. Well, first and foremost, revenue growth is what's ultimately going to drive the best long-term shareholder value. Two, the initiatives that we have in place are focused absolutely 100% on those areas of growth and your comment around focusing — and these are maybe my words, not yours — but on those distributors earlier in their journey to incentivize, motivate, inspire them to understand the opportunity they have to participate both from a product standpoint and a business opportunity is very high on our list of priorities. Accelerating and bringing people in earlier to understand just the magnitude of this opportunity and getting them excited about that is where a lot of our focus and attention is. I think you and I are very much aligned on that, and I think there's also a very definitive reason why we introduced a dividend at this time. I’m going to let Carl answer those and then follow up if there's any additional comments I have.

Thanks, Steve. I can add a couple comments regarding the dividend. It was a careful consideration that we went through, and really from our perspective as we evaluated it, it really is finding that right balance between the share repurchase program that historically we followed, as well as looking for other alternatives to maximize shareholder value. I don't know that it shouldn't be interpreted as we're abandoning the share repurchase program. It's really finding that balance between the two, and as we've evaluated other peers and gone through our analysis, we felt that balance was appropriate for where we are in our current stage of our company.

Yeah. So we are continuing. We still have tens of millions of dollars — $28 million available under our share repurchase plan. We're not signaling that we're going to stop repurchasing shares, but we thought having a balanced approach to both repurchasing and a dividend and we clearly are not signaling with the introduction of a dividend that we're resigning to a value stock because we know the opportunity that we have here to drive meaningful shareholder value through our revenue growth. Thanks for your question, though. Thanks, Maria, and thank you everyone for joining us today. In closing, I just want to take an opportunity to thank all our employees for their hard work and dedication, as well as our outstanding team of distributors and loyal customers. We remain confident in our business model and are focused on delivering the LifeVantage products our customers depend on. We hope you stay safe and healthy and look forward to updating you on our next call. Have a great day. Thanks.

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