Earnings Call Transcript - LFVN Q2 2024

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to today's Conference Call to Discuss LifeVantage's Second Quarter of Fiscal 2024 Results. Hosting today's conference will be Reed Anderson with ICR. As a reminder, today's conference is being recorded. And now I'd like to turn the conference over to Mr. Anderson. Please go ahead, sir.

Reed Anderson, Host

Thank you. Good afternoon, and welcome to LifeVantage Corporation's conference call to discuss results for the second quarter of fiscal 2024. On the call today from LifeVantage with prepared remarks are Steve Fife, President and 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 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-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 metrics 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 the live broadcast, January 30, 2024. 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, the President and Chief Executive Officer of LifeVantage.

Steve Fife, CEO

Thanks, Reed, and good afternoon, everyone. Thank you for joining us today. During our second quarter, we continued to advance our strategic transformation and execute well against the core elements of LV360. A significantly improving profitability was a key takeaway from our latest results. Adjusted EBITDA increased 289% year-over-year to $3.1 million in the second quarter, and our adjusted EBITDA margin was up 450 basis points to 6%, reflecting ongoing efforts to strengthen our core business and drive productivity. We are very pleased with the trends we are seeing in revenue for consultants. In each of the last four quarters, which coincides with the introduction and implementation of several key LV360 initiatives, our revenue per consultant has grown at a solid double-digit rate. For example, in the second quarter, revenue per consultant increased over 13% year-over-year. While total revenue in the second quarter was down slightly versus last year, robust demand for TrueScience liquid collagen, coupled with the positive trends we are seeing in consultant productivity and our performance in markets like Japan, where Q2 revenues were up 3.9% on a currency-neutral basis, give us a high degree of confidence in our long-term growth outlook. Revenue attributable to liquid collagen, including the Healthy Glow Essential Stack, which bundles liquid collagen with Protandim Nrf2 Synergizer exceeded $13 million in the second quarter, an increase of over 44% versus a year ago. In the Americas region, where the product was first introduced in June 2022, we continue to experience strong growth with sales up approximately 13% on a year-over-year basis. In the U.S., consultant penetration of liquid collagen rose to 31.6% in the quarter up from 27.2% in Q1, with a continued focus on Healthy Glow Essential Stacks. Customer penetration was 27.2% in the U.S. during this Q2 compared to 28.1% in Q1 and 26.9% in Q4 of fiscal '23. International sales of liquid collagen accounted for approximately 22% of Q2 liquid collagen revenue, mostly reflecting results from Australia, New Zealand, and Japan, where the product was first introduced in March 2023. In late September 2023, we expanded the international launch of liquid collagen with the initial rollout into Mexico, and this was followed by introduction to the Philippines and Canadian markets in November. We are also pleased with the recent progress on other new innovative products. For example, early in the second quarter, we introduced TrueScience True Renew daily firming complex, a clean cosmetic retinal alternative that is proven to tackle 11 visible signs of aging. Importantly, this unique product perfectly complements Protandim Nrf2 Synergizer and TrueScience liquid collagen, further building on the power of our core positioning around being the activation company while creating momentum for our TrueScience activated skincare line. A couple of weeks ago, we held our annual global kickoff event where we unveiled the launch date for the next phase of LV360 along with new sales incentives and additional consultant tools. Rise Era was announced as a theme for the year with a strong call to action to consultants to rise and build on the strong foundation LV360 has laid for the future. We've streamlined and simplified the message for consultants to drive growth and success by focusing on three basic behaviors of network marketing: enrolling, retaining, and rank advancing for the ERA era. This focus is supported by a new Rise Era incentive that enables consultants to earn enticing lifestyle and business prizes including shareable items like luggage and travel vouchers based on achievement in enrolling, retaining, and advancing. Cape Town, South Africa, including an African safari, was revealed as the first-ever executive destination trip under the new Evolve compensation plan. Qualification criteria for this once-in-a-lifetime trip is based on era behavior and achievements throughout the year, with travel scheduled for February 2025. New consultant tools were also launched at our global kickoff event, including the new Evolve Possibilities pathway, which emphasizes four pivotal consultant ranks within the Evolve compensation plan and what is unlocked at each stage to inspire and motivate rank advancements. Our major events continue to be an important element driving consultant behavior and capitalizing on the strength of our broader LifeVantage community. The global kickoff in January set the tone for calendar 2024, and we will build on this excitement with our upcoming in-person Momentum academies in March. The next phase of our LV360 transformation will commence in a few days at the start of February, Evolve our contemporary compensation plan and reward circle, our unique customer loyalty program, will be launching in Mexico, Canada, and Europe. Recall, we first launched these programs in the U.S., Japan, Australia, New Zealand in March of 2023, as part of LV360, and they have been key elements of our success over the past year. In addition to our Rise Era initiatives in our Phase II launch, we've established an optimization team to lead ongoing strategic efforts to build our active account base. The team is focused on three areas: first, ensuring our enrollers, the group of consultants actively enrolling consultants and customers each month, is increasing, arming our enrollers with a strong dollar per hour earnings potential message, so the business is seen as an enticing business opportunity for those looking for a side hustle. Second, there is a clear replicable path to enrolling someone in your first 30 days as a consultant. And finally, we are making it easy for our raving product fans to share their incredible results and our unique product story in new, innovative, and compelling ways. We will be updating you on the progress of these optimization efforts in upcoming quarters. In summary, we are pleased with progress on our strategic transformation, LV360. Our improved outlook for profitability in fiscal 2024, despite a still challenging top-line environment, underscores our confidence in the trajectory of key initiatives as well as the strength of our competitive position. Engagement levels remain high across the entire organization, and we look forward to our business momentum continuing to build as we expand our efforts across all our international markets over the next several quarters. We remain focused on executing our plan while remaining agile to ensure we are optimizing the key elements of LV360 to drive sustainable, profitable growth and value for shareholders. Capital allocation continues to be a key area of focus, and during the second quarter, we remain steadfast in our balanced approach of returning excess capital to shareholders through dividends and share repurchase. Carl will cover this in more detail in his section. Now let me turn the call over to Carl Aure, our Chief Financial Officer, to review our second-quarter financial results.

Carl Aure, CFO

Thank you, Steve, and good afternoon, everyone. Let me walk you through our second-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. Second-quarter revenue was $51.6 million, down 3.8% on a year-over-year basis, and foreign currency negatively impacted revenue by $0.2 million. Excluding the negative impact of foreign currency fluctuations, second-quarter revenue was down by $1.8 million or 3.4% as compared to the prior year period. Revenue in the Americas region decreased 1.6% to $39.1 million in the quarter, primarily driven by a 9.5% decrease in total active accounts, partially offset by higher average revenue per account, resulting from changes in product mix due to continued penetration of our TrueScience Liquid Collagen product. Revenue in our Asia Pacific and Europe region decreased 10% to $12.6 million in the quarter, driven by an 18.2% decrease in total active accounts, the closure of our e-commerce business in China, and the negative impacts from foreign currency exchange rate fluctuations. Excluding the negative impact from foreign currency fluctuations, second-quarter revenue in our Asia Pacific and Europe region was down 8% as compared to the prior year period. The foreign currency impact continues to be driven by fluctuations in Japan, accounting for $300,000 of the impact. Adjusting for this impact, revenue in Japan increased 3.9% on a constant currency basis in the quarter as compared to the prior year period. Gross margin was 78.6% for the second quarter compared to 78.1% in the prior year period. The increase in gross margin was primarily due to changes in sales mix along with lower shipping-related expenses in the quarter, resulting from changes in shipping methods. Commissions and incentive expense in the second quarter decreased $1.8 million year-over-year. As a percentage of revenue, commissions and incentive expense decreased 180 basis points to 42.1% versus one year ago levels, which was primarily driven by changes in sales mix and impacts from our Evolved compensation plan as well as the timing and magnitude of promotional and incentive programs. Non-GAAP adjusted SG&A expense was $17.4 million compared with $19.4 million in the prior year quarter and was down 230 basis points as a percentage of revenue to 33.8%. Adjusted non-GAAP operating income was $1.4 million, compared with a loss of $0.9 million in the prior year period. Adjusted non-GAAP net income was $1.4 million or $0.10 per fully diluted share in the second quarter, compared to adjusted net loss of $0.8 million or $0.07 per fully diluted share in the comparable period last year. We recorded a tax benefit of $0.5 million in the second quarter of 2024 compared to $17,000 in the prior year period. The increase in tax benefit was primarily due to changes in taxable income and the favorable impact of discrete items. We expect that our effective tax rate will fluctuate slightly during the remainder of fiscal 2024 as the impact of discrete items and other permanent differences are recognized. Adjusted EBITDA for the second quarter was $3.1 million or 6% of revenue compared to $0.8 million and 1.5% in the same period a year ago. Please note that all of the adjustments from GAAP to non-GAAP that I discuss today are reconciled in our earnings press release issued this afternoon. We ended the second quarter in a strong financial position, with $17.3 million of cash and no debt. We also continue to maintain $5 million of availability under our revolving line of credit. Capital expenditures totaled $0.5 million in the second quarter. We anticipate total capital expenditures for fiscal 2024 to be approximately $2.5 million. In addition to maintaining a strong balance sheet, we continue to focus on our capital allocation priorities to drive value for shareholders. During the second quarter, we used approximately $1.9 million in cash to repurchase approximately 288,000 common shares under our share repurchase authorization. And through the first six months of fiscal 2024, we have used approximately $2.7 million to repurchase approximately 433,000 shares. As of December 31, 2023, there is $24.2 million remaining under our stock repurchase authorization. We also announced a quarterly cash dividend of $0.035 per common share of stock or approximately $450,000 in the aggregate. This dividend will be paid on March 15, 2024, to stockholders of record on March 1. Since the beginning of fiscal 2024, including this latest dividend announcement, we will have paid cash dividends of $0.505 per share or approximately $6.4 million in the aggregate. So far this fiscal year, we will have returned over $9 million in total value to our shareholders through share repurchases and dividends. Turning to our fiscal 2024 outlook, we anticipate our fiscal 2024 revenue will be in the range of $207 million to $213 million, down from the previous range of $216 million to $226 million. Additionally, we continue to anticipate adjusted non-GAAP EBITDA in the range of $16 million to $18 million, with adjusted non-GAAP earnings per share in the range of $0.57 to $0.67 per share, increasing from the previous range of $0.52 to $0.62 per share. For fiscal year 2024, we expect our annual effective tax rate to be approximately 22% to 24%. Included in our fiscal 2024 guidance are over $2 million of nonrecurring expenses related to an expiring sponsorship agreement and costs associated with the rollout of LV360 to our remaining markets. We remain committed to improving our adjusted EBITDA margins, and we believe we are on track to reach our long-term target of low double digits. And with that, let me turn the call back over to the operator for questions.

Operator, Operator

Thank you. Ladies and gentlemen, at this time, we will begin doing your question-and-answer session. Our first question comes from the line of Doug Lane with Water Tower Research.

Doug Lane, Analyst

Looking at the focus on the top line here, are we at a turning point where growth, which has primarily come from the Americas following last year's launches, may now start to shift towards international markets becoming a more significant driver going forward?

Steve Fife, CEO

Yes. We had a very successful launch one and a half years ago or so in the Philippines. That market has stabilized and more recently has had some challenges to retain some of its leadership. However, as we look back on LV360, we really slowed down our international expansion to focus on the compensation plan, our product strategy, and other aspects of LV360. I anticipate that in the future we will pick up again a focus on opportunities internationally, which remains a growth opportunity for us. Right now, we're seeing strength primarily in the U.S. and in Japan, as well as our Phase 1 markets, which are adopting Phase I and the Evolve compensation plan.

Doug Lane, Analyst

Right. So there really are two stories internationally. You've got the Philippines and what's going on in China kind of working as a headwind versus the launches in China, I mean, Japan and Australia, New Zealand, which.

Steve Fife, CEO

That's right. You would expect to get some traction. That's exactly right.

Doug Lane, Analyst

Okay. How do we see that playing out? How far along are we in the discontinuation of the business?

Steve Fife, CEO

In China or the Philippines?

Doug Lane, Analyst

No, China.

Steve Fife, CEO

We're through that. Yes, we had relatively close to zero in this current quarter.

Doug Lane, Analyst

Okay. Well, that's one issue that sort of resolved itself then. Okay. And what about the Philippines? Is there still more volatility there?

Steve Fife, CEO

No. I think we have stabilized the leadership group there. We're starting to see some positive signs, and we've got some new corporate team members in place as well as we're attracting some new consultant leaders that I think we have upside in calendar '24 in that market. This business model is very attractive within the Philippines market. We had some success but lost a couple of leaders, and I'm cautiously optimistic that we're in the process of rebuilding that right now.

Doug Lane, Analyst

That's helpful. Another trend that has been quite persistent is a steady decline in active customers, but a nice increase in revenue per active customer. So, is this deliberate? Will this be the model in the foreseeable future, or are there plans to focus on increasing active accounts and improving those numbers again?

Steve Fife, CEO

Yes. First, I'd say that focusing on that active revenue per account was a key element of the very beginning of LV360. We knew and anticipated that the launch of our Liquid Collagen product that has been a huge success would help drive that average revenue per account, and that has continued as we have found additional synergies and bundling our Protandim Nrf2 Synergizer with liquid collagen. So, the focus on increasing the revenue per customer was a very early and conscious decision. Now having said that, I think the drop-off in our customer accounts correlates strongly with what's going on in the broader economy. During that period, we are also seeing some stabilization within our consultant base as we now come through the initial transition of our Evolve compensation plan. We're seeing that base stabilize, and we're really focusing our attentions right now on supporting that consultant base and providing them with the tools, such as videos, other training and products, which is an important element, as they enable consultants to go out and attract new customers as well. So we are at an inflection point with that consultant base, having stabilized and now being equipped with some new tools.

Doug Lane, Analyst

That's a positive observation. The margin situation is looking good. The significant improvement was in commissions and incentives, which are still slightly below what I consider to be a mid-40s long-term trend. Carl, do you believe we will return to that mid-40s level soon, or are we likely to remain in the low 40s range for a few more quarters?

Carl Aure, CFO

Yes. I mean, part of it is likely to increase a little bit over time here. But one of the impacts here in Q2, as you look at it in comparison to the prior year quarter, we're still seeing a larger bucket of non-commissionable revenue that's influencing that percentage as a percentage of total revenue. So that definitely was an impact here in Q2. Looking forward, as we roll out Evolve to the other international markets, the plan starts to mature in the existing markets, it is likely that we will see a bit of an uptick there, but I think that range of the low mid-40s is probably where it will settle.

Steve Fife, CEO

To add, the non-commissionable revenue primarily comes from convention-related and shipping-related sources. As these revenue types increase and represent a larger share of our total revenue, it can make the commission payout appear slightly lower when you look at the percentage of total revenue. This includes certain non-commissionable revenue.

Doug Lane, Analyst

But that non-commissionable revenue is unusually high these days and should normalize going forward?

Steve Fife, CEO

Yes. In the quarter, we had a higher percentage than in previous quarters. But I don't know that there's enough to say that there's a trend or anything going on with that, just in the quarter.

Doug Lane, Analyst

Okay. Fair enough. And then on the outlook, I get the sales change and the EBITDA is the same and then you moved EPS up. So I assume that's mostly the tax rate there.

Carl Aure, CFO

Yes. There are probably two factors affecting the EPS component. Stock-based compensation is slightly down in our forecast for the rest of the year, and the main influences are tax and the effect of interest income in the other income section. These three factors are driving the change in EPS.

Doug Lane, Analyst

Okay. That's helpful. And then just looking out the next several quarters, what are the key new product drivers that you guys are working on? Just trying to get a feel for the timing of product launches. Obviously, if they haven't announced them, you're not going to announce them now. But just to get a feel for the timing of new product launches over the next three or four quarters.

Steve Fife, CEO

Yes. We have, I'd say, a very robust pipeline. I mentioned in March, we will be having in-person momentum academies. Those are country events, so every one of our countries will be holding events. We will be announcing a new product at those momentum academies. So the next product will be coming in March.

Operator, Operator

There are no further questions. I'd like to hand it back to Mr. Fife for closing remarks.

Steve Fife, CEO

Thank you for joining us. As we conclude, I want to express my appreciation to our committed employees, outstanding independent consultants, shareholders, and faithful customer base. The strength of our distinctive platform, coupled with the competitive edge of our business model that empowers individuals to establish businesses on their own terms, is complemented by a steadfast leadership team, a diverse range of unique products, an engaged consultant community, and a robust financial position. This collectively emphasizes our strategic positioning for the future, enabling us to pursue long-term goals while we consistently build substantial value for our shareholders. Thanks for participating today.

Operator, Operator

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.