Medifast Inc Q1 FY2024 Earnings Call

Greetings and welcome to the Medifast First Quarter 2024 Earnings Conference Call. I will now hand it over to your host, Steven Zenker, Vice President of Investor Relations. You may begin.

Good afternoon, and welcome to Medifast First Quarter 2024 Earnings Conference Call. On the call with me today are Dan Chard, Chairman and Chief Executive Officer; and Jim Maloney, Chief Financial Officer. By now, everyone should have access to the earnings release for the quarter ended March 31, 2024, that 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 the Medifast website at www.medifastinc.com. This call is being webcast, and a replay will also be available on the company's website. Before we begin, we would like to remind everyone that today's prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. The words believe, expect, anticipate, and other similar expressions generally identify forward-looking statements. These statements do not guarantee future performance, and therefore, undue reliance should not be placed on them. Actual results could differ materially from these projected in any forward-looking statements. All of the forward-looking statements contained herein speak only as of the date of this call. Medifast assumes no obligation to update any forward-looking statements that may be made in today's release or call. And with that, I would like to turn the call over to Medifast's Chairman and Chief Executive Officer, Dan Chard.

Thank you, Steve, and thank you all for joining us today. With me today is Jim Maloney, Medifast's CFO. I'll give you an update on the progress we're making in our continued business transformation, and Jim will then provide an update on our quarterly financial results. Medical innovation is empowering more people than ever before to achieve their weight loss goals, and that presents a remarkable opportunity for Medifast as an organization. The expanding use of GLP-1 medications for weight loss, as well as expected further innovations in the medically-supported weight loss space is creating new markets in both the care and support segments of the weight-loss industry. It is anticipated that these two areas will become an integral part of the health and wellness journeys of many individuals. As more and more people begin to use medication and make the necessary lifestyle modifications to help achieve greater long-term health and wellness outcomes. For Medifast, the focus of our business transformation is to build a set of differentiated capabilities that will allow us to be a leader in this dynamic and changing health and wellness space. Consistent with our historical focus, we will also continue to support other related health outcomes that are tied to adopting healthy lifestyle habits. With our recent moves to expand our product offerings and target supporting individuals in the medically supported weight loss market, we believe we have significantly expanded our total addressable market by broadening the scope of our consumer offer. Independent research that we commissioned shows that approximately 50% of our prospective customers would consider using GLP-1 medications to aid in their weight loss. As such, it is clear that this high-growth area offers considerable opportunity and fits well with our expertise with over 40 years of history of helping people improve their overall health and wellness. Lifestyle modifications remain as relevant and important as ever, and is an important element to long-term success in the weight loss for those on medications. In fact, the medications themselves are required to be prescribed by licensed clinicians and include instructions for the user to make lifestyle modifications. And we believe our offering and network of OPTAVIA coaches make us uniquely qualified to provide the support. In the clinical study of the new generation of GLP-1 medications, people that were on a placebo instead of medications and who followed lifestyle modification guidance lost 3% to 5% of their initial body weight. Weight loss for those who use GLP-1 medications and followed lifestyle modification guidance was 15% to 21% of their initial body weight, inclusive of both the effects of the medication as well as the benefits from lifestyle modification. Sales of GLP-1 medications alone are projected by many to reach up to $100 billion or more by the year 2030. This opens up a huge opportunity to provide support products and services to this rapidly growing consumer base. Our recent BCG study commissioned by Medifast determined that the GLP-1 support market, which includes products and services purchased by those on GLP-1 medications, excluding those medication costs is roughly $13 billion today, and could grow to $50 billion or more by the year 2030. Individuals on GLP-1 medications are currently spending at an average of around $200 a month on nutritional shakes, bars, vitamins and other related items to aid in their efforts to improve their overall health and wellness in conjunction with the medications according to the same BCG study. Support from nutrition products for those on weight loss and medications, however, is just part of the lifestyle modification equation. A holistic program that includes personalized support to help people learn new lifestyle habits and stay accountable on their transformation journey is another important element to helping individuals succeed in their health and wellness journeys. One of the primary goals of such a program is muscle maintenance to avoid the 20% to 50% weight loss from lean muscle mass that many GLP-1 medication users suffer as part of their experience. The fact is that since we launched OPTAVIA just under 8 years ago, we've gleaned some important insights. We know that people do better in their health and weight loss when they have a coach, and they also do better when they're able to plug into a community of like-minded people. It's also abundantly clear that people do better when they learn healthy habits and can leverage them into the creation of a healthier lifestyle. A clinical study sponsored by Medifast showed that those on the optimal wait 5 and 1 plan with support of an OPTAVIA coach successfully lost 10 times more weight and 17 times more fat than those who try to lose weight on their own. While the health and wellness environment may now have changed due to the weight loss medications, these insights have helped to drive our strategic focus as we continue to transform our business. Coaches and now clinicians are integral to success. So, we will offer a holistic solution that puts support from them at the heart of people's health and weight loss journey. We will integrate customers into a welcoming and engaging community that is on the same journey as each of these individuals. By plugging into what we already do best and adjusting to meet the nature of today's medical innovation, we can offer integrated solutions that align with customer demand and behaviors. In collaboration with LifeMD, a leading telehealth provider, we are now able to deliver a unique holistic offer for consumers who want to use GLP-1 medications that helps them achieve their personal health and weight loss goals. With OPTAVIA coaches and LifeMD clinicians working together, we provide consumers with the nutrition, education and support necessary to help make living a healthy lifestyle second nature. An integrated solution is more efficient, targets a much broader market opportunity and should increase the lifetime value of our customers. That will be important in helping to offset an expected decline in our average monthly revenue per new customer that signs up for a medically-supported weight loss solution, which will be offered at a lower monthly cost than our historical program. While we recognize that GLP-1 usage is accelerating rapidly and should continue to do so for many years, we remain completely customer-focused as an organization rather than single-solution oriented. In other words, we listen closely to the unique circumstances of each individual and then work to find the weight loss and health transformation approach that is right for each of them. Sometimes that could mean using a medication. Other times, that might mean learning to adopt healthy habits, and sometimes, that could mean utilizing support products to help make the wellness turn easier. Regardless of each unique pathway, the presence of a coach and the community creates a platform that helps drive positive end outcomes and that has helped to positively impact the lives of more than 3 million people to date. Turning to our first quarter results. They came in largely as expected, with continued headwinds impacting customer acquisition, primarily from the macro factors, including the growing popularity of GLP-1 medications. We ran a promotion from March, which extended into early April. And this did provide a small lift, but we believe that right now, a much more effective way to grow our business is to focus our resources on building out new channels for customer acquisition through both a LifeMD collaboration and company-led marketing. Jim will go more into the quarterly details shortly. Regarding our collaboration with LifeMD, we are pleased with our execution to date, and we continue to make progress on rolling out our integrated offer. Next month, we intend to take a key interim step in that rollout as we begin offering a GLP-1 support nutrition package in conjunction with LifeMD at a price point of as low as $282 per month, plus the cost of any medication for a 6-month commitment. The package will include a lifestyle program with a dedicated OPTAVIA coach, balanced nutrition options with our GLP-1 nutrition support kit and through LifeMD access to a medical provider and blood work and prescription and insurance support. Over the upcoming months, we will continue to refine the model and evaluate and test the effectiveness and adoption rates of the offer. We expect to add further improvements to the care and support process as we move through the second half of the year, including enhancing the website and the apps utilized by our customers and coaches. We are working diligently on developing the technology to allow for an enhanced customer experience and expect to roll out incremental improvements throughout the rest of the year. These are expected to create a more cohesive way for customers to sign up and remit payments for the holistic offer, as well as additional functionality to make the user experience easier and more integrated with LifeMD's capabilities. We are also working to develop new products specifically for those on GLP-1 medications, which are currently expected to be ready late in the year. As we have previously disclosed, we will be making a significant investment in marketing at the company level. Medifast is committed to driving growth and enhancing brand visibility through a $30 million investment in company-led marketing efforts throughout 2024. This high-profile national campaign led by Dentsu Creative, a renowned global marketing and advertising firm and IC prospect, a leader in performance digital marketing aims to drive customer conversion, elevate brand awareness and foster engagement with new and existing customers. With an omnichannel approach, the digital-first campaign is expected to introduce new branding and elevate the website and digital experience. These investments will ramp up later in the second quarter and even more so in the second half of the year, helping form the foundation of the company's strategy to return to growth and in broadening and deepening our acquisition channels to focus on three key pillars: our marketing initiatives, the expansion of our coaching network, and our strategic collaboration with LifeMD to collectively drive forward our mission to empower individuals on their journey to optimal health and well-being. Importantly, our company-led marketing efforts and our collaboration with LifeMD gives us two new channels for acquiring customers. In addition to the traditional channel where our coaches source customers via their own word-of-mouth campaigns in their local communities and in social media. I've talked about our coaches and how they are at the center of everything we do. This is a clear differentiator for Medifast versus others in our industry. The vast majority of our coaches started as OPTAVIA customers, and therefore, understand the mindset and needs of someone looking to better their overall health. Efforts have been underway for a while regarding the coaches learning about the GLP-1 market and the specific needs and challenges faced by those utilizing the medications. With a more complete offer to take to their prospective customers, including access to weight loss medications through a LifeMD clinician, in addition to our line of nutrition products and support from a coach and a community that is on a similar journey, the value that the coaches can bring to their customers has never been more compelling. There can be little doubt that the weight loss market has seen seismic changes over the past 18 months, as medically-supported weight loss adoption has accelerated more rapidly than perhaps anyone could have expected. But with that uptick in consumer focus comes significant opportunity. With a comprehensive, holistic approach that brings together customers, coaches and clinicians, Medifast is uniquely positioned to provide the nutritional and healthy lifestyle support that GLP-1 users need to achieve the lifelong transformation that they are seeking. We believe that Medifast has the financial strength and strategic flexibility to invest in our ongoing operational and marketing effectiveness, and the scientific and medical heritage that provides us with the credibility to play in this rapidly developing space. Most importantly, we have an experienced team that has shown a consistent ability to pivot and take advantage of the opportunities as they emerge, and the strategy in place working alongside world-class partners to help deliver on the exciting possibilities ahead. We look forward to sharing more on our progress on future calls. Now, I'll turn it over to Jim to review the quarter.

Thank you, Dan. Good afternoon, everyone. 2024 first quarter results were in line with our guidance as we continue to execute our business transformation initiatives that we believe are integral to our success. Revenue for the first quarter of $175 million was at the upper end of our guidance range of $155 million to $175 million, a 49.9% decrease versus the year earlier period, primarily driven by continued pressure on customer acquisition amid the growth in popularity of weight loss medications, which has led to a decline in the number of active earning OPTAVIA coaches and lower productivity per active earning OPTAVIA Coach. We ended the first quarter with approximately 37,800 active earning OPTAVIA coaches, a decrease of 35.6% from the first quarter of 2023. Average revenue per active earning OPTAVIA Coach for the first quarter was $4,623, a year-over-year decline of 22.2%, reflecting the continued headwinds to customer acquisition. Gross profit decreased 48.3% to $127.3 million for the first quarter of 2024, driven by lower revenue. Gross profit margin improved 220 basis points to 72.8% positively impacted by efficiencies in inventory management and cost savings from the fuel for the future initiatives, partially offset by increased shipping costs. SG&A expense was down 38.1% to $119.4 million for the first quarter of 2024, primarily due to fewer active earning coaches and decreased coach compensation on lower volumes, partially offset by the start of company-led advertising expenses, which continues to be in the early stages, as well as market research and investment costs related to medically supported weight loss. SG&A as a percentage of revenue increased 1,300 basis points to 68.3%, primarily as a result of the loss of leverage of fixed costs due to lower sales volumes, as well as factors I just mentioned. On a non-GAAP adjusted basis, which excludes one-time costs to initiate and operationalize the LifeMD collaboration, SG&A decreased 38.8% to $118 million and moved 1,220 basis points higher as a percentage of revenue to 67.5%. Income from operations was $7.9 million in the first quarter of 2024, down 85.2% versus the year earlier period, driven by lower gross profit, partially offset by lower SG&A. As a percentage of revenue, income from operations was 4.5% in the first quarter, a 1,080 basis point decline versus the year earlier level. On a non-GAAP adjusted basis, which excludes the one-time expenses described previously, income from operations decreased 82.7% to $9.3 million. As a percentage of revenue, non-GAAP adjusted income from operations was 5.3%, a decrease of 1,000 basis points from the year-ago period. The effective tax rate was 28.2% was higher than the 25.1% recorded in the prior year's first quarter due to an increase in the tax shortfall for stock compensation and the rate impact of research and development tax credits, partially offset by the decrease in the limitation for executive compensation and various other miscellaneous items. On a non-GAAP adjusted basis, the effective tax rate in the first quarter was 28.7%. Net income in the first quarter of 2024 was $8.3 million or $0.76 per diluted share compared to $40 million or $3.67 per diluted share in the year-earlier period. On a non-GAAP adjusted basis, net income in the first quarter of 2024, which excludes the mark-to-market adjustment of our LifeMD stock holdings, as well as the one-time cost to initiate the LifeMD collaboration was $7.2 million or $0.66 per diluted share. Turning to our balance sheet. We ended the quarter with $156.4 million in cash, cash equivalents and investments and no interest-bearing debt. This is up from $150 million as of December 31, 2023. Now, I'll turn to our guidance. We are expecting second quarter revenue to range from $150 million to $170 million, reflecting continued near-term challenges to customer acquisition as a result of the growth of GLP-1 medications in the marketplace. We expect our EPS for the quarter to range from $0.05 to $0.40. The EPS range excludes the costs related to the initiation of the LifeMD collaboration and any gains and losses from changes in the market price of our LifeMD common stock. While the operating environment remains challenging, we continue to believe that meaningful spending on driving customer acquisition from two additional sources, company-led marketing and customer flow from LifeMD, and the ability to offer access to clinicians will lead to an improvement in customer acquisition trends beginning late in the year. To foster that improvement, we expect to spend around $30 million this year on advertising and other marketing initiatives to increase the visibility and customer engagement around our OPTAVIA brand and its offerings. An elevated level of spending is expected to continue into 2025 as we believe it will be effective in bringing in new customers that will help us grow in the future. These investments in customer acquisition initiatives, as well as the negative impact of lower volumes on operating leverage are expected to continue to pressure profitability over the remainder of 2024. In summary, we are steadfast in continuing our transformation journey, focusing on our integrated offering in the medically supported weight loss space, while also making strategic investments to grow the business in the future. Our strong balance sheet and continued expense reduction efforts helped mitigate the short-term weakness in our results, and we expect the actions we are undertaking to drive improvement as we move into 2025 and beyond. With that, let me turn the call back to the operator for questions.

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of James Salera with Stephens Inc.

I wanted to start with the 2Q revenue guide. If I just take the midpoint, it looks like it's down around 46%, which isn't much different than 1Q. But I would think between the easing comp in 2Q and then the ramp-up of the company-led marketing that there would be a more significant improvement there. Is there something I'm overlooking? Or any color you could offer on that would be helpful.

Sure, Jim. This is Dan. I’ll let Jim respond to that question, but I want to highlight a couple of points to help clarify our guidance thoughts. We've made considerable progress since the collaboration agreement was established late last year. As we look ahead to the new market, we're particularly focused on the support market, which we’re measuring for the first time through a study we commissioned with BCG. This study estimates the GLP-1 support market at $13 billion this year, with potential growth to $50 billion. Additionally, we've launched a new product bundle in collaboration with LifeMD that will be priced at $282. This bundle includes clinician prescriptions, blood work, insurance support, along with our traditional offerings like coaching, nutrition support, the OPTAVIA app, and health habits. This new pricing represents a significant change compared to our previous introductory bundle for the five-in-one plan, which was priced at $400. We also plan to introduce new products by the end of the year and will announce further integration in Q3 and Q4 to create a seamless payment and ordering system for both platforms. We anticipate these initiatives will start to show impacts in the latter half of the year, beginning with improved coach productivity driven by client acquisition and revenue per coach, followed by better client retention, particularly for GLP-1 clients. With that, I’ll turn it over to Jim to discuss the guidance.

Yes. When we look at our guidance for Q2, we are assuming that the challenges with customer acquisition will persist in the short term. The advertising rollout won't occur until the later part of Q2, so our guidance does not reflect that impact. Most of the spending will be concentrated in Q3, where we expect to have a slightly higher level of advertising compared to Q1 and Q2, but the significant expenditure will ramp up more in Q3. As for LifeMD, we are making progress and are pleased with the support we've provided. The number of customers utilizing LifeMD solutions is on the rise, but we believe it will take some more time. We are optimistic that we will see further growth in Q3 and beyond, once the integrated solution is fully operational in Q3. I hope that clarifies things.

Yes. I appreciate the color, guys. Jim, if I can maybe ask you a follow-up just on the cadence of the marketing. If I read the slide deck right, you guys spent about $2.5 million in 1Q, which means you have $27.5 million for the rest of the year. Can you just give us a sense for how steep the ramp is in the back half? Like whether dollars or percentage, how much of that 3Q to 4Q?

Yes, it is quite steep. We anticipate that the level will be somewhat higher in Q2, which is why you don't see the benefits occurring in Q2 as per our guidance. It's slightly higher, but not to a significant extent. We are still in the learning phase, as I mentioned in my part of the script that we are in the early stages. We plan to launch new messaging in Q2, but that will occur at the very end of Q2, and the ramp-up will take place in Q3. To specifically address your question, most of the $30 million in spending will occur in Q3.

Our next question comes from the line of Linda Bolton-Weiser with D.A. Davidson.

Could you discuss the pricing for the new integrated program? My understanding is that LifeMD's charge for the drug is quite low. So, the $282 per month covers everything, including coaching, the prescription, blood work, and most of the drug cost. Is that correct? Additionally, can you clarify how the revenue will be recorded? Will a portion of that $282 be reported as revenue, or will it be split differently? How will the revenue split work?

Yes. Let me answer the first part of your question, and then I'll let Jim answer the revenue question. So, the $282 is inclusive of both of the services from our OPTAVIA program as well as LifeMD. It does not include the cost of medication. And you pointed out, Linda, that there are some very price competitive options through LifeMD that are both branded and compounded, but the $282 does not include the cost of the medication. And the split between the two is roughly $217 for the product and coaching bundle, and roughly $65 for a 6-month commitment to LifeMD.

Yes. So, Linda, we will not be recording the $65 that Dan mentioned for LifeMD's share. They will record the $65, and we will record the $217. The $65 from LifeMD requires a 6-month commitment. That's the commitment needed for LifeMD. For the $217, there is no commitment required from the customer.

Sure. Can you clarify if the $217 million includes both complete products and fuelings?

It includes our active whey protein supplement and fuelings. So, both of them at a designated amount for a full month. In addition to that, it includes the time from a coach, personalized coach, access to the community, access to the OPTAVIA app that includes the recipes as well as weight trackers, which is integrated with a Wi-Fi scale, and it also includes the access to the Habits of Health transformation system.

Can I ask if there have been any changes in the availability of the compounded product used by LifeMD? We know it may disappear at some point. Is there any update on this? What is the strategy if there are constraints on the availability of the compounded product? If the cost of the drug rises to $1,000 a month, what strategies do you have in place to help customers manage an additional $300 monthly expense?

Yes. We're working very closely with the LifeMD team who's very keyed into this key part of the questions. The strategy to date has been to offer a branded solution for those who are insured or who can afford to pay the out-of-pocket. There are cases either that they may not be insured, or in some cases, because of the shortages, the branded solutions are not available, whereas the compound solutions have been readily available. In the case of how long that this current structure will last, I think, will be determined largely by the FDA. As you know, compounders are operating under an exception, which is that they're allowed to offer a compounded solution when we're in a period of scarcity. And we continue to be in this period of scarcity that's projected to last, I believe, several years as the pharmaceutical companies build more capacity. I think there are some other elements that will impact us as well, which could include how quickly insurance companies and Medicare cover the drugs beyond the current exceptions. So what I would say is we feel confident and comfortable that the approach, which is to offer both branded and the compounded solution where appropriate, is relevant for the short-term and even the next several years.

Okay. And then one of the issues, I guess, that is going to happen here is that you have a large number of coaches, even though they've declined, just a moderate amount of new people running the drug. LifeMD only has a small number of clinicians. So, I think it's somewhere around 550 clinicians that they have. How are that number of clinicians going to be able to handle such a large potential number of new customers for the script? Like are they planning to ramp up the number of clinicians? Or can you give a little color on that?

Yes. LifeMD employs physicians licensed in all 50 states, enabling them to assist patients nationwide. Their targeted hiring strategy has helped them meet existing demand. We are collaborating closely with them to ensure they are aware of potential increases in our demand. Currently, we believe they have the short-term capacity and the long-term capability to scale the number of clinicians to handle the growing demand.

Okay. Can you explain the $9.1 million timing difference? Does this mean shifting $9.1 million of revenue from the first quarter to the second quarter? Or can you provide more details about that?

What you are referring to, Linda, is the change in revenue recognition we made last year. There is no impact on 2024; it was related to 2023, as noted in the earnings release. The change was due to the updated terms and conditions with our customers, which took place in the first quarter of last year. After the first quarter, there is no impact for the rest of 2023 or moving into 2024.

Okay. Got you. And do you have an anticipation of how much capital spending will be in 2024?

Yes. I mean, we're looking at spending at the same levels or a little bit more than 2023. So, we didn't really give guidance all the way for 2024. But I would say it's going to be at least the same level as 2023, if not a little bit more than that just because of the investments that we're making regarding the seamless offer and the technology spend that's going to be hitting capital spend in those areas.

Okay. And then finally, I just wanted to ask about gross margin. I guess that was the area of the report that was most below my modeling, but I kind of think I didn't fully recognize the seasonality, like usually gross margin is kind of lower in the first quarter anyway. But do you kind of foresee like stability in gross margin percent? Or like for some reason, I had modeled for the full year kind of flattish, but is there any color you can give to help us on the gross margin outlook?

Yes, when examining the gross margin, we were 220 basis points above 2023. The majority of this improvement compared to the prior year was attributed to our fuel for the future initiatives, which enhanced gross margins. Therefore, I anticipate that gross margins will remain stable in the next quarter. This is primarily because we expect commodity inflation to remain flat for at least the next quarter, leading to similar results.

So you mean it will be flat compared to the first quarter, flat sequentially?

Correct. Flat sequentially, correct.

Okay. That's very helpful. That's all I have.

Thank you. And since we have no more questions, I will now turn the call back over to CEO, Dan Chard, for closing remarks.

I want to thank you all for joining us today, and we look forward to speaking with you at upcoming conferences and on our second quarter earnings call in early August. Thank you.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.