LifeVantage Corp (LFVN) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to today's conference call to discuss LifeVantage's Second Quarter Fiscal 2019 Financial Results. (Operator Instructions) Hosting today's conference will be Scott Van Winkle with ICR. As a reminder, today's conference is being recorded. And now I'd like to turn the conference over to Mr. Van Winkle. Please go ahead, sir.

Thank you, James, and good afternoon, ladies and gentlemen. Welcome to LifeVantage Corporation's conference call to discuss results for the second quarter of fiscal 2019. On the call today from LifeVantage with prepared remarks are Darren Jensen, Chief Executive Officer; and Steve Fife, 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've not received the release, it's 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'd 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'll 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, February 4, 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 company's CEO, Darren Jensen.

Thanks, Scott, and good afternoon, everyone. It is a pleasure to join you today to discuss our second quarter results, and I'm very pleased to inform you that LifeVantage generated its highest quarterly revenue in the company's history. Net sales increased 18% year-over-year, driven by growth in nearly all of our markets. We saw a continued strong growth of our active member count with total members up 8% year-over-year, driven by 6% distributor growth and 9% customer growth. As a result of the continued sales momentum, we are increasing our revenue guidance for fiscal 2019, and are on track to report the highest annual revenue in our company's history. Over the last year, we have realigned the company's incentive programs to more closely align our employees and management with shareholders. We believe we are seeing the benefits of these programs materialize into accelerated revenue growth.

As a result, we are recognizing higher noncash share-based compensation running through our income statement, reflecting the significant increase in our stock price since the beginning of the fiscal year. As Steve will discuss, we are also updating our adjusted earnings per share guidance to reflect this impact.

Our accelerating revenue is driving strong free cash flow and EBITDA growth, which is further strengthening our financial position and providing incremental opportunities to return value in cash to shareholders through increased share repurchases.

On Friday, our Board of Directors increased our share repurchase program from $5 million to $15 million, reflecting the strong growth we are seeing in EBITDA and free cash flow.

I'm very pleased with the results of this new alignment between shareholders and the LifeVantage team. We continue to see favorable impact to our growth rate from each of the key initiatives we have implemented over the last year, and have additional growth drivers planned for the second half of the year. We remain focused on increasing average order size, geographical expansion, product innovation and driving distributor and customer acquisition.

During the second quarter, we had another strong contribution from our Red Carpet program, which is focused on distributor acquisition. Our greater China strategy is delivering accelerated recruiting and sales growth following our very successful launch in Taiwan in mid-calendar 2018. And we saw an enthusiastic response and robust initial sales of our new TrueScience hair care system, launched at our global convention early in the second quarter.

Each of these successful initiatives contributed to our record quarter. As we enter the back half of the year, we have additional geographical growth planned across Europe. After opening Austria early in the fiscal year, we are now on track to open 5 European markets this year. Spain will be the next market to open, which we are targeting for a March launch. Additional markets expected to open this fiscal year include France, Belgium and Ireland.

Recall that we launched a customer-acquisition program during 2018 that made our products available for purchase on a personal use basis in several markets. This initial experience with customer sales allows us to enter new markets with existing demand. We are now broadening the markets where our TrueScience hair care system is available. We have additional product innovation ready to launch that will augment and enhance one of our existing core product line. At Elite Academy in Charleston, South Carolina later this week, we will introduce enhancements to our PhysIQ weight management system. This system has been updated to reflect the evolving demand of biohackers and to keep us at the forefront of smart weight management.

Turning to our distributor and customer initiatives, we saw a strong member growth during the second quarter, as I earlier noted. The success of our greater China strategy, led by the launch of Taiwan, was a key driver of the 17% active distributor growth in our Asia/Pacific and Europe region during the quarter. The success of our Red Carpet program is also driving global growth of active members and contributing to our sequential revenue growth.

We are also experiencing strong adoption of our LifeVantage digital platform, which continues to develop and is enhancing the success of our distributor activities. We have now launched the app in Canada and Australia, and are set to launch in Japan in late February. The app continues to grow in penetration among active members and is enhancing distributor effectiveness among users.

We are measuring success through penetration among active purchasers each month, the time at which a distributor earns his or her first commission and the retention of new member subscriptions.

To reiterate our goals for fiscal 2019, we plan to drive global business with the acquisition of new distributor leaders, launch of new and updated products, expanded availability to existing products internationally, new market development and by driving adoption of our LifeVantage digital platform.

I'm pleased to report that we've progressed as expected, which is driving our higher net sales guidance for 2019 and our strong performance in the first half of the year.

With that, let me turn it over to Steve to run through the financial results. Steve?

Thank you, Darren, and good afternoon, everyone. I am also pleased to report our second quarter results. We generated another quarter of both year-over-year and sequential revenue growth and are confident with our business trends and opportunities for additional growth.

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 detail.

Second quarter revenue was a record $58.2 million, representing a 17.6% increase year-over-year, and a 4.6% sequential increase when compared to the first quarter of fiscal 2019.

Revenue in the Americas increased 15% to $42.4 million, and revenue in Asia/Pacific and Europe increased 25% to $15.7 million, all year-over-year. Both regions also reported growth on a sequential basis with revenue in the Americas increasing 3.3%, while revenue in Asia/Pacific and Europe increased 8.2%, led by our growth in greater China.

Gross margin was 83.2% compared to 81.6% in the prior year period, primarily reflecting the benefit of the price increase during the second half of fiscal of 2018, and changes to product and market mix.

Commissions and incentive expenses as a percentage of sales increased 110 basis points year-over-year to 48.4%, but moderated from the first quarter level of 50%. The year-over-year increase is due in part to the success of our Red Carpet program and incentives, as well as other typical variations that occur based on revenue mix.

Importantly, the commission and incentive expense rate will fluctuate based on the timing and magnitude of promotion and incentive programs, as well as investment in our Red Carpet program.

Adjusted SG&A as a percent of sales were 32.8% compared to 29.2% in the prior year period. The increased SG&A expense reflects the following: First, cost associated with our Global Convention in October, which did not occur in the prior year period; second, increased stock compensation and employee-incentive expense as a result of our increasing stock price, year-to-date financial performance and realignment of our corporate incentive program; and third, higher staffing levels reflecting additions made in the second half of fiscal 2018.

Since those additions, we have maintained our staffing levels. Adjusted operating income was $1.1 million compared to $2.5 million in the prior year period. Adjusted EBITDA for the second quarter was $3.3 million compared to $3.7 million in the prior year period and consistent with the first quarter of 2019. Given the higher noncash stock-based compensation, as well as an increase in our fully diluted shares, both resulting from our increased share price, we continue to believe EBITDA will be a better reflection of our cash profitability growth this year.

We anticipate approximately 15% to 24% growth in adjusted EBITDA during fiscal 2019.

During the second quarter, we reported a $1 million tax benefit on an adjusted basis. The tax benefit was driven by the timing of incentive compensation testing that led to a larger deduction for our tax calculation. We anticipate a full tax rate -- full year tax rate of approximately 20%, plus or minus a couple of percentage points, although our tax rate may continue to be subject to variations resulting from significant discrete items occurring in future quarters.

Adjusted net income was $1.9 million or $0.13 per fully diluted share, up from $1.6 million and $0.11 per fully diluted share in the prior year. As I noted, all of the adjustments from GAAP to non-GAAP are reconciled in our press release.

Turning to the balance sheet. We ended the second quarter of fiscal 2019 in a strong financial position with $19 million of cash compared to $4.4 million of debt. Subsequent to the quarter-end, we paid down our term loan by $2 million and expanded the capacity of our revolving line of credit from $2 million to $5 million, of which none is drawn. During the second quarter of fiscal 2019, we generated $4.6 million of cash from operations compared to $2.2 million in the prior year period. We invested roughly $200,000 in capital expenditures, paid down $500 million on our term loan and funded $600,000 of convertible notes with our app development partner.

We now anticipate CapEx to be approximately $2.5 million for the full year, which includes additional expenditures with our app development partner. During the second quarter, we repurchased 1.5 million of our common shares under our share repurchase authorization. As Darren noted, the Board of Directors has increased our share repurchase authorization from $5 million to $15 million.

Turning to our outlook. We are increasing our fiscal 2019 revenue guidance to a range of $222 million to $232 million, up from our prior range of $215 million to $225 million.

We are updating our adjusted diluted earnings per share guidance to a range of $0.46 to $0.52. As Darren noted, the increase in our stock price since the beginning of the fiscal year along with the realignment of our corporate-incentive programs have both led to an increase in our noncash share-based compensation.

The increase in share price has also led to a higher diluted share count, which increased by approximately 800,000 shares year-over-year during the second quarter.

We estimate the stock-based compensation cost will be $2.2 million to $2.6 million higher during fiscal 2019 than the prior year. We are also expecting to get leverage on adjusted EBITDA, which excludes the impact of these items. We are anticipating adjusted EBITDA to grow in the range of 15% to 24% during fiscal 2019.

Now let me turn the call back to the operator to facilitate questions. Operator?

(Operator Instructions) And we'll take our first question today from Doug Lane with Lane Research.

First, the top line looked right on target with what I was looking for and right in line with what you've been talking about. So I really -- as analysts will do, [when I run to] the numbers that I'm still trying to reconcile in my mind, and that's the changes to the SG&A and the tax rate and the shares outstanding from the incentive programs. So just if I can get the moving pieces right, you've got an increase in the stock price, which affects the SG&A line and also increases the shares outstanding, but then also with a source of benefit on the tax line? Is that basically what happened with that?

That's correct.

So the -- I don't see how that dynamic shouldn't continue to work, right? Where your SG&A is impacted if your stock price goes up, and of course, you shares out. But wouldn't you also have a reduction in your tax rate on a go-forward basis if you continue to get pressure from a higher stock price?

Yes. That will continue. We had several vestings that occurred during the quarter that contributed a very high kind of book-to-tax difference. And we don't necessarily expect that, that's going to recur in future quarters because of the amount of stock that vested during the quarters was greater than what we would anticipate in the future.

And looking at your commentary, looking at the release, it does seem like a big change here in your reduction of your adjusted EPS numbers is the stock price going up. I mean, you knew about the convention, you had the hires in your budgets for this year. So it was the stock going from, call it, $10 to $12 up to the mid-teens here that took the $0.06 to $0.08 out of your adjusted number. So is that the sensitivity here? So if the stock went to, I don't know, $20 or $22, would that be another $0.06 to $0.08 out of an ongoing kind of run rate on EPS? I mean, how should I think about that? Because this sounds like a dynamic that's going to continue for a while.

No, it won't because, again -- and we've made some modifications to our stock-based comp plans internally that should provide us with much better visibility in terms of the impact of rising or declining share price. Previous plans had a significant amount of compensation that was both tied to external performance as well as indexes, and which made it difficult to predict what the impact would be. We also have added a fair amount of the overall compensation from -- converted it from a cash-based compensation to a share-based compensation, which again, the impact of that was greater this year than I would anticipate it being in future periods. In fact, I would estimate that our share-based -- our stock-based comp will go down next year, all things being equal.

Okay. That's good to know. Okay. That's helpful. Let's move to new markets, Spain and the other markets you mentioned. How much do you think incremental we could see in the remainder of this fiscal year from opening those markets? I'm guessing they're not going to be as impactful as Taiwan was, but maybe you could just help me out there?

Yes, Doug, this is Darren speaking. With our European markets, we talked about previously that we have, in 2018, we launched a customer-acquisition program where we allowed people to purchase products for personal consumption in some of these European markets. We had not extended our business opportunity there, but we still had customers. So basically, we've taken many of those markets and converted them over to make them open to our business opportunity. I would say that they wouldn't have a massive impact. We do have higher hopes for Spain. Spain's one of the better network marketing countries in the world, and we've had a fair amount of demand for that from our distributor base. So I'd expect a little more out of Spain than I would some of the other markets like a Belgium that are quite small in population. But yes, so I wouldn't expect them to be of a magnitude of Taiwan, but Spain should be reasonable for us.

Yes. It's a pretty big market. And just one last thing, can you update us on how you're viewing China with e-commerce strategy there?

Yes. So basically, with China, first of all, we're excited that we launched Taiwan, which is -- we felt was a critical step in our overall greater China strategy. And we really are looking for Hong Kong, Taiwan and Mainland to drive synergy across the entire region. So we're very pleased with the growth. Now we continue to focus on our cross-border e-commerce model, and we continue to refine it. We knew that, that was going to be -- being a brand-new model, a slower start for us because we're basically having to create new platforms and new models for it. But we're getting the growth that we had forecasted and hoped for from the region just out of Taiwan itself. So it still leaves a tremendous upside for us, and we are seeing a lot of improvements in Mainland. But -- so I see a ton of upside for us there. We're still refining the model, though.

Next we'll hear from [Eric Peter] with [SDC] Research.

Last conference call, you talked about the hair care product, the immediate reaction was extremely positive. Has that carried through going forward? How are we seeing the demand for that?

Okay. So with it, we have mentioned that it was very positive. As a matter of fact, when we launched it at our Global Convention, we sold out on our first initial order of it. Our second one, I think, sold out, and so we are in stock now of it. And it's only available in the United States currently. We just made a change, I believe, last week where we're beginning to incorporate that into some of our bundling strategies that we have. Because before, it was just basically you would purchase the system or individual product. So really the true extent of it, we don't know yet. Because it's not in some of our main drivers of our sales, like I mentioned our bundling, our enrollment pack. And those -- it's been incorporated now, as well as we are working aggressively to expand that throughout our global distributor network. And -- but right now, it still has been one of our most successful launches. And we would imagine that it would be -- I think it'll little end up being a very good producer for us from a category. It goes to show that -- what we call no-commission products. So lower cost products that are daily use definitely have a value out there, as well as these are very demonstrable on social media. So it's been good. We still have very high hopes and expectations for it.

Great. And just one more. Price increases. So you guys have used price increases and you've also created the packs to a little bit lower price. What has been the response to price increases? Have you had pushback when you do them, or customers who already are using the product, what are you seeing in terms of that?

Well, what we did, a lot of -- when we sat down with our leadership and talked about various strategies that we could use from a margin standpoint. And basically, they all agreed with the price increase. It was moderate, it was a $0.99 on each of our products and it was across the board. And virtually, at that point, we had very, very little pushback from either customers or distributors. We had not adjusted our pricing, I think, in our history. So most understood that everything is not static when it comes to pricing. And from time to time you've got to update it.

(Operator Instructions) We'll now hear from [Jerry. N. Hoffman] with [Robeco].

Two questions. Could you give a little bit more color on the customer trends between Q1 and then Q2? There was a little bit of slowdown there because of -- [I could continue saying] which markets were doing well for you, which [you see] in terms of weakness? And yes, on the SG&A development between Q1 and Q2. So the majority of this step-up on the SG&A expense between the quarters, is that just the stock-based comp plus the Global Convention cost?

And you're talking sequentially, right?

Yes.

Not (inaudible). Yes, let me talk about the G&A first. It is almost exclusively the stock-based comp that is driving the increase. Along with in Q2, we had our Global Convention. Q1, we had -- what we refer to as an Elite Academy. So it's still when we bring together our distributor force. And -- but the Global Convention is done on a much larger scale and it cost us quite a bit -- almost double the cost of a Elite Academy. So those 2 items were the primary drivers for our G&A increase. And from a customer standpoint, sequentially, we were about flat. There is some seasonality in our customer acquisition process in that around the holidays we do see that slowing down a little bit. So calendar of Q4 or our second quarter is typically and seasonally a slightly lower acquisition time period for us from a customer standpoint.

Okay. Great. Maybe one additional thing, the Real Salt Lake soccer partnership. Can you may be provide an update there?

Yes. This is Darren. With that, we've spent a year or even more than a year looking at that relationship. And I do want to say right out of the gate that we highly value the relationship, and RSL has been tremendous partners with this. We brought in an outside sports marketing agency, I think, from New York to help us really evaluate the relationship to see how we monetize it. And so we went through that process, and we worked on it for an entire season and based off of what we were able to find, we have made the decision not to opt out but continue with that relationship through the end of the contract. And one of the main benefits or one of the primary benefits that I can see for this is that we're -- that the industry overall is coming under tremendous pressure to almost move into an Uber-ized way of doing business, in that Uber pushes customers to their drivers and vice versa with many of these split-scaling style companies. And the Real Salt Lake relationship gives us the ability and has put us in a position where we leverage that relationship and all of the customers that are channeled to us from that relationship, we, in turn, pass those back to distributors -- new distributors in our business at keep periods in their distributor life cycle. And we feel that, that drives distributor longevity as well as the total lifetime value of both of our distributors and of our customers. So we see this relationship as an important part of our strategy in helping us compete against some of these entrepreneurial generating companies like an Uber, like an Airbnb, and gives us a really great position that many other companies within our channel do not have.

Our next question will come from Will Hamilton with Manatuck Hill.

Just another question on the SG&A. So in terms of the impact of the higher stock price, is that simply a function of that the incentive compensation was a designated share amount? And then because they were being issued at a certain price, that the price between that and the market price went up, costs increased? (inaudible)

Yes, that is -- that's correct for -- I mean, the biggest element that is driving this increase, that's exactly correct.

So is it possible that we can restructure this? Because I mean it's great to see the share price increase, obviously as shareholders. But that -- it is a -- the incentive compensation is a dollar amount and thus then the rest of our shareholders are not diluted as much or impacted on the SG&A earning side by share count?

And that's exactly one of the changes that we've made, Will, is looking at the overall incentive compensation as a -- on a value or dollar basis. Compared to our peers, we engage a third-party compensation firm, and each year, as part of our proxy process, we look at that. And this year, we made some changes to focus more on total dollar value, which impacts the number of share -- if our share price is going up, then candidly, there is a smaller pool of shares that will be distributed because it's based on the total value as of that point in time. We follow that guidance in our November equity grant to the leadership of the company, directors and above. And that's going to be the philosophy of the company going forward, which should limit significantly the impact that we saw here from the -- this prior year.

Okay, but just -- it could not have been adjusted for whatever was set before? Because, I mean, it came obviously quite expensive.

Yes. No, it could not be adjusted retro. But the -- and although it was expensive to us this year, again, we're pleased with the benefit that it drove. We really do think that our incentive program now is focusing the executive and the employee-base to focus on the performance of the stock -- company's performance and driving benefit for all of our shareholders.

Right. Yes, it just came out to be a little bit more expensive than, I think, all of us would have hoped this time around. Anyway, in terms of -- I just wanted to better understand, going forward, if you can provide sort of guidance for SG&A for the full year? If I include stock comp, we're now looking like roughly a $10 million year-over-year increase?

Yes, I think that's probably a reasonable range. Probably a little less than that. But that's not…

And what is the number you're using for adjusted EBITDA in 2018 to guide us to the 15% to 24% for this year of growth?

The adjusted EBITDA in '18 was just under $15 million, $14.9 million.

Okay. All right. And just a couple of other regional questions. So China is still being included in the Americas region?

That is -- no, it's in the Asia, Europe.

Asia. Okay. Previously, you had indicated it was under U.S. So I just wanted -- so that's now been moved under Asia. Okay.

Correct.

That would fall under the Europe and other, if I look at your...

Yes.

Okay. Or does it go to the non-Japan group?

Correct.

Okay, okay. Got you. And then, in terms of Japan, I know you've been working on various ways of trying to turn that around. It had a better year last year, sort of down a little bit so far this year, I was just -- could you talk about some initiatives that are going on there. What do you think about that market?

Yes, and -- Will, this is Darren. Yes, with that, some of our management that was -- that oversaw the area, we had them in multiple areas. Unfortunately, they had been spending a lot of their time working on the greater China area, and we wanted to bring greater focus to both areas. So we've restructured internally the way that we manage those areas and set up separate teams so that they can really focus and drive productivity in both areas. So we've already made those changes internally, as well as stepped up our programs for product launches, for -- and for additional development within Japan itself. So later this month, we have a major event. We have 2 large events in Japan each year, one in the kind of the winter/spring time and then one in the fall. So we're going into this launch period, coming out with some exciting announcements, we're going to be launching our digital platform there for our app. And so we're bringing a lot more focus back on Japan because it's such a critical part of our business.

Okay, great. One last one if I may, just back on SG&A, I was just thinking about -- get more -- if stock comp is going to add, say, $2.5 million to the year-over-year increase, and we think it's going to be roughly stripping out, say, maybe, some of the other costs, the onetime costs like the class-action stuff, we think it's made $10 million. You bucket that other $7 million, $7.5 million or so for us?

Yes. Yes, so...

I know the events being one of them but yes...

Yes, the events is a big portion of it and then, there is cash-incentive comp for the employees.

How much (inaudible)

We are track -- well, we won't disclose that. But it's a portion that we did not -- we fell short of our expectations in the prior year. We are -- internally, we are tracking ahead of our plan based on the performance of the companies that you've seen from the first half, and so there is a portion of the SG&A growth that is also tied to cash bonuses that are -- that will be paid out based on our employee incentive compensation plan.

That will conclude today's question-and-answer session. I will now turn the conference over to Mr. Jensen for any additional closing remarks.

Thank you, everyone, for joining us today. We're pleased with the sales and business momentum and remain confident in our 2019 outlook.

And we wish you all a great day. Thank you.

That does conclude today's conference call, thank you for your participation.

You may now disconnect.