Nautilus Inc (NLS) 2011 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the Nautilus Q4 2011 fiscal conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Monday, March 12, 2012. I would now like to turn the conference over to John Mills. Please go ahead.

Thank you. Good afternoon and welcome to Nautilus's fourth quarter 2011 conference call. Participants on the call today from Nautilus are Bruce Cazenave, Chief Executive Officer; and Bill McMahon, Chief Operating Officer.

Remarks during today's conference call may include forward-looking statements concerning the Company's prospects, current or future financial and operating trends, or new product introductions. These statements, along with other information presented that are not historical facts, are subject to a number of risks and uncertainties. Actual results may differ materially from these forward-looking statements. Nautilus undertakes no obligation to publicly update any forward-looking statements to reflect new information, events, or circumstances after they are made or to reflect the occurrence of unanticipated events. Please refer to our quarterly and annual reports filed with the SEC for more information about the risks and uncertainties that could cause actual results to differ. Unless otherwise indicated, all information and comments regarding our operating results pertain to our continuing operations.

With that, it's my pleasure to turn the call over to Bruce. Go ahead, Bruce.

Thank you, John. Good afternoon, everyone, and thank you for joining our call today. Overall, we are pleased with the improvements in our business for both the fourth quarter and the full year 2011. Our financial results reflect tremendous improvement over prior years, and we are excited about the building upon the positive momentum and profitable growth we established in 2011. We are continuing to execute on our key initiatives that we outlined last quarter, which include reorganizing and adding resources to our product development organization, successfully introducing new products at new price points, broadening our supply base, and taking steps to stabilize our gross margins.

In the fourth quarter, our business benefited from the initial positive impact from these initiatives. For example, we rolled out the CoreBody reformer in Q4, and we're very pleased with consumers' early response to this new lower-priced product. This product, along with the refreshed TreadClimbers launched in Q4, both contributed significantly to the improved margins in our direct business. We have also benefited from the expanding of our supply base, as our cardio products demand exceeded expectations and our new suppliers, along with existing suppliers, all assisted in meeting this additional demand. There is still more work to be done in this area, and it is a priority for our supply chain and engineering teams. Bill will provide you with some additional commentary of our product initiatives during his remarks.

In the fourth quarter, our year-over-year revenue increase was driven by solid growth in both direct and retail segments, underscoring strong consumer demand for our products. We also successfully leveraged our operating expenses through more effective media spend within our direct business and lower overall general and administrative costs. This enabled us to significantly improve our operating income, as well as net income. Now let me provide some further detail on our financial results for the fourth quarter and full year. In the fourth quarter, net sales totaled $60 million, an increase of 11.7%, as compared to net sales of $53.7 million in the fourth quarter last year. For the full year ended December 31, 2011, net sales totaled $180.4 million, an increase of 7.1% over last year. Net sales of our direct business increased by 10.7% compared to last year, and net sales of our retail segment increased 1.2%. Later in the call, we'll provide additional detail on our direct and retail segments.

Income from operations was $3.3 million for the fourth quarter of 2011, compared to $1.9 million in the fourth quarter last year. The diluted income per share from continuing operations for the fourth quarter was $0.11, compared to $0.06 per share for the fourth quarter last year. The significant improvement in results from continuing operations reflects stronger sales and a 500-point basis decrease in operating expenses as a percentage of sales due to the lower G&A costs and marketing spend efficiencies gained within the direct channel. We reported net income of $3.2 million for the fourth quarter of 2011, which compares favorably to a net loss of $39,000 for the same quarter prior year. Diluted net income per share for the 2011 fourth quarter was $0.10, as compared to diluted net share -- net income per share of break-even for the same quarter prior year.

The net loss for Q4 2011 included a loss from discontinued operation of $121,000, which equates to a loss of $0.01 per diluted share and compares to a loss of $2 million or $0.06 loss per diluted share for Q4 last year. We are making steady progress across -- towards closing down foreign subsidiaries connected with our formal commercial equipment business, which represents the primary source for our -- of our pre-tax loss from our continued operation in 2011. For the full year ended December 31, 2011, income from continuing operations was $2.5 million, and significant improvement over a loss from continuing operations of $9.8 million in 2010. Diluted income per share from continuing operations for 2011 was $0.08, compared to a loss per share of $0.32 last year. Again, our improved results were driven primarily by a more efficient operating expense structure, as well as higher sales.

For the full year 2011, we generated net income of $1.4 million, a marked improvement compared to a net loss of $22.8 million in 2010. Diluted income per share for 2011 was $0.05, as compared to a diluted net loss per share of $0.74 for the same period a prior year ago. Our results for the full year 2011 include a loss from discontinued operation of $1.1 million or $0.03 loss per diluted share, compared to a loss of $13 million or $0.42 loss per diluted share in 2010. Total operating expenses for the fourth quarter as a percentage of sales decreased to 34.7.% from 39.8% in the fourth quarter last year, underscoring our ability to leverage our operating infrastructure across higher sales. Selling and marketing expenses totaled $15.9 million or 26.5% of sales for the fourth quarter, compared to $16.1 million or 30% of sales for the fourth quarter last year. This reduction reflects the benefits of our strategic shift towards on-line media for strength products, as well as marketing and media efficiency gains for cardio products. General and administrative expenses amounted to $4 million or 6.7% of sales for the fourth quarter, a decrease from $4.6 million or 8.6% of sales in the fourth quarter last year, primarily due to lower depreciation, IT, and facility costs.

Turning now to our segment results. Net sales in our direct business increased 12.4% for the fourth quarter of 2011 over the same quarter last year. The sales increase reflects continued strong demand for TreadClimber products, attributable partly to increased advertising effectiveness and higher consumer credit approval rates. Credit approval rates rose to 30% in the 2011 fourth quarter, up from 20% for the same period last year. Fourth quarter of 2011 sales also benefited from the launch and positive consumer reception of the CoreBody Reformer. As anticipated, strong TreadClimber and new product sales were partially offset by a decline in strength product sales due to our strategic decision to decrease advertising expenditures supporting home gyms, using instead an on-line media approach which increases overall bottom line profitability of the strength product category.

Operating income for the fourth quarter of 2011 in our direct segment improved to $1.6 million, a $3.2 million improvement over prior year. This improvement is due to the increase in sales and more effectively -- and more effective media advertising content, the latter which enabled us to reduce media marketing spend while still increasing revenue. The improvements in media spend effectiveness more than offset the creative content costs associated with the launch of the CoreBody Reformer. Gross margin for our direct business was 56% for the fourth quarter 2011, an increase of 350 basis points from the comparable period last year. The increase in gross margin percent was primarily driven by higher margins on new product, as is mentioned previously as one of our key initiatives.

Net sales in our retail segment for the fourth quarter of 2011 were $26.5 million, an increase of 10.8% compared to the fourth quarter last year. The increase in sales was driven by improvements in sales of bikes and ellipticals. Operating income for the retail segment in the fourth quarter 2011 was $5.1 million, a decline of $737,000 from the prior year -- from prior year period. This was primarily due to lower gross margins, offset in part by lower selling and marketing expenses. Retail gross margin was 25% for the fourth quarter 2011, a decline of approximately 620 basis points from the fourth quarter last year. This was primarily due to investment in new product launch support expenses, as well as increased supply chain costs. Improving the margins in our retail business continues to be a very high priority and focus area for our management team, and actions are being put in place to stabilize and improve margins in retail in 2012.

Turning now to our consolidated balance sheet. Cash and cash equivalents totaled $17.4 million as of December 31, 2011, compared to $14.3 million at the end of 2010. Inventories were $11.6 million as of December 31, 2011, compared to $10.3 million at the end of 2010. Trade receivables were $23.8 million as of December 31, reflecting increased retail sales in the fourth quarter. It's important to note, also, that we have $79 million in federal net operating loss carry-forwards available to offset future taxable income.

In summary, we are pleased with our overall improved financial results. Our hard work and successful execution of a number of key initiatives in 2011 leaves us well positioned as we begin 2012. At this time, I would like to turn the call over to Bill McMahon, our Chief Operating Officer, who will provide additional insights into our business and key product initiatives.

Thanks, Bruce. I would like to make a few brief comments regarding our operations to provide some additional background to the results that we just reviewed. In our direct channel, we are continuing to see growth in our Bowflex TreadClimber cardio machine sales. This highlights the underlining strength of our product as well as the successful multi-channel media campaign that continues to drive growing awareness of this platform. Of note, in October, we launched a resigned and updated line of TreadClimber products. These products featured a lower entry price point and overall improvements in cost and performance that benefit both the consumer and our own profitability. We are pleased with the sales of these refreshed units, and in the trend of sales growth in TreadClimber continues to be encouraging.

Also in Q4, we announced a licensing agreement for the relaunch of the commercial club TreadClimber product. We derived an immediate upfront royalty income from this agreement in Q4, and we will receive ongoing royalties once the product is relaunched. We believe our commercial partner is making strong progress towards preparing for that launch, and they will announce its availability at a future date. We are in close collaboration regarding the status of this project. As Bruce mentioned, we are pleased with the consumer response and performance of our new CoreBody Reformer. Consumer acceptance as reported to us by direct feedback and measured by the low return rates and warranty claims against early sales indicate the CoreBody Reformer has had a successful launch.

This product is important to us for a number of reasons. First, CoreBody Reformer targets a new, incremental segment of customers for our business in the popular and growing participation segment of Pilates, yoga, and dance. Second, it is positioned at a price point that is well below our former average order value in the direct business and thus is less dependent on consumer financing. While as Bruce noted, credit approval rates have shown steady improvement, lower price point products help shield us to some extent from tightening credit in times of economic uncertainty. Finally, the CoreBody Reformer provides another opportunity to drive repeat sales by marketing to our large existing database of leads and customers. Throughout the spring and summer, we'll be taking our initial learnings on CoreBody Reformer and advancing our marketing and creative efforts based on that knowledge to continue to build awareness for this product.

Turning now to our retail business, we continue to see solid demand for our products from our retail customers. Although we were impacted by one-time launch support expenses and ongoing product cost pressure that resulted in lower gross margins in Q4, our retail business remains a healthy contributor to our bottom line. Demand for our bikes and elliptical products remained strong in the fourth quarter, and we anticipate continued success in these categories. Last fall, we rolled out several new retail products, including a new iteration of the highly successful Schwinn upright and recumbent exercise bikes, a new home-use indoor cycling bike, our first lower-cost Airdyne recumbent bike, an adjustable ramp Schwinn-branded elliptical, and a new price point dumbbell under the Universal brand. These products will provide addition support for our retail business in 2012. We intend to further advance this key business segment with new innovative products planned for this fall. Additionally, we are testing enhanced marketing efforts specifically for the retail business, and these include new placement on QVC television, as well as online marketing support for selected products.

A key element of our strategic planning for the next several years involves growth via new products and better brand optimization. We realize that we need better business intelligence to drive those product decisions as we go forward. As such, we have kicked off a comprehensive market and brand research initiative, designed to help us better understand the current home fitness market and the opportunities within that market. This effort will be a significant investment over Q1 and Q2 of 2012 but should provide us with the foundation for targeted product development and increased licensing and royalty revenue for the future. This work is underway, and it's already in the survey phase.

Finally, some comments on our supply chain and operations. Our manufacturing is fully Asia-based. Therefore, we are subject to the trends and currency valuation attendant with overseas manufacturing and its impact on our product margins. It's likely these trends will continue throughout the first half of 2012. We have focused high-priority efforts on supply chain and cost optimization to offset anticipated pressure. We recognize that our mitigation efforts to date have not been sufficient to hold margins against those pressures in the retail business. As such, we are closely evaluating both our sourcing and transportation costs in relation to our pricing and will be taking action to improve those margins. The nature of these changes is that benefit would most likely be derived during the next sell-in period in the second half of this year.

As we begin 2012, I'm excited about what the Nautilus team has accomplished in our turn around and the multiple opportunities for growth in front of us. However, one of our top priorities must continue to be management of our product margins. We are encouraged by our efforts today, particularly with our improved margins in direct, while introducing lower price point products to expand our customer base, but we still have work ahead of us, especially in the areas of supply chain product costs and overall margin improvement. Our focus will remain on driving profitable growth in both business segments. Now I would like to turn the call back over to Bruce.

Thank you, Bill. I would like to make some final comments before opening up the call for questions. We are very pleased with our finish to fiscal 2011 and are encouraged by our start to the current year. We successfully executed on our initiatives set in the back half of last year. That is, one, ramping up new product development, including expanding our product portfolio; two, beginning and stabilizing our product margins where there's still work to do but positive results are already evident, particularly in our direct business. Three, tightly managing our operating costs to leverage our business across higher sales volumes. There's clearly more room for improvements on all 3 of these initiatives, but we have a plan, our organization understands the plan, and most importantly, it is aligned and deployed to execute and deliver the plan as efficiently and effectively as possible.

I'm extremely proud of our team and the progress we've made in a relatively short amount of time. As we begin 2012, we know that there are marketplace challenges we need to effectively navigate, from the general retail environment, which remains difficult, to the continued cost pressures from Asia, which is a reality here to stay. We break our challenges into bite-sized pieces and put plans in place to effectively deal with them. The good news is, we feel the initiatives we put in place last year are still exactly the right things to be working on this year, so we are staying the course. The only change is to complement our existing initiatives with the addition of investments in comprehensive market and brand research that Bill mentioned. We have many potential product and brand opportunities at our disposal, and choosing the right course to capitalize on these opportunities is just good business.

We -- this concludes our prepared remarks for today. Thank you, and we will now open up the call for questions.

Thank you. (Operator Instructions). Our first question comes from the line of Reed Anderson with Northland. Please go ahead.

Good afternoon. Thanks for taking my question, and congratulations on a nice finish to the year.

Thank you, Reed.

Bruce, a number of things I want to touch on. First on the sales side, obviously you don't want to give away a lot of detail for competitive reasons, but could you just tack a little more, give a little color as you like look into the next couple of quarters, I'm presuming a lot of it is going to be the refreshed TreadClimber piece on the direct side. But also, just as you think about a new product introduction like CoreBody and really the selling cycle for that, is it really going to be something that will build through without this year, or is it really until we gets to the second half when we see the strength of that product really show up in the numbers? Just give us a sense of how you might see that play out in 2012.

Hi, Reed. This is Bill. You raise a good question. TreadClimber growth continues to be strong in comps, so we expect to continue to see that going forward. On CoreBody, at this point, we're through one fitness season and really going to take some time here and tweak the message. And we really expect to see some strong performance in the second half of the year. The nature of growing awareness is we'll probably see some modest growth in CoreBody through the first half of the year, but it's starting from zero. So really we're just focused right now on trying to get the messages right and continuing to grow the awareness so we can build a strong foundation and take advantage of that as we go into in the next peak season.

On CoreBody, kind of related, I'm just curious, was it a situation that that product was able to sell very strong without many people adopting any financing offers, or did you still see people choose to opt for that as well with that lower price point?

We saw definitely a very high cash take rate. We saw 2 things with CoreBody we wanted to see, which was a high response via the web, which is great for us, because we have a lot of good information on our website there, and the financing rate on CoreBody, I don't have it in front of me, to be honest, but it was immaterial, really, to the performance of the product.

Perfect. That's what I figured. Then on -- shifting to margins a little bit. The direct margins look terrific, nice year-over-year pick up there. Is the situation now we've kind of turned the corner in direct, whether it's driven by product or whatever, and we should see that kind of incrementally higher every quarter, or is it still too early to go there yet?

Reed, this is Bruce. I would say that we -- it's definitely a turning in the corner. I think you should -- I won't make a commitment in terms of what you'll see in terms of how much year-over-year, but we feel that particularly because of the new product and the refreshed product and the higher margins, which is all part of our strategy, that you -- we should see positive metrics improvement year-over-year, particularly versus 2011.

Do you have a -- I mean, I remember back to the days when that just used to be a stunning gross margin, that whole direct business, but that model has changed. Do you have a long-term target or range for direct gross margins you would be willing to share with us, Bruce?

Actually, probably not. That's a good question, and we have our own thoughts in terms of where we would like it to be over the next year, 2 years, and even 3 years, but I am not comfortable sharing that with you. There's a lot of variability in terms of pluses and minuses that would not be fair to share at this point. Go ahead, Bill.

Sure, but suffice to say, you definitely believe there is opportunity to the upside?

Yes. Reed, this is Bill. I just wanted to add to Bruce's comments that one of the things we're looking at in our product development process is we have targets that we are definitely frying to achieve for both channels, and we simply don't launch the product if it doesn't have the opportunity to achieve that target. So we intend to drive the margins upward, even in direct, where possible, going forward.

Makes sense. On the retail side, you know, you've got some new product out there, which looks like it's doing well. In your comments, Bill, about margins, kind of first half, second half, is that just more the time you need to get things and get a little wind at your back, or is there specific events in there that are going to really -- so we would expect to see dramatic margin improvement in the second half?

This is Bruce, Reed. A couple of things happened to us in the back half, and mostly as described by the product costs increases coming out of Asia. Due to the timing of when those costs became apparent to us, it kind of put us in a -- limiting our ability to pass on what we couldn't mitigate. The part of it we mitigated, but part of it we would have ideally tried to pass on in the form of wholesale price increases. Due to the timing of it, we were be able -- we were not able to do that. Now we know kind of what the year costs look like going through the balance of the year in retail, as we do in direct, and we are taking actions not only to mitigate as much as possible, and there's a number of things we're doing, but also, we are reevaluating the pricing that we have in the marketplace. And once you take that pricing, it basically does not manifest itself until -- because of lead times with customers and the fact that the season starts really in the back half in retail, that that's when you would start to see some of the things that we have in place to shore up the retail margin compression that we're seeing.

Okay. That makes sense. And then last question, on retail that's been a category that some of the larger general sporting goods operators have kind of -- just in general have kind of reduced a little footprint in terms of what they sell, etcetera. Do you feel, though, with your product that now you're actually starting to get a little bigger footprint inside of existing customers, or is the growth you're seeing simply a matter of product and new customers?

Reed, this is Bill again. Our retail growth that we're seeing is really being driven by 2 factors. We did -- the retail footprints, indeed, are starting to slip a little bit for us. We acquired incremental footprint in Q4 in bricks and mortar, which was great to do and a great job by our retail team. Also, we're a strong player in the dot com world, where we think the quality of our products and the ratings that our products get really help us carry the day. So we're seeing a lot of growth in dot com, as well.

Great. Well, good, I'll stop there and let somebody else jump in. Best of luck.

Thank you, Reed.

Our next question comes from the line of Joe Munda with Sidoti. Please go ahead.

Good afternoon, guys. Thanks for taking my questions.

Yes. Hello, Joe.

Real quick, what was operating cash flow for the year, as well as CapEx?

I don't have that in front of me. We're turning pages, Joe.

No problem.

We may have to get back to you, Joe.

Okay. Is the Q coming out in the next few days? I'm just wondering.

Yes.

Okay. That's fine. You guys spoke a little bit about the closure of some foreign facilities. Are we looking at modeling that in 2012? Do you expect further losses from discontinued -- how should we look at that?

I would say that there will be further losses in 2012, and they'll be less than what they were in 2011.

Okay. I mean, can you give us a little bit more? Are you expecting half, or --

That would be a plus or minus directionally, that would -- about half of what we experienced in 2011 is a fair place.

Okay.

And, believe me, the sooner the better, as we're looking at it.

Yes. You guys also spoke -- I think Bill McMahon had spoken about the brand research initiative. I was wondering, can you give us a little more color on that as far as any early findings, any takeaways so far, and how should we look at the SG&A for the first half of the year? Are we expecting a little bit of an inflated number in regards to that, as well?

Yes, Joe, the -- certainly there will be additional expense in Q1 and some in Q2, due to this market research, but we are in the survey phase now, so we don't yet have any preliminary findings. They're out talking to approximately 1,000 to 1,500 consumers as we speak.

And just -- what do you ask in these? I'm just curious. What are you asking these consumers, what type of questions?

Well, the questions are everything that relates to how they view our brands today. By that I mean, everything from Nautilus, Bowflex, Schwinn, and Universal, as well as the competitive set. There are behavioral questions like what do they view as important to them in different modalities and things like that. So the research is designed to not only give us a picture of what our brands mean today to the population and be able to segment it by activity level, and male, female, etcetera, but also importantly develop a map on where we can take the brands going forward and what product innovation strategies might make the most sense. And that's part of the reason I said we could go a lot of different directions. We think there's a lot of opportunities out there, Joe. We just want another -- some outside input to help us rifle shot where the best place is to go in terms of opportunity.

Okay. And I think Bill also had spoke a little bit about the next selling period, that being the second half of the year, so -- and I know the last caller had talked a little bit about margin. So are we to assume that margins are going to stay around this level into -- going into third quarter, and then we're going to see a margin improvement -- a gross margin improvement, because that's the next selling period? Is that the way we should look at it?

I would say that -- let me back up and say that on the direct side, I think we're on a path, okay, of improved margins already underway, and you saw that in Q4. The retail side is going to take longer than we anticipated to make the turnaround that you're already seeing in direct affect retail. So I can't pinpoint exactly the timing of it. I can tell you that the actions that we've put in place, and that relates to everything from sourcing to pricing, will start to move the needle. The question is, will it move it as fast as what we're seeing in the direct side right now.

Okay. And then on the retail side, are you getting -- is there any type of feedback or anything significant you guys can relay to us that some of your retailers are seeing in regards to the fitness equipment?

Yes, I would say -- I would say that I've had the opportunity over the last -- particularly the last 3 months, to visit at very high levels with all of our retail customers, and their general feeling is that the market is still very challenged. There's the dot com phenomenon happening, in terms of market shift between brick and mortar and dot com, but in general, the market is still tough, and retailers continue to rationalize the space that they have allocated in their stores to fitness equipment. So that's -- we view that in one way as an opportunity, because our market share in retail is relatively low, compared to our competitors', so that spells more of an opportunity for us to show them how we can turn the momentum in their department in a positive way, given the opportunity.

Okay. And then just really my last question here is are you guys taking a look at the -- well, the CrossFit phenomenon that's currently going on? I don't know if you guys are fully aware, where it's like high-intensity cardio workouts with a mix of strength, basically, and the popularity that they are garnering right now is unbelievable.

Yes, Joe, this is Bill. We're aware of that. In fact, the irony is that the areas around that are some of the product opportunities we have, and hence our desire to get into the research and determine what's really driving those trends in fitness. But we have some of our own ideas for that, and certainly we are advocates for the type of workout that CrossFit is doing.

Yes, I mean just from looking at it myself, I think this is like right in the sweet spot of what you guys are trying to do. It's a nice mix of strength and cardio.

Joe, let me come back to your question. I just got -- in terms of operating cash flow for the year, we generated about $4.6 million positive operating cash flow versus losing $10.7 million last year during the full year 2010. And on CapEx, our CapEx came at about $2.5 million in 2011 for a full year basis.

Is that a number you guys are going to work with in '12 as well, going forward?

It's going to be slightly higher but plus or minus, close, for 2012.

Okay. Okay. Thanks, guys. I'll hop back in the queue.

Okay. Thank you.

(Operator Instructions). Our next question comes from the line of John Wright with Compass Capital. Please go ahead.

Hey, guys. Good quarter.

Thank you.

I had some questions about a few things. The first one was, the credit approval rate you said was about 30%. What was it back before the recession, say in 2007?

John, this is Bill. We're not to pre -recession level consumer financing yet. In those days, we were seeing 37% to 40%. We also feel it's unlikely we'll get all the way back to that in the new economy, but that -- hence our desire to diversify a bit in our product mix.

Okay. Yes, and then as far as the margins go, I think, if my math is correct, it looks like you guys did about 46%. That looks like it's the highest you've had in at least 5 or so quarters. Do you expect a dip in Q1, Q2, or is that more a seasonal thing?

We're anticipating pretty much the same in Q1.

That's great. And that's mostly attributable, do you think, because of the new products, or --

I think so. The new products provide us an opportunity both in direct and retail to level set some pricing, respective of the pressures we have on us. It's harder with the existing stuff to recover, especially, as Bruce pointed out, when you have a price list set for the year with your retailers and then you get cost increases several months after that, it's difficult to get around that. So new products always provide us opportunities to go out at the margins we like.

So which of the new products contributed the most, do you think?

On a weighted basis, the new TreadClimbers that provided us some incremental standard product margin certainly would have moved the needle the most.

Okay. And then I had just kind of a higher-level question, and it relates to the -- I guess the interactive nature of social marketing and all the stuff that you guys are trying to get into. Do you have any plans of creating more kind of interactive, almost like a gaming nature with your machines, where, say, someone could do a workout and post it on -- and post it on to, like, their private log and be able to compare how they're trending or maybe even compete against friends, if they're doing a certain course, say, on a machine that they're working out on? And do you have any kind of initiatives in the works on doing something like that?

Yes, John, we do. We call that a digital strategy for our products, and there are some challenges with that in the equipment world. However, we're working on some things right now that we're not quite ready to talk about, so I'll give you the bag answer and say we're aware of that, and certainly we are big proponents of increased interactivity with social media and otherwise. In fact, our Bowflex Facebook page will probably go over 100,000 likes here in the very short term/ But you're talking about engagement and being able to post workouts and such, and we're looking at opportunities in that area, but not quite ready to go to market with them.

Okay, yes, because I don't recall who the competing bike was, but I noticed an ad where somebody could -- I think it was on a bike, they could essentially bike a certain course that was actually a real live course, maybe was the Tour de France, or whatever it was, and then they could compete with other people, kind of a lot more interactive and more involved into the machines. And obviously you would be working off the 100,000 people that are on your Facebook page, trying to build out some sort of social platform there. I think there could be a lot of value in that.

We agree, and we're looking at several options for us that will -- that have the path for us.

Yes, I think it falls under generally, John, we have several criteria as we're screening new products besides just market potential and profit margins, etcetera. And that is, number one is, it has to work, in terms of delivering the results to the customer, assuming they use it. Number two is, it has to be physiologically correct, meaning it's not going to cause any pain or strain, so that people will get hurt using it. And thirdly is that it has to be ideally engaging. So that's the third piece that we have to really step up and try to make our products as -- that's becoming a key factor even more than it was in the past, is to make it more engaging and almost fun to do the exercise and the work. Okay?

Our last question comes from the line of Ethan Steinberg with Friess Associates. Please go ahead.

Hi, guys. Thanks for taking the question. A couple of questions. One, did you -- what was the operating cash flow for the quarter?

I just have the full year.

That's okay. We can come back to it.

Yes.

What I'm curious, though, is that the operating income of just over $5 million, the GAAP tax was 35%. Are you paying any cash taxes with those NOLs, and do you expect to pay any cash taxes or any material cash taxes in the near future?

No. The short answer, Ethan, is we expect that our NOL will prevent us from having to pay out any cash against our taxes for the foreseeable future, at least up to $79 million.

We do have parts, Ethan, like in Canada and places where we have to pay taxes where the NOLs aren't carried, and there could be some tax liability there, but that's a small part of the business.

Are the cash earnings, were they closer to $0.16, $0.17 in the quarter? Am I looking at that correctly if you back out the discontinued ops impact and the GAAP tax?

If you back out the tax? I don't know. I'll have to get back to you. You're interested to know if you take out the tax effect what the fourth quarter earnings per share was?

Yes. I mean, it looked to me about $0.16 or $0.17, so I wanted to make sure I was right on that.

We'll have to get back to you.

So the discontinued loss was just over $0.5 million, but then there was an income tax benefit of $435,000. Do you continue to expect to have mostly offsetting tax benefits from the discontinued operations?

I believe so, yes.

Okay. And then the initiative, as far as the surveys and such, can you give us just a sense of how much that's going to cost?

It would be in the several hundred thousand dollars range.

Okay. There are any costs, any other sort of additional costs we should be thinking about or that will be coming out that might mitigate the OpEx impact from that?

No, I would say that we're looking at it as -- I mean, we're continuing to be very tight everywhere in terms of operating expense and media, on down to the smaller things. But this is going to be an over and above investment that we feel is absolutely necessary. And it's not small, given the size of our Company, we know, and -- but we feel that -- strongly that it will pay back, more than pay back in the years to come, not only in brand, licensing opportunities, but also in product innovation input that we will get. So it will be a little bit of a hit in the first half this year, Q1 and Q2, but -- and we have ongoing research, and so I don't want to give you this impression that we're only doing research here once, a one-time type of thing. There will be ongoing research, as there has been all along, for product and other questions that we want market feedback on. But this is -- it's a sizable investment that we're making, and we feel that we have the right partners doing it for us. And once we get the results back in the mid-year time frame, that it will better position us towards going after the opportunities in a more targeted way, as I said earlier.

Okay. That's great. And I think I heard you say gross margin you thought should be pretty steady to increasing sequentially? Did I understand that correctly?

I said that as it relates to the direct business. In terms of what you saw in the fourth quarter is we expect that we will have improvement in the direct side of the business as the year advances, just like you saw in the fourth quarter.

And so like if you look at the margin in the retail business in the quarter you just reported, do you think that from here gets better or worse sequentially?

I think it -- one of the things we talk about is we won't have the ability to effect too much change in regard to the impact from product costs until we get to a new sell-in cycle. So probably in the first half of the year, we'll do what we can to mitigate it, but we'll be in this range, and we hope to effect a larger change the second half of the year for the retail side.

Okay. But not necessarily gets worse before it gets better?

We're certainly doing everything we can to avoid that.

Okay. Great. And then I forget the exact seasonality, but you have so many initiatives going on right now that sound like they could offset some of the historical seasonality. Can you give us a sense of what the next couple of quarters should look like seasonally, and then also, what are the key product launch offsets?

As you know, we're not providing guidance, but I would say we hope eventually some of these products will provide a little bit different seasonality to our business, as it were, something like CoreBody could evolve into a more year-round product. But there's a definite seasonality to our business, and in the near term, I don't see that changing in 2012. If the weather heats up during the summer, more people want to work out outside than inside. So, historically, our sales tend to reflect that.

And then, if that cash flow number approximates the operating profit number, you have got a very healthy balance sheet right now, it is going to -- that cash balance could grow quite a bit. How do you guys think about or how do you think the Board is thinking about what to do with that capital or any sort of plan to start returning any to shareholders?

Well, we -- right now we want to continue to see the positive trend in terms of cash build. Our business has a seasonality in cash requirements, just like it does in the seasonality of the revenues. So as we go into the third quarter, in particular, the working capital requirements become greater for the business. So we are -- we're positive about what we're building, and we -- but we're not in a position yet, we feel, to start making a decision on, okay, let's do this or that, or even in terms of acquisitions or other things, until we get a little bit more stability in the trend line. So that's kind of where we are. I don't foresee us -- it's very topical. We'll be out in front of it, but we're not imminently thinking about doing anything specific right now.

Okay. Great. And congrats on the quarter. I guess just last thing, without getting into guidance or anything, but you guys said it sounds good. I am just sort of curious how things look first couple of months. Do they look up a lot, or down a lot, or flat from last year?

I can't comment on that, Ethan, but I look forward to giving you some more perspective on that when we talk in May.

And I would like to turn the call over to Bruce for closing remarks. Please go ahead.

Well, I just wanted to thank everyone for being on today's call. And as I just said, we really look forward to continuing some of the positive things that are evidenced in our business in the back half of last year continuing and look forward to updating you more on this progress during our first quarter call in the May time frame. So thank you all, and have a great day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.