Nautilus Inc (NLS) 2012 Q4 法說會逐字稿

Good afternoon, and welcome to Nautilus' fourth-quarter 2012 conference call. Participants on the call today from Nautilus are Bruce Cazenave, Chief Executive Officer; Linda Pearce, Chief Financial Officer and Bill McMahon, Chief Operating Officer. Remarks during today's conference call may include forward-looking statements concerning the Company's prospectus, 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 pertaining to our continuing operations. With that, it is 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 our fourth-quarter and full-year fiscal 2012 financial results. We achieved solid improvements in revenue, gross margin and net income for both the fourth quarter and the full year. These results are attributable to steady progress on a number of initiatives, but is largely due to executing well on the three key ones we have mentioned in previous calls. That is -- one, to ramping up new product development and expanding our product portfolio; two, improving margins; and three, continuing to tightly manage operating costs and leverage our infrastructure across higher sales in the long term. Our team's efforts behind these initiatives helped us deliver short-term financial improvements like what we achieved this past year, but equally important, they are also enabling us to build a strong underlying foundation that supports our objective of long term profitable growth and market success.

Linda Pearce will provide more detailed discussion of our financial results in a moment, but first, I would like to call your attention to a few highlights. In the fourth quarter, our Direct business continued to perform very well, as sales from this segment increased approximately 31% year-over-year, and gross margin for Direct increased 330 basis points to 58.9%. In addition to higher sales reflecting the steadily growing demand for our products, we also benefited from strategic decisions relative to inventory investment and media spend.

Regarding our Retail business in the fourth quarter, our sales were impacted by a soft overall retail environment for fitness equipment, as well as the timing of new product placements with certain key retailers. Retailers were very cautious with their spend on higher ticket items going into the peak season. We believe this proved to be a wise decision, given the increased promotional activity that many retailers found was necessary to move inventory and to achieve their planned sales. Our Retail business is still transitioning, and as we discussed -- previously discussed, we took steps in 2012 to position this part of our business for long term growth and improved profitability. On a full year basis, the Retail business was down approximately 7% to prior year and the pace of margin decline experienced over the past few years was stabilized. The challenging retail market environment reinforces the direction we took during 2012 to focus our product development efforts on an entirely new lineup of cardio products, which are scheduled for introduction this coming fall season. By our next earnings call in May, we should have a good feel as to retailers' receptivity to this new line of products. That said, we expect that in the next couple of quarters, we will continue to experience some challenges with our Retail business.

As we begin 2013, we are building off our success in 2012 and remain focused on delivering steady improvements in our financial results. Thanks to all the business improvements we have put in place over the past couple of years. We are in a healthy overall position, including a strong balance sheet, with a cadence of new products picking up and with more in the pipeline that will roll out throughout 2013. Now, I would like to turn the call over to Linda to discuss our financial results for the quarter in more detail. Linda?

Thank you, Bruce, and good afternoon, everyone. Net sales for the fourth quarter totaled $65 million, an increase of 8.4%, as compared to the same period last year. Fourth-quarter gross margins improved 490 basis points to 48.3% versus 43.4% last year. Income from continuing operations improved to $7.3 million for the fourth quarter of 2012, compared to $3.3 million for the fourth quarter last year. Income per diluted share from continuing operations for the fourth quarter more than doubled to $0.23 compared to $0.11 per diluted share for the same period last year. This strong improvement in results from continuing operations are primarily attributed to higher sales and improved gross margins in the Direct business.

We reported total net income, including discontinued operations, of $13.6 million for the fourth quarter of 2012, which compares favorably to net income of $3.2 million for the same quarter in the prior year. Net income for the fourth quarter of 2012 includes a $6.2 million gain from discontinued operations for the non-cash recognition of foreign currency translation adjustments related to the substantial liquidation of our European entities. Net income per diluted share for the 2012 fourth quarter increased to $0.44 compared to $0.10 for the fourth quarter last year. Income from discontinued operations for the fourth quarter of 2012 was $6.3 million or $0.21 per diluted share as compared to a loss from discontinued operations of $0.1 million, or $0.01 per diluted share for the same quarter last year. Total operating expenses for the fourth quarter as a percentage of sales increased slightly to 36.5% from 34.7% for the fourth quarter last year. Selling and marketing expenses totaled $17.6 million or 27% of sales for the fourth quarter, compared to $15.9 million or 26.5% of sales for the fourth quarter last year. Higher selling and marketing expenses reflect our investment in creative content and media spending to support the launch of new products during the quarter.

General and administrative expenses amounted to $5 million or 7.7% of sales for the fourth quarter, which compares to $4 million or 6.7% of sales in the prior year period. The timing of certain G&A expenses fell heavier in the fourth quarter of 2012 compared to the same period last year. For the full year of 2012, G&A expenses as a percentage of sales were down 400 basis points compared to the same period last year. Research and development costs in Q4 increased to $1.2 million, up from $0.9 million the same period last year, which reflects our commitment to develop and introduce a steady stream of new and innovative products. As a percentage of net sales, R&D expense increased as planned by 40 basis points compared to the fourth quarter last year.

Now turning to our segment results, net sales in the Direct business totaled $41.4 million for the fourth quarter, a 30.7% increase over the same quarter last year. This improvement reflects strong demand for our cardio products, especially our Bowflex TreadClimber line. This strong demand was partly driven by increased advertising and call center effectiveness and higher US consumer credit approval rates. US credit approval rates rose to 37% in the fourth quarter of 2012, up from 30% for the same period last year. Fourth-quarter 2012 Direct sales also benefited from the relaunch of CoreBody Reformer in the third quarter of 2012. Our Direct team continues to make improvements by balancing the right creative content, media mix and placement. This has generated strong leads and driven our top and bottom line improvements for this segment of our business.

Operating income for the fourth quarter in our Direct segment improved to $6.5 million, compared to $1.6 million in the prior year. This improvement reflects stronger sales, as well as a 330 basis point improvement in Direct segment gross margin. As Bruce mentioned, gross margin for the Direct business was 58.9% for the fourth quarter of 2012, compared to 55.6% in the fourth quarter of last year. Direct business gross margins benefited from better product mix of higher margin cardio sales and less promotional activity in 2012.

Net sales in our Retail segment for the fourth quarter were $21.8 million compared to $26.5 million in the fourth quarter last year. This year-over-year decline reflects a soft overall retail environment for fitness equipment, along with the timing of product placement with certain retail partners. Operating income for the retail segment was $3.7 million, compared to $5.1 million for the fourth quarter last year. Retail gross margin was 24.1% in the fourth quarter of 2012, compared to 25% in the same quarter of last year. Retail margins were adversely affected by less absorption of fixed cost due to the lower volumes in the 2012 fourth quarter versus the same period last year.

Turning now to our consolidated balance sheet, cash and cash equivalents were $23.2 million as of December 31, 2012, with no debt financing, compared to $17.4 million at the end of 2011 with $5.6 million of debt financing. Inventories were $18.8 million as of December 31, 2012, compared to $11.6 million at the end of last year. We took a more aggressive inventory position than in past years; this decision helped support the sales growth experienced in Q4 2012 and has positioned us well to begin 2013. We expect inventories to decline as we move into the slower part of the year, and we will continue to invest strategically to support new products and existing product opportunities. It is also worth mentioning that we have $75 million of federal net operating loss carry forwards available to offset future taxable income.

In summary, we are in a strong financial position as we begin 2013. We have continued to deliver steady, top line improvements and generated significantly higher net income compared to prior year periods. These are the best operating results we have reported in over five years. We have a strong, clean balance sheet, which gives us the financial flexibility to make necessary and strategic investments in our business to support future top and bottom line growth. At this time, I would like to turn the call over to Bill McMahon, our Chief Operating Officer, who will provide some additional insights into our business and key product initiatives. Bill?

Thank you, Linda. I would like to make a few comments regarding our operations to provide additional background on our fourth-quarter results. Our Direct channel continues to experience strong growth driven by the performance of our cardio product lines. The Bowflex TreadClimber cardio machine continues to perform well as the awareness of the proprietary TreadClimber brand trademark increases in the marketplace. Additionally, the early results from our CoreBody Reformer relaunch are encouraging. This product grew significantly over the same period prior year, more than doubling sales, and is meeting our expectation for continued investment and growth.

We observed further stepped improvement in consumer credit approval rates in Q4, and this uptick was a contributor to the sales growth we experienced. Q4 is historically our strongest quarter for credit approvals, so there is seasonal behavior in credit performance. However, we can also directly attribute some of the increase in approval rates to the effectiveness of our new television creative that was launched in the second half of 2012. In addition, our overarching media strategy, which focuses on drawing a more credit worthy potential customer wherever possible, has positively contributed to our results. We remain committed to establishing a new product launch cadence in both of our business channels.

For Direct, our product strategy continues to be focused on identifying new, incremental market and prices point segments and deploying products that provide solutions and values to consumers within those segments. With this goal in mind, we recently launched the Bowflex UpperCut machine. This product leverages the strength of our Bowflex brand, which our research confirms is the most recognized brand in consumer fitness, and builds on the established Bowflex heritage of effective and efficient strength training that provides fast results. UpperCut enables you to perform a variety of old school moves in order to sculpt the upper body. The secret to the product lies in the use of ARC technology, ARC is short for activation, repetition and control. This technology is scientifically proven, confirmed via an independent university study, to activate up to 30% more muscle and enable up to four times more repetition to deliver control in muscle engagement. This, in turn, allows users to perform exercises that they likely could not do unassisted.

Along with the product, Nautilus is distributing a mobile web application that includes five UpperCut workouts, and it is available on the iOS and Android platforms. This product is marketed via short form television creative, online advertising and social media marketing. The price point of the Bowflex UpperCut is $99.95 and further information on the product can be found online at Bowflexuppercut.com. Bowflex UpperCut represents our first major effort to revitalize the strength category. While it is still early in the product's introduction cycle, we are very pleased with the rate of initial acceptance and we look forward to updating you on our progress in future conference calls.

Turning now to our Retail business, as Bruce described during his remarks, the overall retail environment for fitness products has been challenging. Our sales via online retailers and outside of the United States did continue to see growth throughout 2012. However, our sales in bricks and mortar stores were down. As discussed in prior conference calls, this was primarily due to a loss of floor space in the fall season at certain national sporting goods retailers. Apparently, overall retail fitness market experienced weakness in Q4, as well. We have focused this past year on developing an updated lineup of cardio products, including bikes and elliptical machines, that are scheduled for introduction in the fall of 2013. These products are new from the ground up, and feature highly competitive specifications that should, given what we currently know about the market and our competitor's offerings, enable us to better compete in the market. We feel that combining our already high product quality profile with compelling consumer insight driven product feature sets, under the umbrella of our strong brand, will be the key to acquiring incremental retail market share, and ultimately, driving higher sell through and growth within the retail business.

In our recent discussions with the major fitness retailers, a few key themes have emerged from the fall season just concluded. First, overall, they are disappointed in their fitness category sales for the season. Second, they are anxious for new ideas and products that better meet emerging consumer trends. Retailers are looking for improvements to traditional on-floor categories, such as bikes and ellipticals, as well as true innovation in product. Given our low market share, and specifically, our relatively small share of floor space this past season, we feel the current overall conditions in the market should actually present Nautilus with opportunities for growth. Our new model year '13 bikes and ellipticals are designed to upgrade our competitive capability in the traditional categories, while new and innovative modalities, such as our Schwinn 520 Reclined Elliptical are focused on giving retailers the option to feature unique products on their floor or website. We are right in the middle of the fall 2013 retail selling cycle, so it is still too early to get a good read on our retailers' fall assortment decisions. I can say, though, that the initial reviews of our new product prototypes have been encouraging and indicates that we are on the right track.

In terms of our outlook for the retail business for the next two quarters, it is important to keep in mind that our Q2 fiscal 2012 sales benefited from certain of our retail partners accelerating their buying patterns in advance of our price increases in the back half of 2012. Hence, our retail business will face some difficult comps to prior year during the first half of 2013. With that said, I want to reiterate that our Retail business continues to strongly contribute to our overall profitability. We are focused on introducing products into the retail space that will enable us to return to a path of market share acquisition versus erosion. We feel the proper steps are in progress towards achievement of that goal.

Our third revenue source is in the form of strategic licensing of our intellectual property and our brands. Last week, we announced a new brand licensing partnership with the Seltzer Group. This partnership is intended to explore opportunities to license our well-known brands with products outside of the fitness equipment space. Our research indicates that many of our brands, especially Nautilus and Bowflex, have extendibility and positive attributes that might be valuable when applied to consumer products. It is important to note that this process will take some time before we expect to see meaningful revenue as we work through identifying and vetting individual opportunities and partners. In turn, the approved licensees will then need time to develop products that meet the selling cycle appropriate to their category. With that said, we are optimistic that these efforts will complement our royalty revenue stream in the future.

Regarding the licensing agreement in place for commercial TreadClimber, our partner, Star Trac, has deployed production units into the market with select partners for third party field testing. The early results are very positive in terms of product acceptance by club members, as well as in terms of quality and reliability. Star Trac intends to publicly launch the commercial TreadClimber product at the IHRSA industry trade show March 19 through March 22. Nautilus will derive royalty revenue driven by sales on a quarterly basis coinciding with the launch of the product.

Lastly, a few brief comments on our inventory position at the end of the year. We chose to carry a higher amount of inventory into 2013 as compared to the same period a year earlier. This initial investment in inventory helped us to be properly positioned for the sales surge we experienced in the fourth quarter without eroding our ability to meet Q1 2013 demand, or forcing us to use more costly methods to replenish our supply chain. Our strong balance sheet enabled us to take this position in the peak fitness season, and this has already proven to be a wise investment. Overall, we plan to manage our inventory levels with respect to the historical seasonality of our business, and we anticipate a level of inventory at mid-year that is reduced from current level.

In summary, I'm very proud of the results our team delivered in fiscal 2012. We introduced a number of new and exciting products that help build a stronger foundation to our brands. We have a healthy pipeline of new product ideas, each leveraging our strong brand heritage that will enable us to introduce new products with a regular cadence. Our product development and supply chain capabilities are proving capable of supporting our growth plans. We are excited about fiscal 2013, and we remain fully focused on meeting our long-range strategic objectives. Now, I would like to turn the call back over to Bruce for his final comments. Bruce?

Thank you, Bill. Before opening up the call for questions, I would like to take a few minutes to comment on the business in general. First of all, I want to acknowledge that the tremendous improvements that have been made over the past two to three years are a testament to the hard work and enthusiasm of our entire team. 2012, in particular, was a milestone year, and it is gratifying for our team to see all the hard work pay off, both in the consumer marketplace, as well as in the financial results. While there is still much work to do to achieve our long-term ideal state, we closed the chapter on the turnaround and are now focused on building higher performance into everything we do. This spans activities from improving success rates with new products, to gaining further efficiencies in how we do our daily work processes, whether it be moving product through a warehouse or answering a customer inquiry.

In 2013, our focus will be to continue generating top and bottom line growth in Direct and to complete the cardio product line revamp in retail to get us on the desired trajectory for that business starting in the back half of this year. We will also continue to support new product launches for both businesses, as always, and will, as appropriate, apply greater marketing and public relations support than in previous years. Our products and brand equities are very compelling, and we intend to increase access through various means of additional exposure. We are excited about the business prospects in 2013, and appreciate the support and confidence our employees and external partners have exhibited in us. That concludes our prepared remarks, and I would now like to open up the call for questions. John?

Thank you.

(Operator Instructions).

Our first question from the line of Reed Anderson. Please proceed.

Good afternoon. Can you hear me okay, Bruce?

Yes, we can hear you, Reed.

Great, nice job. Say, couple of questions. First, Bruce, for you, I think. Overall, obviously, a huge acceleration on the Direct side in the fourth quarter and very much a reflection of what you have been doing with new product, but also, I think, the messaging and what you did on the CoreBody. Your sense of, not -- I'm not looking for you to do 30% growth year-over-year over the near-term, but just your sense of sustainability of some of the momentum you seemed to pick up in the fourth quarter, specifically looking at the Direct and some things to think about.

Well, I think -- thank you, Reed. The -- I'd like to stick with our goal, and Direct, as we've publicly stated, is to try to grow the business on a top line basis in the low double digits kind of a pace, which is what we have been doing. And granted, the fourth quarter was a big quarter and a lot of things came together to make that happen. But I think as far as modeling our business, I think it would be fair to say that you should stay more or less in the same kind of parameters that we've outlined as our long-term ideal state for Direct and for Retail.

Okay, that's helpful. In terms of the changes you made in CoreBody, it sounds like it had kind of the desired effect, if you will. Do you feel like that process is where it needs to be, or is there further fine tuning with that product? And also, things you learned from that that apply to some of the new stuff, maybe like, UpperCut or whatever, whether it is getting it to the right market or -- channel, whatever; just thoughts on that, please.

Hey Reed, this is Bill. Good afternoon. On CBR, I think we learned a lot about creative messaging and how to emphasize the key elements of the product in a way that got through to the consumer in round two. There is a few proprietary trade things I don't necessarily want to give up, but --

Sure.

Despite to say that the team did a great job of identifying a way to communicate the message that resonated, and we measured how it resonates based on response and conversion. So we are pleased with that. As always, on our Direct side, even with a mature product like TreadClimber, we are constantly tweaking on the messaging to try to find things that advance the ball.

Okay, good. Thank you. This is probably for Bruce or Bill, you guys can arm wrestle over it, but the -- in terms of the licensing piece, that was good detail you gave. Just thinking about the commercial piece, any sense of what that might be in terms of impact on the numbers or the timing of the rollout? And I guess related to that, what price point are they selling that product at, or what are the ranges of price points?

Yes, Reed, they haven't formally announced price point yet. I'm certain they will at the trade show, IHRSA, later this month --

Okay, okay.

So I don't know to steal their thunder on that. The royalties would be paid to us based on that selling price, and then we would, in essence, true up on that every quarter. So I would say second half of this year, if they announce it in the show and begin to sell in, in the middle of the year, I would say in the second half of the year, we'll start to see some revenue.

Okay, good. And then Linda, I don't want to leave you out, so a quick margin question for you. In terms of -- specifically, on the Direct side, obviously, again, a huge benefit there. Is that, first of all, again, thoughts on sustainability on those sort of numbers. It seems a little rich over the near term, at least, not on a quarterly basis, but also, was that mostly a function of just the mix of product? Again, looking at really, Direct, or was there also some benefit on the costing side with products that weren't new in the quarter?

Well, first of all, sustainability, we expect to hold the gains that we've made. And --

Okay.

We probably had most of the benefit did come from the product mix, followed by a costing save that we continue to work on and will continue on into the future, as well.

Okay, good. All right, I'll stop there, I'll let somebody else jump in and I'll come back later. Thanks, good luck.

Thank you, Reed.

Our next question from the line of Chris Armbruster with B. Reily & Company. Please proceed.

Good afternoon.

Good afternoon, Chris.

Was -- I have to echo the sentiment on the tremendous results in the Direct business. Was there any continue from Peak Fit System in this quarter?

Hi Chris. There was some contribution from Peak, but it -- we continue to evolve that product and are working on it, as we speak. The biggest drivers were really TreadClimber and CoreBody.

Okay, and then on the pipeline in the new product announcement timing, you guys have kind of accelerated, or it seems some of the new product announcements, you have had a number of them recently. Do you expect the frequency that we have seen over maybe the last three to four months to be something that we can expect going forward, or is it going to be a little bit more spaced out than that?

It is a difficult question to answer, Chris, because we won't launch a product unless it is ready to launch, okay? So I would say the pace, particularly towards the tail end of last year, is more indicative of what we'd like to keep -- have happen on the Direct side. And then, of course, on the retail side, we are bringing in a whole -- as we talked about, a whole new revamp, ground-up product line in the cardio area, and that will happen with a normal [planogram] cycle in the fall. So that -- it all depends on when the product is ready and when the environment's right, we will go in Direct. On the Retail side, we obviously target when the planograms are being reset for the year, for the fall.

Right, and on that new retail product line, do you expect to see any uptick, or I guess any change, in general, in the gross margin levels of the new product?

Our goal is that, again, part of our discipline here is in the new product development processes to introduce new products that are higher margins than the fleet average in the respective business that it is coming into. So the answer to your question is yes, and that's what we hope to have -- see happen. But again, it all depends on other factors like volume, depends on mix, how much is new versus existing products, and so forth. So there are a number of variables, but I will tell you we stand by our attention to bring new products in at higher margins than any items that they are replacing.

Okay, and just one more. The tail -- the advertising effectiveness increase that you guys have seen, what is the tail on that? How long does that -- is that shift really going to impact your business? Is that going to create a big tail wind for the first couple of quarters for next year and then maybe level out? Or is there even room to expand that on a year-over-year basis if you looked into Q4 of next year, is there additional incremental gains you can make from your media strategy?

Chris, our desire is always to monitor how the creative is performing in the market, and we see in essence, daily results, so we modify our creative plans based on how an ad is doing. So a give an ad might provide more boost early, but then burnout faster or vice-versa, we are constantly looking at that. We generally budget creative cadence, in addition to a product cadence, so we know we need to refresh ads in a given amount of time. And we build on what we have learned from the successes of the last iteration, and apply it into the new iteration, the ad. So in short, we intend to build on what we have achieved so far with our creative, but we will monitor it. And really, ads have -- some ads I have seen have a tremendously long life span, and others do great, but then they are done, so you sort of have to just stay on top of it and be ready with new creative as needed.

Okay, thanks, guys. I'll hop back in.

Thank you, Chris.

Our next question comes from the line of Joe Munda with Sidoti & Company. Please proceed.

Good afternoon. Thanks for asking my -- answering my question.

Hi Joe.

How are you?

Good.

You guys talked about -- just with the last caller, higher margin on the retail side. Would that also include offering new products at a lower price point, but with a higher margin -- a higher incremental margin?

It would be possible, and let me turn that around a little bit. I want to make sure that people are not taking away that we are focused -- redirecting our focus to just lower price point product, that is not the case at all. We are in the process of diversifying our product offering, both in Direct and in Retail, so in some cases, we might be going up in retail pricing, in others, we might be coming down, okay? Like an example, in Direct, we have come down into the sub-$500 price point, but that doesn't take away from our continuing efforts to develop new products for the existing price points that we are already very strong in. So that's an important point, number one. Number two, I think more specifically, to what you are asking, is even if a product sells for $100, the goal would be that it would be selling for a higher gross margin to us than what the fleet average would be for that side of the business that it's in. Does that answer your question?

Yes, it does. Okay, and then my question, in regards to the retailer and losing floor space, are you losing floor space to competitors. Or are you just -- or is just the floor, the outlay for fitness products is shrinking because they are bringing in apparel or what have you? Can you give us more color on what retailers are seeing and doing in regards to their floor space? And what new consumer trends you had spoke of that they are really hungry for, like you said?

Yes, I think a few things, Joe. Specifically related to us, we specifically lost floor space at a national retailer chose to go with a private label assortment last fall, so that was a direct hit to what we otherwise would have had for sales. To your overall question in the market, the retailers were generally unhappy with their sales this fall season, overall. The new trends that are coming include things like CrossFit, or basically, other types of fitness that are nontraditional. So the lion's share of sales is still occurring in traditional markets, but they are starting to see a lot of interest in areas of people who are basically seeking variety in their workouts. I think that is a lot of the reason why our Direct sides perform well; it offers, in essence, alternative fitness solutions to people versus the traditional on-the-floor items. So I think we are uniquely situated to deal with either outcome, but we are definitely focused on how do we respond to the retailer's needs at this time, and trying to provide them with solutions that get them excited again about carrying our product on the floor.

Okay, and then Bruce, my final question on the media strategy. I'm not going to lie, I saw a couple of ads on The Bachelor for CoreBody Reformer; my wife was DVR-ing it, I'm not going to lie, I saw it. I almost dropped my coffee because I didn't expect to see that (laughter), and she was asking me about it, and I said, yes, I know what that is. But also you know we have seen UpperCut now on ESPN. So I mean are the plans to really run more of the ads that you are currently running, but on a broader base of consumer -- I guess, in those age groups that would be watching programs such as that? Or are you going to stick to those particular programs and just refresh the ads?

Joe, I'll take that one, and I can tell you that it's a great question. The truth is we are finding that we have media buying capability that allows us to run our ads wherever it makes sense economically, and that means the cost of the ad versus the response we are getting. So if you see us in higher awareness ad positions, it means that the ad's working and we are able to take advantage of capturing an even larger audience and get the desired results pay for the ad. So we are hopeful we can continue to expand; our media teams are doing a get job of finding us incremental placements in those high eyeball count TV networks.

Okay, so I'm guessing, should we assume that that would continue to ramp going forward, as well?

Yes, in essence, we are always hopeful to grow our investment where it shows an ROI that is going to works for us to our long-range goals. If we can keep doing that, we certainly will.

Okay, thank you. I'll hop back in the queue.

Thank you, Joe.

(Operator instructions).

Our next question from the line of Bill Dezellem with Tieton Capital Management. Please proceed.

Thank you, that's Tieton Capital. Specifically, I wanted you to address the approval rates that benefited the quarter. Was that primarily, in your opinion, a function of lenders loosening their standards? Or was it primarily a function of consumers becoming healthier and/or just higher credit quality customers choosing to buy your products?

Hi Bill, Bill here. Good afternoon. We do not have any indication that there was large scale changes in the score cards that our credit providers used to evaluate our applicants, so therefore, we feel the vast majority of the driving of improvement here was both our creative strategy, but also general health with the consumer. We saw that the higher approvals are directly attributable to higher FICO scores, and we are seeing higher FICO scores in response to our ads. Hence, the higher approval rate. I think overall, it is all good, but we haven't yet seen a large movement or loosening in consumer credit with our partners, and certainly, that could happen as the economy hopefully continues to get well.

And if I could actually take that a step further, how -- are we hearing you correctly that your ads are somehow more -- directed more towards consumers with higher FICO scores, and those individuals with lower FICO scores are recognizing that they need not call -- you'll call them instead?

No, no, it doesn't -- anytime you are advertising on national TV or national cable, as we do, you are basically casting a wide net. There are certain networks that tend to have demographics that are more favorable for higher financing rates, but nevertheless, overall, anytime you advertise, you are getting a wide swath of Americana that comes in as a response rate. What we are seeing though is there are certain messages we have that tend to resonate with the higher quality credit consumer, as well as certainly, just overall gross response rate. The more you take in of people who are interested in your product, the more likely you are to hit veins of higher qualified people.

Great

We constantly focus on our messaging, and are constantly trying to refine that message, anytime we come across things that work.

That is helpful, and I would like to dive in one step further. To what degree in the fourth quarter of 2012 was the fact that you had lower priced products also a driver to the higher approval rate? Meaning if someone calls in for a TreadClimber, they may not have received approval, but if that same individual came in for a CoreBody Reformer, they would be approved, and hence, that would benefit your approval rate scores.

Yes, actually Bill, there is no effect at all from that set. When our financing partners look at an applicant, they are actually opening a revolving account, so they are not actually looking specifically at what is the dollar amount of their order. So there isn't necessarily a higher approval rate on something like a CoreBody Reformer than there would be on a TreadClimber. That said, use of credit, as you might guess, is a lot more prevalent on a TreadClimber product than it is on the low price products.

Thank you.

Thank you, Bill.

Next question is a follow-up question from the line of Reed Anderson with Northland Securities. Please proceed.

Hi, one follow-up. I was curious, Bruce, I was thinking back to the marketing we did last fall, when you were laying out the long-term vision of what the business model would look like, and kind of getting margins back to that whatever high-single, low-double digit area. Did that include some major change or growth in the licensing piece, or was that something that would potentially make that even more compelling?

No, that is a good question, Reed. The -- when we put our plans together to lay out where we think the business can get to, we did not assume any growth in licensing, nor deterioration of licensing. We assume just the baseline, which is where we have been really the last two years, just under $5 million a year, roughly. So to the degree that we drop in some incremental licensing or licensees with the new partner into new categories, and to the degree that we don't lose some of the existing baseline that's already in the base. Then potentially, there could be upside to not only the license stream, but also the total operating margin that we suggested in that presentation.

That's great. Thanks very much.

Okay. I just will emphasize that again, it is something that is tough to predict, licensing, that is. Because you are dependent upon what the licensees are selling. Sometimes there could be obstacles they run into, whether it be environmental obstacles or their own internal obstacles, and so therefore, it is a little tough to predict and we don't try to predict it.

Okay.

Next question is a follow-up question from the line of Chris Armbruster with B. Riley & Company. Please proceed.

I know you guys are going to file your 10-K in a little bit here, but I was wondering if you would be able to tell us what the depreciation and amortization in CapEx were for quarter.

For the fourth quarter of 2012?

Correct.

Yes, our CapEx was $700,000, and depreciation was approximately that, as well.

Okay. And then I guess just one more follow-up on the change in R&D expense. Is the Q4 run rate, is that something that is seasonal, as well, or is the Q4 run rate something that you guys expect to build on as you go forward?

No, actually Chris, we have been building, as you know, throughout the last year and a half, and I believe that the number for the full year ended up at about 2.1% of sales. And that would still be on the light side, I would say, to where we think we need to be. But we'll be very select in terms of what investment we make there, but it's still not quite where we think we need to be.

Okay, great. Thanks, guys.

Thank you, Chris.

There are no further questions at this time.

Very good. Well, I just wanted to thank everyone again for their participation and interest in our call today. We look forward to speaking with you on the -- for the first quarter 2013 conference call in May. Thank you, all, and have a great rest of the day. Bye.