Nautilus Inc (NLS) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Nautilus Third Quarter 2014 Earnings 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 call is being recorded on day November 3, 2014.

I would now turn the conference call over to John Mills of ICR. Go ahead Sir.

Great, thank you. Good afternoon everyone, Welcome to Nautilus' third quarter 2014 conference call. Participants on the call from Nautilus are Bruce Cazenave, Chief Executive Officer; Sid Nayar, Chief Financial Officer and Bill McMahon, Chief Operating Officer.

Our earnings release was issued earlier today and may be downloaded from our website at nautilusinc.com on the Investor Relations page. The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measure.

Remarks on today's conference call may include forward-looking statements within the meanings of the securities laws. These statements include statements concerning the Company's current or future financial and operating trends. Anticipated new product introductions, available supply of certain products, planned and anticipated results of facility initiatives and forecast related to international sales are subject to a number of risk and uncertainties and actual results may differ materially from those statements. For more information about these risks, please refer to our quarterly and annual reports filed with the SEC, as well the (technical difficulty). 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 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. On today's call, I would like to start by providing a general overview of the third quarter and then we'll turn it over to Sid Nayar to review our financial results in more detail. Bill McMahon will then add some details on each business segment, as well as updates on product activity. I will then close with some summary remarks before we open up the call for questions.

During the third quarter, we continued to make progress across all areas of our business, and as a result, are reporting another strong quarter of financial growth and improved profitability. We achieved topline growth of 28%, reflecting double-digit increases in both the direct and retail businesses. The Bowflex Max Trainer product line continued to be a key contributor to our growth in the direct business for which sales increased 34% year-over-year. In its first year on the market, the product line has performed extremely well and we remain excited about its long-term potential as part of our product portfolio.

Our retail business topline increased 21% over the same period prior year. We are particularly pleased with this increase, given the very challenging growth comparison we had from the third quarter of last year. Our strong retail performance underscores the success of last year's new product lineup, as well as positive customer receptivity to the additional new products that were launched this September.

In the quarter, we continued to make progress on improving gross margins, which increased 170 basis points to 48.8%. This along with continued and greater leverage of operating costs led to an increase in pretax income of 171% to $4.3 million.

As we begin the peak fitness season, we remain well positioned to deliver continued growth. We recently announced the launch of a number of new and innovative products for the direct and retail channels that encompass broad areas of fitness and will further expand and diversify our product portfolio. Bill will provide more detail on these new products during his remarks.

In summary, we are pleased with what we have accomplished thus far in 2014 and are confident that we remain on the right track by executing on our three key priorities of ongoing product innovation, margin improvement and achieving greater operating leverage.

At this time, I'd like to turn it over to Sid Nayar, our Chief Financial Officer, who will provide some additional details about the third quarter financials. Sid?

Thank you, Bruce. I would like to review the details of our financial results for the third quarter of 2014.

Net sales for the third quarter totaled $59.1 million, an increase of 27.7% as compared to the same period in the prior year. Year-to-date net sales for 2014 totaled $179.5 million, up 26.7% as compared to net sales of $141.7 million for the same period last year. Third quarter gross margins increased 110 basis points in the Retail segment and 120 basis points in the Direct segment to 26.5% and 62.2% respectively when compared to the same quarter last year.

On an overall basis, total Company gross margins improved to 48.8%, up 170 basis points versus the same period prior year. For the first nine months of 2014, total gross margins improved to 51.3%, up 200 basis points as compared to the same prior period.

Total operating expenses for the third quarter as a percentage of sales decreased to 41.5% from 44.2% in the same period last year, underscoring our ongoing initiatives to leverage operating expenses across higher sales volume. The reduction in operating expenses as a percentage of sales reflects improved revenue leverage on media spending related to strong Bowflex MAX Trainer sales. Operating expenses for the nine months ended September 30, 2014 as a percentage of sales totaled 42.6% as compared to 45.3% for the same prior period.

General and administrative expenses were $5.7 million or 9.7% of sales for the third quarter of 2014, which compares to $4.9 million or 10.6% of sales in the same period last year. The increased dollar spending in G&A primarily reflects higher spending for international intellectual property registration and increased patent related legal fees. The improvement in G&A as a percentage of sales, highlights favorable operating efficiencies and our ability to leverage the existing operating base as the business expands. General and administrative expenses for the first nine months of 2014 as a percentage of sales totaled 9.2% as compared to 9.8% for the same prior period.

Research and development costs in the third quarter of 2014 were $1.7 million or 2.8% of net sales compared to $1.4 million or 3% of net sales in the same period last year. The dollar increase reflects our ongoing commitment to invest in the product development and engineering resources required to innovate and broaden our product portfolio through new and refresh products. Research and development costs for the first nine months of 2014 totaled $5.3 million or 3% of net sales, as compared to $3.8 million or 2.7% of net sales for the same prior period.

Operating income for the third quarter of 2014 increased to $4.3 million as compared to income of $1.3 million in the same quarter of last year. The increase reflects higher sales and gross margins in both Direct and Retail segments, combined with improved operating leverage of sales and marketing, and general and administrative expenses. Operating margin for the third quarter of 2014 improved to 7.3% compared to 2.9% for the same period last year. For the first nine months of 2014, operating income totaled $15.7 million or 8.7% of net sales, up 179% compared to the same period last year.

Pre-tax income from continuing operations for the third quarter of 2014 was $4.3 million or $0.14 per diluted share, compared to income of $1.6 million or $0.05 per diluted share in the same period last year. Pre-tax income from continuing operations for the first nine months of 2014 totaled $15.6 million or $0.49 per diluted share compared to $5.9 million or $0.19 per diluted share in the comparable period last year.

Beginning in the first quarter of 2014, the Company started to record income taxes at a normalized rate following the partial reversal of its valuation allowances in 2013. We believe that pre-tax income comparisons provide a useful metric to gauge underlying business performance. Given the Company's US net operating loss carry-forward position, we expect to have minimal cash tax payments in the near term.

Net income from continuing operations for the third quarter of 2014 was $2.7 million or $0.08 per diluted share as compared to $1.5 million or $0.05 per diluted share for the same period last year. Net income from continuing operations for the first nine months of 2014 totaled $9.9 million or $0.31 per diluted share as compared to $39.7 million or $1.26 per diluted share for the first nine months of 2013. The 2013 numbers included a one-time income tax benefit of $34.2 million, or $1.09 per diluted share, due to a partial reversal of a valuation allowance recorded against the Company's deferred tax assets in Q2 2013.

Total net income including discontinued operations for the third quarter of 2014 was $2.5 million or $0.08 per diluted share. This includes a $0.2 million loss, net of taxes, or $0.01 loss per diluted share from discontinued operations. This compares to the third quarter last year, where we reported total net income including discontinued operations of $1.4 million or $0.04 per diluted share, which included a loss from discontinued operations of $0.1 million net of taxes or less than $0.01 loss per diluted share. Total net income for the first nine months of 2014 was $8.4 million or $0.27 per diluted share compared to $39.4 million or $1.25 per diluted share for the same prior period, including the one-time tax benefit previously mentioned.

Turning now to our segment results, our net sales in the Direct business totaled $34.5 million for the third quarter of 2014, a 34.1% increase over the same quarter last year. Direct segment sales benefited from continued strong demand for our cardio products, primarily driven by sales of the Bowflex MAX Trainer product line that was launched during Q1, 2014. This growth was partially offset by the continued decline of strength in other products in the Direct channel, as we continued to see some of these products cascade into the retail business. Net sales for the first nine months of 2014 in the Direct segment totaled $117.6 million, up 25.5% over the same period last year, driven primarily by incremental revenue from the launch of Bowflex MAX Trainer and higher sales in the Bowflex TreadClimber category.

US credit approval rates rose to 40.3% in the third quarter of 2014, up from 34.3% for the same period last year, attributable to several factors, including the launch of the Bowflex MAX Trainer, which has thus far attracted consumers with better credit scores, along with our media strategy focused on driving quality customer leads and an expanded lender base.

Gross margin for the Direct business improved to 62.2% for the third quarter of 2014, compared to 61% in the same quarter of last year. The Direct business gross margin benefited from overall overhead operating efficiency and product cost improvements, coupled with favorable product mix.

Operating income for the third quarter of 2014 in our Direct business was $4.1 million, compared to $1.3 million in the same quarter prior year. Operating income benefited from higher gross margins and improved leverage of selling and marketing expenses as a percentage of sales in the third quarter of 2014.

Net sales in our Retail segment for the third quarter of 2014 were $23.5 million, an increase of 21.2% compared to $19.4 million in the third quarter of last year. The improvement reflects strong retailer and consumer acceptance of the Company's new lineup of cardio products launched last fall, coupled with additional new products recently introduced. Additionally, retail sales in the third quarter of 2014 also benefited from a few customers accelerating some of their fourth quarter orders into the third quarter to better position their supply chains for the upcoming peak season. For the first nine months of 2014, net sales for the Retail segment totaled $58.6 million, an increase of 31.2% over the same period last year.

Gross margins for the Retail business increased by 110 basis points to 26.5% in the third quarter of 2014 as compared to 25.4% for the prior period, driven by the mix of new products and improved overall overhead operating efficiency. In the third quarter of 2014, operating income for the Retail business increased to $3.7 million, as compared to $2.9 million in the same period last year.

Now turning to the consolidated balance sheet. Cash, cash equivalents and marketable securities totaled $41.7 million as of September 30, 2014, with no debt. This compares to $41 million and $27.7 million in cash, cash equivalents and marketable securities and no debt at December 2013 and September 2013 respectively. Inventories were $21.3 million as of September 30, 2014, compared to $15.8 million at December 31, 2013 and $17.5 million at September 30, 2013. The increase in inventory versus year-end 2013 reflected inventory stocking of our new distribution center in Ohio that opened during third quarter of 2014, as well as the seasonal build for the fourth quarter which is historically the largest revenue quarter. Trade payables were $21.2 million as of September 30, 2014, compared to $37.2 million at the end of 2013, and $27 million at the end of September 2013. The timing of the inventory build earlier in Q2 2014 resulted in the lower payable balances year-over-year.

Capital expenditures totaled $1.6 million for the quarter and we anticipate spending $3.8 million to $4.3 million for the year, primarily on IT, infrastructure, product tooling and warehouse leasehold improvements. At this time, I would like to turn it over to Bill McMahon, our Chief Operating Officer, who will provide additional insights into our business and key products.

Thank you Sid. I'd like to provide additional background on our third quarter results and the overall position of our business as we enter into the fitness season.

Starting with our Direct business, as Sid just outlined, we delivered another solid quarter of revenue and operating income growth, largely driven by the Bowflex MAX Trainer. In the first nine months since its launch, consumer demand has been very strong for this product and the product continues to receive favorable reviews across the industry. In the third quarter, we began advertising and shipping the product to our customers in Canada. Media performance within the US and Canada continues to indicate that additional investment in MAX is prudent. MAX Trainer advertising will be prominently featured as we enter the fall season. We feel that we are well positioned on the supply side to meet our currently projected demand.

Our Direct channel results are also heavily influenced by the continued performance of the TreadClimber product line. TreadClimber remains the largest segment in the Direct business, despite the growth we are seeing in MAX Trainer. We are seeing a small, but normal amount of cross shopping between MAX and TreadClimber by those who visit our bowflex.com website and this behavior is both healthy and accounted for in our media planning for both products.

We continue to experience favorable gains in consumer financing approval rates, which improved to 40% in Q3, as Sid stated. Our analysis shows that the improvement in credit has been driven three key factors. First, the quality of applicants being delivered by MAX Trainer advertising is superior to the run rates of our other product categories. Second, our advertising, in general, is driving measurable improvement to the inbound FICO scores of our overall applicant pool as compared to prior year, which in turn leads to higher approval rates. Lastly, our credit partners, who now have multiple years of portfolio performance with which to base their decisions, are approving at cautiously higher rates. It's important to note that many of our Direct products are considered purchase and as such access to financing has always been a key factor in Direct sales conversion. That said, in Q3, the majority of purchases were made with the traditional credit card versus use of financing and year-over-year credit card sales grew at a faster pace than finance purchases. This healthy mix of payment method continues to indicate that our growth in Direct is being driven primarily by compelling products, combined with the effective messaging leading to quality response.

As has been the case for the past several years, we continued to see a decline in Direct strength category sales as the natural life cycle of these legacy products plays out via cascading of sales to our Retail channel. For comparative purposes, it's important to keep in mind that these declines in actual dollars are becoming a small percentage of our direct business overall.

Turning now to our Retail business, retail customer response to our new lineup that launched in the fall of 2013, as well as our products launched in September of this year, continues to be positive. We measure our selling success during each new fitness season through a metric we call [skewed] orders, which is the measure of gains on the retail sales floor via either more doors in the store's chain or more SKUs on the floor within store chains where we already have presence. We are pleased with the gains we've made this fall in acquiring incremental position on the Retail floor. Additionally, our product offerings continue to perform well in the eCommerce space where we are encouraged by consistently high ratings. Retail growth is also fueled by our international sales, which in Q3 continued to grow at a rapid pace and are currently on track to exceed our estimates for the year.

Our incremental placements, including select locations featuring our new line of Schwinn and Nautilus treadmills will begin to appear on the floor this month. As always, sell-in of our retail products is just the first step of the process and success of our product lines is ultimately measured by end consumer sales and acceptance. We'll continue to monitor point-of-sale performance for all of our products as we enter the peak season. We're encouraged by the gains we've made in the past 18 months and are optimistic about our ability to continue to expand our Retail business. It's important to note that even with the gains we've made to-date, we still represent a small share of the overall retail market. We feel that there is still more work to do and ample space available to gain further market share and floor space at our key retail partners through ongoing product innovation.

Investment in that product innovation continues to be a key focus area for Nautilus. As Sid noted, our research and development expenses continued to grow in Q3. This is important as our current and future growth will be fueled by maintaining a regular cadence of new product introduction in both our Retail and Direct business units. To that end, we recently showcased several new products in our pipeline at an event in New York City. At the show, we highlighted the features and capabilities of our new Nautilus line of cardio products, as well as our Nautilus and Schwinn branded treadmills, which represent our first entries into the treadmill category in several years. Treadmills are the single largest category in retail fitness and we feel our four new treadmill SKUs provide a great first step back into this important area of equipment.

We're very pleased with the early feedback on our Nautilus line of cardio products, which have a unique look and feel, extensive use of Bluetooth technology to help users measure their performance while working out and these products are fully international compliant. The Nautilus brand is our strongest brand for the world stage, and these products represent an opportunity to further advance our international efforts, while reintroducing this well recognized and favorably viewed brand in the US home fitness market. Our Nautilus cardio products and our treadmill line are shipping to our retail partners now, and they will be available later this month.

At the New York event, we also demonstrated an early prototype of our new Bowflex SelectTech 560 Dumbbell. The SelectTech 560 features two key elements. First, a significant redesign and an improvement on the original SelectTech 552 design, including the ability to upgrade to 100 pounds. Secondly, we plan to introduce digital integration and rep counting technology to the product. The SelectTech 560 project is continuing through our development phase and we anticipate availability of the product in 2015.

Lastly, at our product showcase, we previewed our new line of nutritional products called Bowflex Body. Created by a team of nutritional chemists and nutrition industry veterans, Bowflex Body is a line of products that can be used as a pre or a post workout energy booster, as well as a meal replacement with all the necessary nutrition. Its effective formula will help activate metabolism, support the immune system, build muscle, burn calories, provide energy and refuel the body. The Bowflex Body Shape product includes a base vanilla flavor, along with three available boosts, each with a distinct set of benefits, ranging from fat burning to protein boosting, as well as antioxidants. Our lineup also features two additional energy formulas, Pre-Workout Energy and Daily Energy, which can be easily mixed with water. Bowflex Body features premium ingredients, leading to a low-calorie, high nutrition content product that's adaptable to the goals of our customers.

Our decision to enter the nutrition space arose out of market and customer research. Many of our current customers have been asking us to offer this type of product to complement and enhance their ability to achieve their fitness goals. The space is crowded and confusing and our customers trust us to provide one solution with no confusion. We conducted internal research and learned that over 50% of our current customers are using some form of nutritional supplement and most often it is [shaked] along with energy booster. Further depending on the source of data you wish to reference, the size of the nutritional supplement market in the United States is 5 to 20 times larger than the fitness equipment market, indicating that we have a substantial opportunity. We feel that these nutrition products are a strategic addition to our product mix, are in line with our long-term strategy of leveraging our strong brand heritage while diversifying our product portfolio.

Bowflex Body will initially be offered to our existing customer base, as well as in trial form to new Bowflex customers and via e-commerce. This approach will allow us to gauge long-term interest in a low risk manner. Bowflex Body will be available for purchase later this month.

Turning now to our operations, our new Ohio distribution center is now fully functional. With this center on line, our normal shipping time is reduced to less than five days across the US as compared to 10 to 12 days previously. Further, our initial experience rate for delivery since opening the new Ohio DC is three days to the consumer on average. While we will incur some initial increase to operating expense associated with this facility, we expect that the operational efficiencies and improved customer service levels to more than offset cost. Continually improving our service level is a key to competing in the North America market where consumer expectations for immediate shipment and fast delivery are becoming the norm versus the exception.

In summary, we have great momentum across all aspects of our business as we begin the final quarter of 2014. We are excited to track the progress of our new products, while continuing to execute on further product innovation.

And with that, I'd 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 make a few final summary comments. As mentioned, we are pleased with our accomplishments to-date in 2014 and how we are positioned entering the peak season for fitness equipment sales. While we have made tremendous progress in terms of growth and profitability, we still have work ahead of us to reach the full potential of our Company. We will continue to expand and diversify our product offerings where it makes strategic sense and supports our objective of continued profitable growth. Concurrently, we intend to extend our global presence and increased consumer access points via both our Retail and Direct businesses and partners.

Nautilus is still in the early stages of the journey to realize its full potential. During the last three years, we have transformed the Company and significantly improved operating performance, while at the same time we're building processes, infrastructure and platforms to support more growth in the future. We are now in a strong position to leverage some of those growth platforms, while adding new ones. Two examples of new growth platforms include revitalizing the Nautilus brand for home use products with a higher [speced] cardio line and our selective entry into the nutrition market. The new nutrition line is a natural and complementary extension of our Bowflex brand that also satisfies our customers' desires for a comprehensive fitness solution.

Given our progress to date, we can focus on prioritizing options as it relates to optimal deployment of capital that will strengthen our Company while supporting our objectives of growth and creating long-term shareholder value. At this time, the highest priority for use of capital is to invest in internal growth initiatives.

Secondly, in order of priority, are opportunities to acquire intellectual property, product lines for companies that could accelerate growth and greater leverage our platforms and initiatives, while also being accretive to earnings. We are following a highly disciplined process as we look at potential acquisition opportunities and will seriously consider only those opportunities that we believe enhance shareholder value.

Third, in order of priority, are options related to returning capital to our shareholders. We recognize that the Company's strong balance sheet and operating cash flow provides the flexibility to further that possibility in the context of the priorities just mentioned. Today, we announced that the Board of Directors has authorized a stock repurchase program providing for the purchase in the aggregate of up to $15 million of the Company's outstanding common stock over the next 24 months. The program is intended to create shareholder value by making opportunistic stock repurchases during periods of favorable market conditions and the timing of such purchases will be based on a variety of factors, including stock acquisition price, applicable legal requirements and other market and economic factors.

A primary consideration in executing any of the capital deployment strategies just mentioned is to ensure that we continue to maintain a strong balance sheet and deliver on our long-term profitability and growth targets. Our overriding desire is to be good stewards of the Company's resources in the interest of providing attractive returns for our shareholders. The process will take time and we are applying the same level of diligence and careful consideration as we do with other strategic decisions.

In closing, I want to express how extremely proud I am of our team and thank them all for their hard work and dedication to Nautilus. That concludes our prepared remarks. Now I'd like to open up the call for questions. Operator?

(Operator Instructions) Lee Giordano, CRT Capital.

My question is on the Retail business. Can you just talk a little bit about the amount of the shifts in sales from the fourth quarter into the third and how big that might have been and then maybe talk about what kind of expectations we should think about going into the fourth quarter for the Retail business? Do you think we can still have positive growth versus tough comparisons?

Hi Lee, this is Bill, thanks for the question. On the Retail side, there's always some timing right around the cut-off between late September, early October, and in this case, we saw our retailers looking to take product as soon as possible, especially in the case where it was Schwinn product that was performing well for them. So retail business still would have grown and grown closer to our annual growth rates despite this move and we'd also anticipate continuing to grow in Q4.

And then just secondly on the international part of the business, can you talk about how big is international at this point in time, and what countries are you in at this point and is the Nautilus brand treadmills, are they also outside the US this year, is that down the road?

Yes, I'll start with your last question first, Bill again. The treadmills internationally are compliant. They'll be first entering the market in 2015, though, later -- early in 2015. On the international growth, we've indicated that we look to double our sales over what we disclosed in our K earlier this year. We believe we're on track to beat that and we're pretty much in there where you'd expect us to be globally. We're in Europe, we're in Southeast Asia, mainly Australia and New Zealand and we've pretty good presence in the Middle East as well. But it's really much like our US and Canada position. We're in a lot of places, we just need to take more share in those places, and we believe that the Nautilus brand will help us do that.

Andrew Burns, D.A. Davidson.

Just a follow-up on the Retail side. Now that you've had some Schwinn product in stores for a year now, what have you learned relative to this initial expectations from a year ago?

Hey, Andrew. Bill again. I'd tell you, I think what we've learned is, is our commitment to product development and consumer insights and research is paying off. The success of the Schwinn product from a year ago and it's continued acceptance in store this year is all due to what we learned from that research and frankly building a better product that was more in line with what the consumer wants. We believe we've applied those same principles to the Nautilus [productivity] now, as well as the treadmills. But we recognize ultimately the consumer will be the judge of that, but in terms of what we learned it really is about that. We have the brands, we have the capability, we really needed to get in touch with the consumer and make products that appeal to them.

And on the strength side, is the SelectTech 560 a big enough product launch to potentially stabilize strength in Direct or how do you think about that sort of overall category and potential for growth over the next several years?

Well Andrew, I think that we think there is a lot of potential in the strength category overall. We're devoting R&D cycles to producing products in our pipeline that we think will help address the decline on the Direct side and shore up Retail too, which can always use help. The 560 itself it's hard to say [this] certainly. We think that SelectTech is a very good category for us, it's a profitable category and we haven't done a lot with it. So in that regard, we feel optimistic about what the 560 could do for us. But in terms of turning around, the strength fortunes in Direct, there is also the decline in the raw gyms there. So I'm not sure that any one product will completely reverse that. But again the numbers are getting pretty small on the strength side in Direct.

On more and I'll jump back in the queue. Lot of moving parts on the royalty side, could you sort of update us on how to think about the headwinds and tailwinds to that line of the business going forward, considering the Nautilus commercial products, the TreadClimber commercial products, that there are some headwinds as well?

Andrew, this is Sid. I mean as you point out, and I think we've said this on prior calls, certainly with the transition of the Nautilus commercial, we had anticipated in the second half being a little more difficult than what we had posted in the prior year. We probably see that extending into the first half of -- at least the first half of 2015. And so there's a few things coming in, but there is also a few items going out. So I would say, I think as we've cautioned on prior calls, not to -- certainly in the near-term, not to really anticipate much upside from where we're tracking this year.

Frank Camma, Sidoti.

Couple of quick questions. You mentioned that TreadClimber is still the largest product for you, but I wasn't sure, did you say -- were sales door increasing there? Did you see some declines based on the MAX Trainer, I was wondering if you can comment on that?

The TreadClimber is not growing at the pace MAX Trainer is and we generally don't give specific details. But I'll say the TreadClimber has seen a slight decline last quarter.

Okay, yes, that makes sense.

But it's still up year-to-date, I would notice that (multiple speakers).

Right. Yes, I knew that from last [quarter].

And we'd expect, it's normal if you think about it. People are going to -- we're going to drive people as often as we can to consider our products online and get the additional information we have there. And so, when they get to bowflex.com, we would expect people to shop and see what other offerings we have. So it's perfectly normal for us in the past when we've had multiple products on TV to have that sort of cross behavior go on and then a new equilibrium will be reached. But as long as we plan our media accordingly, it's all positive.

Can you comment on if you're spending more in absolute dollars on one versus the other or just on a acquisition base -- customer acquisition base, just wonder if you could give us some color on that?

We don't disclose that. Frankly, I can't say we do spend more on TreadClimber advertising than we do on MAX Trainer advertising.

And I was just wondering, is there -- have you noticed like a different demographic there, are you seeing more of -- the MAX trainer appeal more to men, or is there anything there, just looking at the commercials and stuff, I was just wondering if it appeals more to the -- like hard core -- I mean obviously it's more geared towards a hardcore workout person. I was just wondering if it skews more to one type or the other?

We are seeing -- we have target demographics that we are aiming at for both TreadClimber and MAX, and we would like to see a little differentiation there, as it helps with the advertising. We are seeing a good healthy populace response to MAX, though, across the board. It is slightly younger than TreadClimber, but only slightly, and it has a healthy male/female mix. So -- it's the one demographic that we can't say for sure that's been very positive on MAX so far. We mentioned in our comments was that the credit scores of the MAX respondents to-date, the early adopters, has been quite strong compared to even TreadClimber customers.

Yeah, that was curious. You kind of mentioned three sub-reasons there, or you pointed out that obviously the advertising, where you advertise makes sense, whether you are advertising on a certain show or somewhat that would appeal to different economic background. And then you said the Credit Partners was part of it, but the quality of applicants, any idea why higher quality applicants would appeal towards that product or is there -- or you just don't know yet, it's too soon?

Well, it's always hard to say, we'll measure these things, but in general, we believe that it's probably due to early adopters and the product has seen as a tech product. So it's bringing in -- people are interested in the latest and greatest thing and there is generally higher scores there.

(Operator Instructions) There are no further questions at this time, we'll turn it back to the presenters.

Okay, thanks again for everyone's participation and interest in our call today. We will be attending a few investor events over the next few months and we hope to see you there. Either way, look forward to speaking with you at our next year-end 2014 conference call early next year. I hope everyone has a great rest of the day. Thank you.

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.