LifeVantage's (LFVN) CEO Darren Jensen on Q2 2016 Results - Earnings Call Transcript

| About: LifeVantage Corporation (LFVN)

LifeVantage Corporation (NASDAQ:LFVN)

Q2 2016 Earnings Conference Call

February 9, 2016 4:30 PM ET

Executives

John Mills - ICR

Darren Jensen - Chief Executive Officer

Mark Jaggi - Chief Financial Officer

Analysts

Will Hamilton - Manatuck Hill Partners

Operator

Ladies and gentlemen welcome to the LifeVantage’s Q2 Fiscal Year 2016 Conference Call. As a reminder, today's conference call is being recorded.

And at this time I'd like to turn the conference over to Mr. John Mills of ICR. Please go ahead sir.

John Mills

Thank you. Good afternoon, ladies and gentlemen and welcome to LifeVantage Corporation's fiscal second quarter 2016 conference call. On the call today from LifeVantage with prepared remarks are Darren Jensen, Chief Executive Officer; and Mark Jaggi, Chief Financial Officer.

By now everyone should have access to the earnings release which went out this afternoon at approximately 4.15 Eastern Time. If you have not received the release, it is available on the Investor Relations portion of LifeVantage’s website at lifevantage.com. This call is being webcast and a replay will be available on the company’s website as well.

Before we begin we'd like to remind everyone that our prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of the management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of LifeVantage’s most recently filed Form 10-Q and 10-K. These risk factors contain a more detailed discussion of factors that could cause actual results to differ materially from those projected in any forward-looking statements.

Please note that during today's call we'll discuss non-GAAP financials measures, including results on adjusted basis. We believe these financials measures can facilitate a more complete analysis and greater transparency into LifeVantage's ongoing results of operations, particularly when comparing underlying results from period-to-period. We have included a reconciliation of these non-GAAP measures with today's release. This also contains time sensitive information that is accurate only as of the date of this live broadcast, February 9, 2016. LifeVantage assumes no obligation to update any forward-looking projection that may be made in today's release or call. Based on the number of participants on today's call during the Q&A session we ask that you please limit the number of your questions to three.

Now, I will turn the call over to the company's CEO, Darren Jensen.

Darren Jensen

Thank you, John and good afternoon everyone. We are pleased to report second quarter top line growth on both the sequential and year-over-year basis. Our revenue was $52 million, which represents 14.6% increase compared to the first fiscal quarter of 2016 and 7.8% increase compared to the prior year period. This also includes 7.3% sequential growth in our Japanese market, which is the first improvement in this market in nearly three years.

Improved sales are attributable to execution on our growth strategy including new product launches and enhanced distributor engagement and it affirms that our business is turned around and is moving in the right direction.

Adjusted EBITDA increased 7.4% to 4.5 million in the second fiscal quarter of 2016, compared to 4.2 million in the prior year period. We are pleased to continue to generate healthy cash flow as we make strategic investments to better position our business for a long-term growth.

While these investments have had an impact on our near-term results, we’re confident that they will also position the company for continued profitable growth. When I joined LifeVantage, the company was in a cost cutting mode rather than a revenue generating mode.

Under our new management team, we are focused on executing a growth strategy and have already achieved improved top line performance. We continue to be prudent with our spending, but recognize that certain upfront investments are crucial in order to put LifeVantage on a sustainable growth trajectory.

In addition to investing in the various components that are part of our 8 point growth strategy that we’ve discussed at length on previous calls, I would like to briefly discuss an additional area of investment that we made in the second quarter.

As those of you that follow our industry are aware, the regulatory environment is constantly involving and over the past several months, we’ve seen new regulatory guidance come into play. We have proactively taken steps to ensure that we are fully in compliance with this ever-changing regulatory landscape.

Despite the fact that we are a relatively small company when compared to others in our industry, we believe that we are the industry leader in terms of setting a standard for compliance. While these investments resulted in some additional expense that was not previously factored into our guidance, we will benefit in the long-term.

Mark will go over our financial results in more detail and provide an update on our annual guidance.

We continue to execute on our 8 point growth strategy that takes a deliberate approach to position LifeVantage for improved financial performance in fiscal 2016 and beyond. Accelerated product innovation is one of the key components of our growth strategy. And I’d like to provide an update on our progress with this important initiative.

In the second quarter, we launched the PhysIQ Smart Weight Management system, which includes fat burn, pro-bio and protein shake for distribution in the United States and Canada. PhysIQ fits perfectly within our philosophy of science-based products that are safe, effective and easy to share.

It is a comprehensive line formulated to immediately begin to recharge and rebalance the body’s internal weight management system. PhysIQ is distinctively positioned to meet the rising market demand for weight management products.

According to The Global Weight Loss and Diet Products Industry Report in 2014, the weight loss and weight management market represented $148 billion worldwide with $64 billion in the United States alone. The weight management market represents a significant untapped opportunity for LifeVantage.

We first launched the product at a first of its kind for LifeVantage live cyber launch that was broadcast worldwide through our company website. The live telecast was viewed in 21 countries and had an estimated audience of nearly 50,000 viewers, while it’s still very early.

We have been encouraged by the initial adoption of the product line, feedback from distributors has been positive, and confirm that this is exactly the type of product that will help them accelerate the growth of their business. We plan to launch PhysIQ in international markets throughout the remainder of fiscal 2016 and throughout fiscal 2017.

In addition in the second quarter, we also expanded our revolutionary TrueScience Skin Care system with the launch of Micro Lift Serum. Looking ahead with new product launches we will focus on both expanding lines within our existing brand as we did with the launch of TrueScience Micro Lift system as well as strategically introducing new brands such as PhysIQ.

We also expect to introduce a complementary product to Protandim during the fourth fiscal quarter of this year. While developing and launching new brands requires more upfront investment, our research indicated that there are significant opportunities to expand our product offerings, which makes the imperative to enhance our product portfolio. Over the long-term our product development focus will be to continue expanding existing lines and launching them globally.

Another important component of our growth strategy where we have made tangible progress, is enhancing our technology to facilitate more efficient and effective business building for our distributors. At our global convention in October, we launched LifeVantage Pro, a proprietary mobile back office application specifically designed for our network of independent distributors.

The LifeVantage Pro app provides distributors access to their personal businesses in real-time and allows them to prospect from their contact list, place orders, view up-to-date business qualifications and enroll people in their organizations, all directly from their smart phone, We are committed to being a leader in the new technology paradigm taking shape within our industry.

Since its launch, thousands of distributors have downloaded the app and we have received positive feedback and we believe this is one of the factors that has led to our increased revenue.

Now, moving into our progress with international expansion initiatives, since announcing our plan to expand our footprint into the European Community, our team has been working diligently to prepare for a launch in the United Kingdom and the Netherlands. LifeVantage has no prior presence in Europe and this region represents an incredible growth opportunity for us.

According to the World Federation of Direct Selling Associations, Europe represents a $33 billion market with 14 million direct sellers participating. We have just returned from a pre-market or a prelaunch meeting in the UK and are excited to finalize our product after registrations and expect to be opening there shortly. Historically Europe has been a very consistent stable region that is very product focused, consumer oriented area and we look forward to methodically building our business there.

In summary, we’re encouraged by what we have accomplished in the first half of fiscal 2016, particularly our return to both year-over-year and sequential sales growth. Our growth strategy was designed to enable us to realize its benefits beginning in fiscal year 2016, with accelerated and further improvement in coming years as our initiatives take hold across our entire global organization.

We launched our new products including a new brand, positioned our company to enter new international market, adapted to the ever-changing regulatory landscape and brought in new technologies that will ultimately better position our business for long-term growth. Implementing these growth drivers has required a certain level of investments which will pay off in coming quarters and years.

We are still in the very early stages of executing on our growth strategy and have a solid platform to operate from. We look forward to continuing to capitalize on the robust opportunities that lie ahead for LifeVantage.

With that, I'll turn the call over to our CFO, Mark Jaggi.

Mark Jaggi

Thanks, Darren. Good afternoon everyone. For the second quarter ended December 31, 2015 we reported revenue of approximately $52 million. Revenue increased 14.6% on a sequential basis compared to 45.4 million in the first quarter of fiscal 2016 and increase also 7.8% versus revenue of 48.2 million in the second quarter of fiscal 2015.

On a sequential basis, revenue in the America increased 15.3% and revenue in the Asia-Pacific region increased to 12.4%. On a year-over-year basis second quarter of fiscal 2016 revenue in the Americas increased 14.3% and revenue in the Asia-Pacific region declined to 9.6% primarily due to lower sales in Japan. However, we are pleased to report that we believe we are seeing stabilization in Japan, and on a sequential basis, sales in the second quarter were actually up 7.3%.

Revenue for the quarter was negatively impacted 0.9 million or approximately 1.9% by foreign currency fluctuations. Looking at our customers we ended the second quarter of fiscal 2016 with 67,000 total active distributors. This represents an increase from 64,000 at the end of first quarter of fiscal 2016 and is a testament to our success in improving distributor engagement and attracting new distributors as part of our growth strategy.

The number of preferred customers at the end of the second quarter of fiscal 2016 was 117,000, an increase when compared to 114,000 at end of first quarter of 2016. Our gross profit margin and gross profit for the second quarter was 84.9% and 44.2 million respectively, compared to 84.6% and 38.4 million in the first fiscal quarter of 2016, when compared to 85% and 41 million for the second fiscal quarter 2015.

Commission and incentive expenses for the second quarter were 52.5% of revenue compared to 48.6% of revenue in the first fiscal quarter of 2016 and compared to 48.1% of revenue in the same period last year. The increases are due primarily to the faster rate of growth and rank advancements of distributor networks, the adaptation of the regulatory landscape and distributed growth initiatives.

SG&A expense for the second quarter was 26.6% of revenue compared to 30.1% of revenue in the prior sequential quarter and compared to 30% of revenue in the same period last year. Second fiscal quarter of 2016 SG&A include cost associated with new product launches and initiatives to enhance business building technology among other strategic investments to position the company for long-term growth. In addition as we discussed in our last quarter’s call, we completed the reverse stock split in the second quarter which also added onetime costs.

Operating income for the second quarter of fiscal 2016 was 3.0 million compared to 2.7 million in the first fiscal quarter of 2016 and compared to 3.1 million in the second fiscal quarter of last year. Operating income for the second quarter fiscal 2016, includes the previously discussed investments that to drive future sales and profitable growth; it also includes 0.5 million in executive team transition cost and expenses associated with the Company’s reverse stock split.

Adjusted EBITDA was 4.5 million for the second quarter of 2016 compared to 4.2 million in the prior year period.

Net income for the second quarter was 1.6 million or $0.11 per diluted share calculated on approximately 14 million fully diluted shares. This compares to 1.5 million or $0.10 per diluted share, calculated on 14.4 million fully diluted shares in the same period last year. Please note the share counts for both periods reflect post-reverse stock split amounts.

On a tax adjusted basis the previously mentioned one-time charges were $300,000 for the quarter resulting in adjusted net income of 1.9 million for the second quarter fiscal quarter of 2016 or $0.14 per diluted share compared to 1.5 million or $0.10 per diluted share for the comparable period last year.

Turning briefly to our year-to-date results for the first six months of fiscal 2016, revenue was approximately 97.3 million compared to 99.9 million in the prior year period. Revenue in the Americas increased 4.6%, while revenue in Asia-Pacific decreased 20.5%, due primarily to lower sales in Japan. Foreign currency fluctuations negatively impacted our first six months revenue by 2.8 million or 2.8%.

Operating income for the first six months of fiscal 2016 was 5.7 million and includes the impact of the investments in SG&A in the second quarter that I referenced earlier in my remarks. This compares to 10.9 million in the prior year period.

Adjusted EBITDA was 8.9 million for the first six months of fiscal 2016, compared to 11 million in the prior year. For modeling purposes please note, that the first six months of fiscal 2016 operating income and adjusted EBITDA include the benefit of approximately $2 million of proceeds recovered and related to the companies December 2012 product recall.

Net income for the first six months of fiscal 2016 was 2.7 million or $0.19 per diluted share, compared to 6.2 million or $0.43 per diluted share in the prior year period. Adjusted net income for the first six months of 2016 was 3.7 million or $0.27 per diluted share compared to 4.8 million or $0.34 per diluted share in the same period last year.

Turning to our balance sheet, our cash and cash equivalents as of December 31, 2015 was15.8 million, compared to 13.9 million at the end of fiscal year 2015. In the second fiscal quarter of 2016, we generated cash flow from operations of 8.5 million, compared to 8.0 million in the second fiscal quarter of 2015, which again includes the $2 million benefit from the insurance proceeds last year.

We repaid 6.8 million of debt during the first six months of fiscal 2016. We have a strong balance sheet and we are in the process of exploring our options to refinance debt that would free up some cash flow that we can use to invest in our growth strategy. We will report back to you on our progress on our next call.

Now, I would like to review guidance, in fiscal 2016 we continue to expect to generate full year revenue in the range of 195 million to 210 million, representing a 2% to 10% increase over fiscal year 2015. Based on increased investments associated with revenue driving initiatives we will experience lower operating margins compared to our previous guidance.

We expect adjusted non-GAAP earnings per diluted share in the range of $0.50 to $0.60 and we expect our GAAP earnings per share range that includes the previously mentioned one-time cost to be in the range of $0.42 to $0.52 earnings per diluted share. This does not include one-time costs associated with the potential debt refinancing. This is based on an estimated 14 million diluted shares and a 36% tax rate.

So at this point, I would like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator instruction] And we will go to Will Hamilton with Manatuck Hill Partners.

Will Hamilton

Hi guys, just a question on the higher compliance cost you were mentioned earlier, roughly how much was that in the quarter? How much you expect sort of for the year.

Mark Jaggi

You mean the absolute value of the compliance cost?

Will Hamilton

Yes, that will be helpful.

Mark Jaggi

Well, they come from couple of different places and rather than give you a specific exact amount, somewhere north of couple of hundred thousand dollars so we are in the 300 plus 1000 dollar range on the right now. Fair enough?

Will Hamilton

Yeah, okay. That’s helpful. And just in terms of the EPS guidance I think previously talked about being at the lower end that range anyway, but have you pulled forward any growth over these growth initiatives or because of the results you are seeing on the top line strengthen them or added other investments just to get a sense there.

Darren Jensen

You are asking - it sound like you’re asking if we pulled forward growth from future periods is that what the question?

Will Hamilton

No, I’m sorry, you pulled forward any expenses or add to any of the gross investments because of the results you’re seeing in terms of the top line, obviously the top line reversed nicely and it grew in the quarter which is the first in whatever, five or six quarters, so I was just wondering if you had –pulled stuff forward or increased amount of investments you are doing that lead you to the EPS guidance.

Mark Jaggi

Yeah, the answer is, we have pull forward some. Mostly we’ve added a few things in, so it’s - Frankly we’ve done a lot of incentive work, right, to get started, to get things moving. When we started here we had - last year’s earnings was - last year’s revenue was 190 million, but the reality is, our run rate was below 180 million, probably closer to 175 million. So when we got started and got into Darren’s 8 point plan, we spent all - most of our time in our first quarter just getting that 8 point plan launched in and we did a good job there, so I feel like that really worked well. And as we started seeing some real traction, yeah, we pulled forward a little bit of gas on the fire. So we have added a little bit into those.

Darren Jensen

So as Mark was saying, this is Darren, when we first started, I think the decline in the sales was little acute than what we had anticipated. As market said, it was probably in the 175 million range of where we started and not in the 190 range. So we feel - that’s why I’m very pleased that we feel comfortable with our revenue guidance still. And as you’ve seen form the second quarter, we feel that we are starting to get some traction with the new programs. The adoption into the distributor for seems to be going well and we remain positive.

Will Hamilton

All right, yeah, I mean the top line is definitely encouraging and I mean you’re back around 200 million run rate, where do you think you exit the year, this fiscal year in terms of top line run rate.

Mark Jaggi

You mean in terms of revenue.

Darren Jensen

I would go back to our guidance of - yeah, I go back to our guidance of - right now we just reaffirmed it, somewhere between 195 to 210.

Mark Jaggi

Yeah, the run rate is stronger, right. The run rate is definitely stronger 195 to 210, but having yielded a first quarter of 45 million and stabilized, we don’t want to - we like the run rate, we’ll continue on that run rate and start growing from there, but we’re one half of the way through the year, so.

Will Hamilton

And the last question from me just on the commission side of things, at a little north of 52% of sales is that sort of a good run rate right now or would you expect it to maybe sort of leverage that in the second half of the year?

Darren Jensen

I would say that right now a lot of the - as we mentioned earlier that, with that 52% is not going to be permanent, but right now it’s part of the increase due primarily to the faster growth of rank advancements of distributors as well as to our distributor growth initiatives that we have. So as the business continues to accelerate, we already have plans to begin moderating those to a certain extent. I mean, I don’t think we have to keep our foot down as hard on the gas to get it going. So I think we’ll start to see that come back down and - but for - I would say for the next quarter or two, we want to make sure that the growth that we’re seeing on the top line continues, so we’ll continue to, I guess using the analogy, keep our foot down on the pedals for a while, but I wouldn’t say that it’s permanent, no.

Will Hamilton

Thank you.

Operator

[Operator Instructions] And we have no questions holding at this time.

Darren Jensen

Alright, well, thank you everyone for joining us today. We appreciate your continued interest and loyalty to our company. We look forward to speaking and meeting with many of you over the next few months. Have a good day everyone. Thank you.

Operator

And this does conclude today's conference everyone. We thank you for your participation. You may now disconnect.

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