LifeVantage Corporation (LFVN) CEO Darren Jensen on Q1 2019 Results - Earnings Call Transcript

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About: LifeVantage Corporation (LFVN)
by: SA Transcripts

Start Time: 16:30 January 1, 0000 5:05 PM ET

LifeVantage Corporation (NASDAQ:LFVN)

Q1 2019 Earnings Conference Call

November 01, 2018, 16:30 PM ET

Executives

Darren Jensen - President and CEO

Steve Fife - CFO

Scott Van Winkle - ICR

Analysts

Steven Martin - Slater Capital

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to today’s Conference Call to discuss LifeVantage’s First Quarter Fiscal 2019 Financial Results. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up. Hosting today’s conference will be Scott Van Winkle with ICR. As a reminder, today’s conference is being recorded.

And now, I would like to turn the conference over to Mr. Van Winkle. Please go ahead, sir.

Scott Van Winkle

Thank you. Good afternoon, ladies and gentlemen, and welcome to LifeVantage Corporation’s conference call to discuss results for the first quarter of fiscal 2019. On the call today from LifeVantage with prepared remarks are Darren Jensen, Chief Executive Officer; and Steve Fife, Chief Financial Officer.

By now, everyone should have access to the earnings release which went out this afternoon at approximately 4.05 p.m. Eastern Time. If you’ve not received the release, it’s available on the Investor Relations portion of LifeVantage’s Web site at www.lifevantage.com. This call is being webcast and a replay will be available on the company’s Web site 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 the current expectations of the company’s management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of LifeVantage’s most recently filed forms 10-Q and 10-K.

Please note that during today’s call, we will discuss non-GAAP financial measures, including results on an adjusted basis. Management believes these financial measures can facilitate a more complete analysis and greater transparency into LifeVantage’s ongoing results of operations, particularly when comparing underlying operating results from period-to-period. We’ve included a reconciliation of these non-GAAP measures with today’s release. This call also contains time-sensitive information that is accurate only as of the date of this live broadcast, November 1, 2018. LifeVantage assumes no obligation to update any forward-looking projections that maybe made in today’s release or call.

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

Darren Jensen

Thank you, Scott, and good afternoon to everyone. I’m pleased to join you today to discuss our first quarter results. We had a strong start to our fiscal 2019 with 13% year-over-year net sales growth during the first quarter and continued sequential growth.

We grew active member counts both on a year-over-year basis and sequentially, are seeing good retention rates and continue to drive higher average order sizes. As a result of the sales momentum, we are increasing our revenue guidance for fiscal 2019 which Steve will discuss momentarily.

I would like to note that even the low end of our new revenue guidance range would represent the highest annual revenue in our company’s history. We believe that the improved trends we have seen over the last year as well as our confidence in our fiscal 2019 outlook are a reflection of the key initiatives we have implemented over the last year and will continue to execute upon during 2019.

We remain focused on our key growth drivers including increasing average order size, geographical expansion, product innovation and driving distributor and customer acquisitions. Each of these initiatives contributed to the continued sequential growth during the first quarter.

We had a strong contribution from our Red Carpet program which is focused on distributor acquisition, a very successful launch in Taiwan which reflects our geographical growth initiative and our stacks continued to increase average order size. The opening of Taiwan at the beginning of the first quarter completed our Greater China footprint and has been one of our most successful new market launches to-date.

During September, Taiwan was our third largest market in terms of sales. We also had further enhancements coming to our Greater China strategy this year as we fine tune our Mainland China programs over the coming quarters.

We also continued to develop our European footprint during the first quarter with the launch of Austria. This new market was a national expansion given our operations in Germany and the overlap with many of our German distributor groups.

Last week at Global Convention, we announced plans for five additional European markets to begin in the second half of the fiscal year. These new market opportunities includes; Spain, Greece, France, Belgium, and Ireland. Our expansion into these markets is being driven by distributor demand.

Also during our highly successful Global Convention, we launched our newest product innovation True Science hair care. We saw strong response to the introduction selling through nearly all of our inventory. The response from our distributor leadership and customers has been overwhelmingly positive. We are excited to enter this promising new product category.

Hair care is an $89 billion global industry expected to grow to over 110 billion by 2024. It has favorable attributes such as it is daily used and is a non-permission category meaning that the purchase is not something the spouse typically needs to approve. We believe our new line is a complementary category that fits very well into our product portfolio.

In addition to innovation, we continue to expand our core products into our international markets. We recently launched Nrf1 in Australia with a strong customer response that drove good sales momentum during the first quarter.

As I noted, the Red Carpet program continued to add to growth. And along with our Pace Setter program, we are seeing new member acquisitions increase, strengthening within our distributor leadership rank with consistently strong retention.

We are also experiencing strong adoption of our LV digital platform which continues to develop and is enhancing the success of our distributor activities. Thus far we have more than 16,000 downloads of the app and early indications show that these distributors who are actively using it are enrolling three times as many new members than those who were not. Each of these initiatives contributed to the improved active member count during the first quarter.

As we discussed on our last call, our goals for fiscal 2019 are to drive our global business with the acquisition of new distributor leaders, launch of new product, expanded availability of our existing product internationally, new market development and driving adoption of our LV digital platform. We are progressing on plan with our 2019 initiative and are pleased with the results to-date, which are evident in both ourselves and active member trends.

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

Steve Fife

Thank you, Darren, and good afternoon, everyone. I’m very pleased to report our first quarter results. We generated another quarter of both year-over-year and sequential revenue growth and sales are running ahead of the plan to-date.

Please note that I will be discussing our non-GAAP adjusted results. You can refer to the GAAP to non-GAAP reconciliation in today’s press release for additional detail.

First quarter revenue was 55.6 million, representing a 13.2% increase year-over-year and a 2.9% sequential increase when compared to the fourth quarter of fiscal 2018. Revenue in the Americas increased 13.6% to 41.1 million and revenue in Asia Pacific and Europe increased 12.1% to 14.5 million, all year-over-year.

Those regions also reported growth on a sequential basis with revenue in the Americas increasing 1.4% while revenue in Asia Pacific and Europe increased 7.5%, reflecting the very successful launch in Taiwan.

Gross margin was 83.5% compared to 82.2% last year, primarily reflecting the benefits of a price increase during the second half of fiscal 2019 and changes to product and market mix.

Commissions and incentive expenses as a percentage of sales increased 240 basis points to 50%. The year-over-year increase is due in part to the success of our Red Carpet program and Pace Setter promotion during the first quarter.

We also held multiple incentive events during the quarter and saw other typical variations that occurred based on revenue mix each period. Our target commissions and incentive remains 48% which will fluctuate based on the timing and magnitude of promotion and incentive programs.

Adjusted SG&A as a percent of sales were 30.8% compared to adjusted SG&A as a percent of sales of 31.1% a year ago. While the SG&A expense percentage improved on a year-over-year basis, the total dollars increased due to three distributor events compared to two in the prior year period and compared to one during the fourth quarter, as well as increased stock compensation expense as a result of our increasing stock price and higher staffing levels reflecting additions made in the second half of fiscal 2018. The impact of the timing of events and increased stock compensation expense contributed approximately $1 million of higher SG&A than the prior year period.

Adjusted operating income was 1.5 million compared to 1.7 million in the prior year period. Adjusted EBITDA for the first quarter increased 22.5% to 3.3 million compared to 2.7 million in the prior year period.

Given the higher stock-based compensation as well as an increase in our fully diluted shares resulting from our increased share price, we believe EBITDA will be a better reflection of cash profitability growth this year.

While our adjusted EPS guidance, which I will discuss in a few minutes, reflects growth in the range of 6% to 14%, we anticipate approximately 10% to 20% growth in adjusted EBITDA during fiscal '19.

Our effective tax rate for the quarter was 21.8%, down significantly from the prior year period. This is due mainly to the tax reform enacted during December 2017 which reduced the federal corporate tax rate to 21%, and due to stock compensation-related discrete items benefitting the rate during the quarter. Our tax rate may be subject to variations resulting from significant discrete items occurring in future quarters.

Adjusted net income was $1 million or $0.07 per fully diluted share consistent with the prior year period. As I noted, all the adjustments from GAAP to non-GAAP are reconciled in our earnings press release.

Turning to the balance sheet. We ended the first quarter of fiscal 2019 in a strong financial position with 17.1 million in cash compared to 4.9 million of debt. During the first quarter, we generated 2.4 million of cash from operations relatively consistent with the 2.5 million in the prior year period.

We invested roughly $100,000 in capital expenditures, issued a $1.4 million convertible note to our technology development partner and paid down 0.5 million on our term loan. We continue to anticipate our 2019 capital expenditures will be $1 million to $1.5 million.

Turning to guidance. We are increasing our fiscal 2019 revenue guidance to a range of 215 million to 225 million, up from our prior range of 210 million to 220 million. We are maintaining our adjusted diluted earnings per share guidance in the range of $0.54 to $0.58.

As we have noted, the increase in our stock price since the end of June has led to both a higher diluted share count, which increased 1 million shares year-over-year during the first quarter, and higher levels of stock-based compensation costs.

We are now estimating that stock-based compensation costs will be $1.5 million to $2 million higher during fiscal 2019 than what was contemplated in our initial guidance. The increased stock comp and higher share count are the reasons our adjusted EPS outlook is unchanged while we increased our revenue guidance. However, we are expecting great leverage on adjusted EBITDA which excludes the impact of these items.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. We will now take our first question from Steve Martin from Slater. Your line is open. Please go ahead.

Steven Martin

I didn’t expect to get the first one. Congratulations guys on major progress.

Darren Jensen

Thank you, Steve.

Steven Martin

So you’re one quarter in and you raised your top line guidance by $5 million at both ends of the range. What are you seeing? And you talked a little bit. Can you give more details about some of the new markets and products that you were comfortable enough to raise it that much that quickly?

Darren Jensen

Yes. I’d say our Q1 results exceeded our expectations and we’re excited. We talked about the geographic launch into new countries in Europe in the second half of the year. Taiwan just came out of the gate really strong. And our Convention – the enthusiasm I’d say that we felt in the Convention including the sale of our hair care product exceeded our expectations. And so a good start in Q1, a very strong October just again driven largely by hair care and what we saw in the Convention, we’re excited about the trajectory that we’re on. So that’s what gave us the confidence.

Steven Martin

And you would boost up your packaging so that your ASPs were higher. Can you talk about that and how that’s progressing, and how the acceptance is?

Steve Fife

Yes, I think in Darren’s prepared remarks we saw a continued increase in our average order size during the quarter. And so that strategy is continuing to payoff. We saw an increase in our asset member counts both distributors and customers and that coupled with the increase in our average order size is really what contributed to the strong 13% revenue growth during the quarter.

Darren Jensen

And – go ahead.

Steven Martin

I was just going to ask, can you give us an idea of what the average order size is or how much it’s grown, or if – some metrics that we can play around in model?

Darren Jensen

Should we talk about how much it’s grown, do you have those numbers? I don’t think – Steve, this is Darren. I’m not sure that we have ever released exactly how much it is. I think that it makes pretty easy to back calculate on certain things. But we’re looking the numbers up right now but while they’re looking those up, let me just say, our concentration on shifting our model from a single product sell to the stacks or bundling of products has been very successful on the average order size. As a matter of fact the hair care product that we just launched was also released as a bundle. And so there were selling multiple products – actually the bundle was a great product. So it’s been a very successful launch for us. Steve, we’re looking up those numbers. When we get them, we’ll let you know what they are.

Steven Martin

Okay. So let’s turn to the expense side. Your comments about commissions and SG&A, how soon can you get commissions back to the 48%? You said you still expected them to be 48, but you didn’t give us a timeframe. Are they just going to drop back to normal in the second quarter or is it going to take the rest of the year?

Darren Jensen

Yes, I think that’s going to ebb and flow. A big driver for that – the increase to 50% this quarter is really driven by our Red Carpet program. And candidly we think that that’s a great investment in our money. The revenue that that is generating versus that initial investment is really paying off for us. And so it will ebb and flow as we bring on new leadership through that program.

Steve Fife

In addition to that, Steve, with the 50% payout, typically when you see the company going through a greater growth period, naturally it can creep up higher because initially our compensation plan pays out a little bit higher front on the first few orders as well as, as we get people at higher levels of rank achieving certain bonuses, it can trigger a little bit higher of a payout. So I think it can be chunky in the way that it comes out depending on who we have promoting at the time or what promotions we have going on. I do have an answer for you on that previous question. Our average order size is up 11.9% over last year.

Steven Martin

And has that got – if I had asked you that question in the fourth quarter, would that have been lower or higher?

Steve Fife

Actually the same.

Darren Jensen

Say that again, Steve?

Steven Martin

If you had answered that question in the fourth quarter, what would that answer have been?

Steve Fife

Actually let me just clarify that. That was the increase over our – what we ended the year, so that was Q4.

Steven Martin

Okay, so that was the sequential.

Steve Fife

That was sequential, yes.

Steven Martin

Okay. Going back to the expenses then, so how do you want us to model those for the rest of the year understanding that commissions are – they’re going to be a little chunky but on the G&A side with the three events now behind you, where should we get to and what should it look like for the rest of the year?

Darren Jensen

Yes, I think our run rate in G&A candidly is going to be about the same as it was in Q1. And in part because the challenge we have is really forecasting and you’ll have is forecasting the variable comp element and specifically the stock comp. But based on our outlook right now, we’re looking at SG&A from a dollar standpoint as relatively flat but we’ll probably see a little bit of a bump, an increase in Q2 because of the Convention. Conventions cost us much more than our Elite Academies. But other than that, we would anticipate that it will ebb really with our events. We have another event in Q3 and then no event in Q4.

Steven Martin

But the event in Q3 and – so you’re saying you have one event in the back half of the year. How would that compare to last year?

Darren Jensen

It will be comparable to last year from an event standpoint.

Steven Martin

Got you. All right, I’ll leave it for someone else.

Darren Jensen

Great. Thanks, Steve.

Steve Fife

Thanks, Steve.

Operator

[Operator Instructions]. It appears there are no further questions at this time. Mr. Jensen, I’d like to turn the conference back to you for any additional – pardon me. We have a follow-up question from Mr. Steven Martin. Your line is open. Please go ahead, sir.

Steven Martin

Okay. I guess we’re --

Darren Jensen

Welcome back, Steve.

Steven Martin

Recognizing that the diluted share count is going to be impacted by options going forward, and you guys have done a great job on the balance sheet, what do you think about being more – and now you have a little more visibility into the business, how do you feel about being a little more aggressive with the buyback recognizing that if you deliver what you think you’re going to deliver, the likelihood of seeing the stock below $10 again is probably pretty whim?

Darren Jensen

Yes. We set parameters at the beginning of this quarter around our buyback and we did not purchase anything during this quarter, but we have evaluated that and established new parameters that lead me to believe that we will be back in the market. And we are also looking at the possibility of just entering into a plan as well so that we don’t have to time our purchases with our open trading windows, like we’re currently doing.

Steven Martin

Okay. And Real Salt Lake, as I recall and I couldn’t find my notes, you guys were revisiting that whole issue given everything and the relationships. Where did you come out on that or where are you coming out?

Steve Fife

Actually a formal presentation will be made here shortly to our Board of Directors. And so we’re still working that through the process and we haven’t made any announcement yet.

Steven Martin

Okay. Thank you very much and I guess I’ll leave it to whoever may want to ask a question.

Darren Jensen

All right. Thanks, Steve.

Steve Fife

Thanks, Steve.

Operator

[Operator Instructions]. We will take our next question from Will Summerton [ph]. Please go ahead, sir.

Unidentified Analyst

Hi, guys, can’t let Steve hog the whole call now. Just a question on the distributor talent. The Asia Pacific region in terms of distributors had a nice sequential and year-over-year pickup which also included I believe Europe as well. So can you just elaborate which of those three areas – I guess two areas are driving that and do you see that picking up further as you’re opening up more markets?

Darren Jensen

All right. Will, thank you. I think you see that occurring in multiple areas. As we mentioned, we had a very successful launch in Taiwan. And last month that market represented our third largest market in terms of revenue. So we’re seeing a strong pickup especially out of Taiwan. But also we’ve had good leadership groups join with us in Europe and that area is beginning to drive also. So overall we’re seeing great growth both in Europe, we’re seeing great growth in Asia throughout all the areas of Asia. Australia is performing incredibly well right now. And as I mentioned earlier, we just launched one of our top products down there, our Protandim, Nrf1. So that market is up and running. And so overall you’re seeing a strong United States, a great Canada. Mexico is doing well. Actually most of our markets are really doing great. So that growth is occurring not just in one area or even two but overall throughout the world.

Steve Fife

And, Will, just keep in mind also that we launched formally into Austria during this quarter, so we saw some real pickup there.

Unidentified Analyst

Okay. And then speaking of new markets; France, Belgium, Ireland, Spain, roughly when you expect those deals in?

Darren Jensen

All that we have stated – yes, in the second half or in the back half of this fiscal year.

Unidentified Analyst

Okay. Thanks. And I don’t know if I missed this, but the hair care product, what is the price point there?

Steve Fife

Well, it depends on the product because there’s three of them. Selling a hair system [ph] which is a shampoo, hair conditioner and a serum that you use on the scalp is $100.

Unidentified Analyst

Okay. And if you just buy shampoo and conditioner?

Steve Fife

I don’t have the prices here.

Darren Jensen

I think individually it totals about $130, $140. Where we have been positioned is in kind of the midrange for the premium category in hair. So they’re very competitive. And the way that we have them positioned with having Nrf2 technology and having them clean [indiscernible] as a product has really created tremendous distributor excitement, so it’s been good for us.

Unidentified Analyst

Okay. Last question is just on China. I think you commented that it’s progressing well. I don’t know if you could provide any numbers around it yet or expectations for contribution going forward here? It is at least on track or better than what you expected or how is that --?

Darren Jensen

Well, we look at not just China but we look at it as the Greater China region. And as a region, it is progressing on schedule or ahead of schedule. And especially with the growth that we’re seeing out of Taiwan has been very beneficial for us there. And as I mentioned in my portion of the talk that we’re continuing to fine tune the model that we have for cross-border e-commerce and we’ll be rolling that here out in Q2, some of those enhancements which give greater control to us as a company. And I think that will even, to a greater extent, be able to drive the Mainland China side of our e-commerce program. So in answer to your question, on schedule or ahead of schedule.

Unidentified Analyst

Okay. Thank you.

Darren Jensen

Thanks, Will.

Operator

We will now take our next question from Renee Ludwig [ph]. Please go ahead.

Unidentified Analyst

Yes. Can you hear me all right?

Darren Jensen

We can. How are you, Renee?

Unidentified Analyst

Good. Thanks. You guys are doing great. I wondered how the United States with the [Technical Difficulty]

Darren Jensen

Can you say that again? You’re kind of blurring out. What was the increase in the distributor number for the United States?

Unidentified Analyst

Yes.

Darren Jensen

Well, we disclosed the Americas. We do not disclose the United States separately.

Steve Fife

Give us a second. We’ll look that up for you. So year-over-year we increased from a distributor standpoint active distributors about 1,000 distributors.

Unidentified Analyst

Okay. And can you see retention in the customer base still really high?

Darren Jensen

Yes. What we’re seeing and I’ve mentioned this before that especially with our Pace Setter program and some of the other programs that we’re doing, we’ve seen a very good increase in the retention, both of our distributors as well as our customers. Yes, it remains high and progressing very well.

Unidentified Analyst

Great. Okay. Thank you very much.

Darren Jensen

Thank you, Renee.

Operator

It appears there are no further questions at this time. Mr. Jensen, I’d like to turn the conference back to you for any additional or closing remarks.

Darren Jensen

Thank you. Thank you for joining us today. We’re pleased with the improved revenue growth and business momentum and remain confident in our 2019 outlook. And we wish you all a great day. Goodbye.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.