YogaWorks, Inc. (NASDAQ:YOGA) Q1 2019 Earnings Conference Call May 14, 2019 4:30 PM ET
Jean Fontana - IR
Rosanna McCollough - President & CEO
Vance Chang - CFO
Conference Call Participants
Oliver Chen - Cowen and Company
Dave King - Roth Capital
Greetings, and welcome to the YogaWorks' First Quarter 2019 Earnings Conference [Operator Instructions] As a reminder, this conference is being recorded.
I now would like to turn the conference over to your host Jean Fontana. Please go ahead.
Thank you. Good afternoon, everyone. Thank you for joining us today for the YogaWorks' first quarter fiscal 2019 earnings conference call. Presenting on the call today are Rosanna McCollough, President and Chief Executive Officer; and Vance Chang, Chief Financial Officer.
Before we begin, I would like to remind you that during today's call YogaWorks management will be making forward looking statements that are subject to risks and uncertainties. Risk factors that may impact those statements could cause actual results to differ materially from currently expected results are described in YogaWorks filings with the SEC as well as mentioned in the forward looking statements in the YogaWorks press release issued in advance of this call.
Investors should not assume that statements made during the call will remain operative at a later time and the Company undertakes no obligation to update any information discussed on the call.
With that, I will turn the call over to Rosanna McCollough.
Thanks, Jean. Good afternoon, everyone. Thank you for joining our call to review our first quarter results. Let me begin by saying that the year is off to a terrific start. We are very pleased to have delivered financial results at the high end of our expectations as we've remained focused on growing our base business and delivering improved EBITDA performance. In the first quarter revenue increased 1% to $15.7 million. Last year, we said we were going to work on our base business and we are in the early innings of seeing the results of all the work we began last year. I'd like to point out that our increase is fueled by focus on memberships, which grew 11% versus Q4, 2018, and represents an increase of 14% versus last year, both on the same store basis. In fact, this is the highest quarter we've ever had in terms of membership sales. So we are super excited to see that our strategy is working. And importantly, this foundational growth will have an even bigger impact on our business in the second half of the year.
We are particularly pleased with our results given that we decided not to anniversary any of the deeply discounted class packages which were offered throughout the first quarter of last year. In lieu of class package promotions we promote our memberships with an introductory offer and by explaining how Yoga can change a person's life and help them reach his or her goals. As we've discussed over the last few quarters, we've been heightening our efforts on memberships which deliver a higher lifetime value per customer than class package purchasers as they buy more products and visit more frequently. That said, class packages remain part of our offering to give students the opportunity to choose the product that best aligns with their goals to remain customer focused. We are also pleased to report that visitors increased 5% overall and increased 4% on a same store basis. This increase reflects a sequential improvement over the 1% increase we saw last quarter. We believe that our marketing efforts, innovative programming and the refocus of our offering are all helping to attract new students. In fact, we increased our marketing spend and allocated more working media dollars to online channels.
As we leverage our effective cost per lead while continue to convert more students to members. We believe we will drive even stronger same store growth in the second half of the year. This has decreased 2% in the first quarter, while same store visits were down only 1% for our base business. This was in-line with our expectations given the lapping of huge class package promotions last year, and the transition impact as we ramp up membership. This also reflects significant sequential improvement over 4% decline in same services last quarter. Adjusted EBITDA for the first quarter was negative $1.1 million, which like revenue was at the better end of our expectations. Our four wall EBITDA margin was 18% in the first quarter, as compared to 10% in Q4, 2018.
Now let's talk about our strategic initiatives in more detail. Looking to the rest of 2019 our priorities are as follows. Our first initiative is and must always be to deliver the highest quality class schedules using both qualitative feedback and quantitative reports defined in the schedule based on the local preferences of each community. YogaWorks is known for simply the best yoga and the highest quality and experienced teachers in the market with our globally respected teacher training program. We also take the opportunity to innovate our programming and add new class formats that appeal to our customers and we believe will attract new ones. Last quarter I mentioned that we had actually completed the development of a proprietary new Hot Sculpt, and heated flow set of classes. And now in the second quarter, we begin our first heated flow and sculpt teacher training in two markets so we can then begin the rollout of classes across studios later this year and into next.
Maintaining diverse programming is very important to us, as we attract one of the broadest demographics of ages and abilities to our studios over any other boutique fitness concept, which is a major strategic advantage of our brand. Next, we continue to create demand and drive traffic to our studios through marketing initiatives. We are pleased with the results of our efforts to gain new customers and have allocated additional resources in this area. Our continued optimization of our digital ad strategy is showing strong results. We increased total leads by 20% and grew our leads from Digital Media by 65% compared to Q1 of last year, and we successfully reduced our cost per lead by over 10% percent. This investment in marketing once again is designed to drive a larger membership base that will fuel our margin expansion.
Our online marketing efforts include geo targeted ads through the Google Keyword buys, as well as through social media and the Facebook ad platform. Each of these channels is showing healthy growth and strong cost per lead that delivers an attractive return on our investment. In terms of direct marketing, we've increased our automation of email campaigns, with the launch of 11 automated email journeys, each designed to send customized, perfectly timed content to our students at various points in their life cycle with us. This automation allows us to improve key performance metrics, while reducing marketing labor, and we intend to build more automated touch points throughout this year. Referrals have always been a large part of our marketing strategy with high conversions and we are particularly excited about our new referral program, which we rolled out at the beginning of Q2. We are now integrating the referral program into the membership sales process to heighten awareness and results. The impact of our referrals combined with our consistently strong ratings should continue to drive new students. Our average ratings on Google and Facebook are 4.6 and 4.8 out of 5.0 respectively.
Our third initiative is to increase sales conversion and continue to drive membership sales. As I spoke about earlier, the center of our messaging remains on helping our customers understand that the practice of yoga just two times per week can make a great difference both physically and mentally and that Yoga is complementary to other fitness modalities. This makes the membership options the best value for students. Fourth, we will continue to optimize our studio footprint to ensure we are delivering attractive four wall contribution margins. We monitor the performance across all of our studios and for those that don't deliver or exceed our target contribution, we will look to either close or relocate those studios. One example of this is our Valencia, California studio that we relocated from a larger footprint to smaller one, it's Q1 performance is already delivering a higher four wall contribution. We are also in the process of relocating a large studio in Northern California to a smaller footprint in Q3. We believe that we will be able to largely maintain our current studio base, student base and not sacrifice much capacity while reducing our cost structure as we march to profitability.
Finally, we will continue with our efforts to drive community engagement through myyogaworks.com. We are pleased that it is also off to a solid start with total revenue and total subscribers both up 9% versus Q1, 2018. Part of the increase was the result of our gifting initiative, which is up substantially higher than prior year and in-line with our referral strategy to share the news about YogaWorks programming. As we discussed last quarter, we are laser focused on driving accelerated improvement in our base business and our first quarter results are a positive initial reflection of those efforts. We also remain extremely mindful of our cash position and Vance will speak to this in more detail shortly.
Overall, we're excited to see many of our initiatives are beginning to bear fruit and look forward to updating you on our continued progress. Importantly, the work we are doing today is setting us up nicely for long term scalable growth and we still have tremendous opportunity ahead of us. We continue to receive inbound interest from independent studio owners who would like to sell their studio to YogaWorks as we are the [indiscernible] choice. We have a strong studio pipeline, and we look forward to resuming our studio expansion in the future. I want to thank our teachers and staff who work tirelessly each day to create a differentiated and exceptional environment for our students.
I'll now turn it over to Vance to detail our financial results and outlook for fiscal 2019.
Thanks, Rosanna and good afternoon, everyone. I'll start with the review of our first quarter 2019 results, and then discuss our outlook for the second quarter and fiscal year 2019.
We're very pleased to have delivered first quarter results at the better end of our expectations. Actions we've taken that put us firmly on track to achieve our full year guidance and continue to capitalize on the growth opportunities that lie ahead for a business. First quarter of net revenue increased 1% to $15.7 million, compared to $15.5 million in the first quarter 2018 which was that the high end of our guidance. The increase from last year with reflects revenue from acquired studios, as well as a material $1.7 million increase in membership sales from existing studios and from new studios. These increases were offset by $1.3 million decrease in sales from multi-class packages, which was an intentional shift as we continue to focus on driving higher lifetime valued memberships. For the quarter G&A expenses declined 1% as compared to the same period last year, primarily due to lower fees for professional services and decrease in travel expenses, partially offset by increased marketing spend. First quarter adjusted EBITDA was at the better end of our guidance at negative $1.1 million.
Our adjusted studio level EBITDA for the first quarter of 2019 was flat at $2.8 million or 18% of sales versus 18% in Q1 last year, and 10% in Q4 of last year. For reconciliation of adjusted EBITDA and studio level adjusted EBITDA, please see the tables in our earnings press release. In the first quarter, we had $6.1 million in cash on the balance sheet. Cash used in operating activities was $4.7 million for the quarter compared to cash used in operating activities of $2.7 million in the first quarter of 2018. The $2 million difference in cash used was primarily related to a one time settlement payment for a wage statement legal claim, a one-time earn out and hold back payment for acquiring studios in the prior year as well as timing difference for working capital accounts associated with operating costs and capital investments accrued in 2018 but paid into Q1 of 2019. Looking to second quarter, we fully expect cash used in operating activities to be significantly lower than Q1 of 2019 as part of the normal working capital seasonality.
We ended the quarter with 68 studios compared to 66 studios at the end of first quarter 2018. Overall, we're very encouraged by the progress we have made in driving improved financial performance and we will continue on this momentum through the remainder of fiscal year 2019. As we have shared previously, we have engaged a financial advisor to help explore various capital raise opportunities. The process is well underway and we will update you as appropriate. Our top priority is our cash position. To do this, we remain extremely focused on driving more profitable sales as we move forward while continuing to operate as a big organization and to carefully manage our expenses.
Now turning to our guidance, for the second quarter of 2019, we expect net revenue to be between $14.3 million and $15.1 million as compared to $14.9 million in the second quarter of 2018. We expect adjusted EBITDA to be between negative $1.9 million, and negative $1.2 million in 2019 as compared to negative $1.4 million in the second quarter last year.
Our guidance reflects 68 studios for the quarter versus 71 studios in Q2 of 2018 as well as incremental marketing investments to acquire new customers as we look to capitalize on our product market fit and set up for a stronger second half of the year and beyond. We continue to build significant momentum shift shifting towards a higher mix of membership sales, which will help us drive better operating leverage given our mostly fixed cost structure. The nature of the membership revenue is that it compounds monthly and as we continue to focus on memberships, we expect sales in the second half of the year to grow more than in the first half. For the full year of 2019 with our current 68 studios, we expect to hold our prior revenue and EBITDA guidance as $60 million and $62 million as compared to $59.6 million in 2018 and negative $6 million to negative $5 million as compared to negative $6.3 million last year. Our outlook assumes growth in the membership revenue stream, which has been building for the past 10 months and we expect to continue throughout 2019 and beyond.
With that we will open it up for Q&A.
[Operator Instructions]. Our first question comes from Oliver Chen with Cowen and Company. Please go ahead.
Regarding achieving results at the better end of your expectations what were some of the main drivers that led to that and as we think about the revenue growth on the financial model, how many more quarters will we have the multi-class package headwind and the expectation here for your guidance is that the membership sales growth outpaces the headwind from multi-class packages? Would love your thoughts on those dynamics going forward?
Yes, so let me answer the second question. First, I think May was about the last month we had the class package headwinds. So after that, I think it's smooth sailing after that point. As far as your first question for Q1, I think the better end of the guidance was achieved because that the health of the membership business and the sales conversion and the marketing funnels have really combined effort of all of our strategies working together.
Okay, regarding your footprint now in your fleet, you have a lot of flexibility given lease expirations as well. What are your thoughts about the studio footprint? And how has that evolved relative to your performance lately?
The studio footprint optimization has been a key focus of ours this past year, as you heard on our delivered remarks that we are taking a very aggressive stance when it comes to our leases, it's a studio, it's too large, we look to downsize it either in its current location or by moving it. If the studio is up for lease coming up, and it's not performing and we have a studio nearby that we've acquired and we can consolidate, we will look to do that and that's only if it's not performing. If it is performing, of course then that is a major key input, what we're looking for is regional market share when we go into each market. So we know that as each studio adds it may not add at the same amount as in terms of regional density and market share. We're looking for that creative opportunity on both revenue and an EBITDA perspective. So we will continue to see the scrutiny of every single lease to earn its place in our regional portfolio.
On the revenue growth in terms of the membership sales growth, what is your guidance incorporate in terms of what you're expecting to happen? You have that 14% number this year? And that looks attractive to us? Like what drove a lot of that success there with the membership sales growth?
So for us, I think importantly, and this is such an important thing to understand is, it's not just about doing something that's right for our business, it's about the focus on the customer, the intersection of the customers goals, and our mission is what we call the why. So the why someone comes to YogaWorks is not because they want a class package or a membership, they come because they're searching for some physical or mental goal and we explain how we can deliver on that goal. The secondary issue is how do you get there? Well, if you're coming two or more times, then membership is the right thing you know for that person with the greatest value and the greatest, really desire for them to come as often as possible. When you're paying for a membership, you're going to show up more often because you're paying for it. So for us, the improvement in our membership was really focusing on the why people come to YogaWorks and then the recommendation of a membership when it's met with the consumer goals. And I'm so proud of the team for doing the hard work to go back to our mission and back to the customer and I think you see it in the numbers.
Thanks for advance for the guidance level. What does that incorporate in terms of that membership, sales growth, we should expect next quarter?
I mean, we haven't broken that out separately before but it's going to be -- over time it's going to be a bigger and bigger part of our total sales, you know, we spend to hit over half of our total sales in the run rate.
Okay, and my last question was just general thoughts for the team about the capital raise and what will be important to you in terms of key parameters that will be good in terms of the deal structure or timing and any thoughts on managing risk in terms of the cash position as well? Thank you.
Yes. We're definitely in the process of exploring different capital alternatives and we will update the street and all the analysts as appropriate. We care about flexibility. We care about pricing, we care about the amount of capital to be raised. Those are all key factors for us. In part, that decision process is still a bit early to have anything definitive to say, but we're definitely looking to have this solved before year-end.
Our next question comes from Dave King with Roth Capital. Please go ahead.
So maybe following up on some of the last line of question a little bit to better understand the key to guidance. Are you still seeing memberships grow in Q2 so far at the same pace that you saw in Q1 just trying to get a sense of the puts and takes to that guidance a little bit?
Yes, we are.
Okay. Okay, perfect. And then maybe switching gears to the EBITDA guidance for full year? What is that assuming in studio level EBITDA I guess, more importantly, when do you expect to start seeing the improvement from the compounding of membership revenue off leverage, etc.
Yes, if you look at Q1 versus Q4, it's already a big improvement. As we were sort of over the last year's anniversary amount and that number was steadily improved. We think the most of improvement will come in the second half of the year. A few things, one is last year, you know, we were really in the midst of building out the infrastructure, the training and the marketing funnel that we talked about, that we spent so much time on and so the fruits of it'is coming online, in Q3 and Q4. But also, again, we talked about the you know, to your point, the compounding effect of the membership model, the bigger, the more time it has to grow, the bigger the impact. And so by Q3 and Q4, we won't have to overcome promotions anymore. On top of that membership at that point we will be a meaningful amount heavier than what we had last year. So it's just simple math and margin expansion will happen.
Okay, so is it fair then to assume I think in the past, you may have said the studio level EBITDA for the year might be up on a full year basis, is that sort of a reasonable expectation?
Okay. Lastly, for me, it actually sounds like another advance question. The $6 million of cash, what sort of burn should we be expecting on a quarterly basis? It sounds like down obviously in Q2 versus Q1, but just trying to get a sense of what is the kind of run rate for that?
Yes, I mean, that's a really good question. We talked about Q1 being higher because of a few one-time things, Q2 just normal working capital seasonality for us is going to be a lot lower and I think looking at last Q2 is probably a fair gauge as far as you know, just the normal working capital usage and then as we improve the profitability profile of our studios, the burn would decrease in Q3 and Q4.
Thank you. We will now turn the call back to Rosanna for closing comments.
Thank you all for joining our call today. We look forward to updating you on the progress of our Q2 efforts. Talk to you next time.
This concludes today's teleconference. Thank you for your participation.