LifeVantage Corporation (NASDAQ:LFVN) Q4 2019 Results Earnings Conference Call August 14, 2019 4:30 PM ET
Van Winkle - Investor Relations
Darren Jensen - President, CEO
Steven Fife - CFO
Conference Call Participants
Doug Lane - Lane Research
Steven Martin - Slater
Good day, ladies and gentlemen. Thank you for standing by. Welcome to today's Conference Call to discuss LifeVantage's Fourth Quarter and Full Year 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 I would now like to turn the conference over to Mr. Van Winkle. Please go ahead, sir.
Thank you. Good afternoon, and welcome to LifeVantage Corporation's conference call to discuss results for the fourth quarter and full year fiscal 2019. On the call today from LifeVantage with prepared remarks are Darren Jensen, Chief Executive Officer; and Steven 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 have not received the release, it is available on the Investor Relations portion of LifeVantage's website at www.lifevantage.com. This call is being webcast, and a replay will be available on the company's website as well.
Before we begin, we would 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 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, August 14, 2019. LifeVantage assumes no obligation to update any forward-looking projection that may be made in today's release or call.
Now I will turn the call over to the company's CEO, Darren Jensen.
Thank you, Scott, and good afternoon, everyone. It's a pleasure to be with you today to discuss our fourth quarter and full year fiscal 2019 results. We're proud to have finished the year with another quarter of positive revenue growth, driving 11.2% growth for the full year of fiscal 2019 and delivering the highest annual revenue in our company's history, $226 million. This growth was driven by a 3.4% growth of our active members, including 4.8% growth in active independent distributors and 2.6% growth in active customers and a 6.5% increase in our average order size.
We generated year-over-year growth of our active member count in all 4 quarters during fiscal 2019. To put this in perspective, during fiscal 2018, our member count declined in 3 of the 4 quarters. This improvement reflects the efficacy of our distributor and customer initiatives during the past year.
This momentum supported our revenue growth and contributed to our strong year-over-year adjusted EBITDA growth of 48.6% during the fourth quarter and 22.4% growth for the full fiscal year. We exceeded our adjusted diluted earnings per share guidance for the year and are forecasting continued growth in fiscal 2020.
Each of our fiscal 2019 strategic initiatives contributed to our strong performance, including driving distributor and customer acquisition, geographic expansion, product innovation and increased average order size. We will continue to focus our organization on our key initiatives to drive growth and improve profit and shareholder value.
Before I discuss our fiscal '20 details -- plans in details, let me highlight some of our fiscal '19 successes.
In fiscal '19, we had a successful launch of our TrueScience Hair Care System at our Global Convention early in the second quarter. The response to our hair care launch led to the strongest quarter in our company's history. During the third quarter, we relaunched our enhanced PhysIQ Smart Weight Management System, including the addition of PhysIQ Prebiotic as part of the refresh.
As we recently announced, we have new innovation plans for the second quarter of fiscal '20 where we will be adding to our flagship Protandim line at our October Elite Academy event in Long Beach, California. We believe this launch could be a major North American driver towards accelerated revenue and active member growth beginning in the second quarter.
During the year, we continued our global expansion, opening operations in Austria and Spain and during the fourth quarter, Ireland and Belgium. We will continue to evaluate additional markets and plan to launch operations in 2 additional countries during fiscal '20 with a focus on the Asia/Pacific region.
We successfully launched our LV app. Our app simplifies business operations for our independent distributors and supports enhanced member acquisition, all while advancing our biohacking culture, which has become the underlying message with our distributors. The app includes machine learning that is designed to turn a distributor's smartphone into a powerful productivity tool. Our app is now currently available in the United States, Canada, Japan and Australia with plans for further global expansion. We've strengthened our current markets and continue to promote our biohacking culture through enhanced distributor-facing technologies.
Finally, during fiscal 2019, the Red Carpet program continued to produce very strong results and return on investments, further enhancing our experienced distributor team. The program is designed to search for seasoned leaders in transition and aid in making LifeVantage their new home of choice. We're very excited by the success of this program, which we expect will continue to support growth of our distributor leadership in fiscal 2020 and beyond.
As you can see, we worked hard this year to build great momentum and are looking forward to continuing it into fiscal '20. As we enter the new fiscal year, we're focused on 4 key initiatives to support our continued near-term and long-term growth. Let me walk you through each of the initiatives.
Our first initiative is to become masters of biohacking subscription. Today, 60% of our members process a subscription order within their first 90 days, driving strong average order sizes to retention. To support further growth, we plan to launch an innovative new addition to our flagship Protandim line that we expect will aid further growth in subscription and that is on trend with our biohacking culture.
We are also evaluating a free-shipping program to further support our subscription model. We will share more on this free-shipping program as the plan's details are finalized. We are also focused on adapting our product offering to support consumer demand in regional markets with an initial effort to enhance the form factor of our Protandim offering to better cater to our Japanese members.
Second, we are continuing to work to attract and create biohacking influencers. This includes continued focus on our efforts with the Red Carpet program, which proved to be incremental with favorable returns on investment during fiscal 2019. We expect to expand our geographic footprint further during fiscal 2020 with the planned launch of 2 additional markets with a focus on Asia/Pacific. We will also continue our focus of driving growth in synergy in our Greater China region.
Beginning in fiscal '20, we are refining the cadence and volume of our member events, introducing a new series of meetings for influencers. We are shifting from 3 Elite Academies per year and 1 Global Convention every 18 months by transitioning 1 Elite Academy to a series of regional events and changing the cycle of our Global Convention to annual and by turning 1 of our Elite Academies into a destination event. Our new series of meetings will place our events closer to our members, which we expect to increase attendance and the number of influencer meetings. This cadence is intended to be more effectively -- to more effectively reach a larger portion of our member base.
Third, our plan to further simplify business building at LifeVantage with the goal of making it as easy to build a LifeVantage as it is to call an Uber. This includes a plan to introduce daily pay into our compensation plan, providing an -- a more rapid incentive for our independent distributors. We are also working to update and enhance our international compensation plan, which is slated to begin in Thailand later this year, with a broader rollout to additional international markets also expected this year.
Further penetration of the LV app will continue to be a focus, which will reduce complexity and increase success rates for users. As development of the LV app continues, its functionality and effectiveness continues to improve.
Finally, we're building a solid foundation for future growth. This focus includes 2 new programs to develop internal talent: enhancing our cybersecurity and upgrading our member-facing systems to improve convenience, remove friction and improve efficiencies.
Our annual focus on key initiatives -- on key strategic initiatives over the last couple of years has been a key driver of our growth, and we are confident that our fiscal 2020 initiatives will support our momentum. We're excited to continue to write our biohacking story and deliver innovative products, tools and strategies to support our long-term growth.
With that, let me turn it over to Steve to run through the financial results. Steve?
Thank you, Darren, and good afternoon, everyone. I am pleased to report our fourth quarter results. We generated another quarter of positive year-over-year revenue growth with consistent quarterly revenue on a sequential basis, despite the lack of a major event during the fourth quarter. We remain confident in the momentum we have built, and we expect to build upon this further as fiscal 2020 progresses.
Please note, 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.
Fourth quarter revenue was $56.2 million, representing a 4% increase year-over-year. Revenue in the Americas decreased 2.9% to $39.4 million, while revenue in Asia/Pacific and Europe increased 24.4% to $16.8 million, all year-over-year. Growth in Asia/Pacific and Europe region reflected continued strong performance in Greater China as well as across our Asia/Pacific markets and the opening of several new markets in Europe during the last fiscal year. The modest decline in the Americas was primarily driven by higher level of new enrollments in the prior year, which generated higher average purchases. This primarily reflects the inherent fluctuations in new enrollments associated with our Red Carpet program.
Gross margin was 82.7% compared to 85.1% in the prior year period. The decrease in gross margin was largely driven by an approximate $900,000 benefit that was recorded in the fourth quarter of 2018 due to a change in accrued import estimates. Normalized for this change, adjusted non-GAAP gross margin for the fourth quarter of fiscal 2018 was 83.5%.
Commissions and incentive expenses as a percent of revenue decreased 480 basis points year-over-year to 45.3%. The year-over-year decrease is due to timing of accruals for incentive and promotional programs. Just as a reminder, the commissions and incentive expense rate will fluctuate based on the timing and magnitude of promotions and incentive programs as well as the inherent fluctuation in Red Carpet expenditures. We continue to target commission and incentive expenses to be around 48%.
Adjusted SG&A as a percent of revenue was 27.1% compared to 26.6% in the prior year period. The increase in SG&A expense as a percent of revenue primarily reflects an increase in expenses associated with stock and other employee incentive compensation programs, reflecting this year's positive revenue, adjusted EBITDA and share price performance.
Adjusted operating income was $5.8 million compared to $3.7 million in the prior year period. Adjusted EBITDA for the fourth quarter increased 48.6% to $7.7 million compared to $5.2 million in the prior year period. Given the higher noncash stock-based compensation as well as an increase in our fully diluted shares, both resulting from our increased share price, we continue to believe non-GAAP adjusted EBITDA is a better reflection of our cash profitability growth.
Adjusted net income increased 41.6% to $4 million or $0.26 per fully diluted share, up from $2.8 million or $0.20 per fully diluted share in the prior year.
We continue to expect fluctuations in our tax rate over the coming quarters. Specifically, our tax rate can fluctuate significantly based on the timing and magnitude of stock award vesting from quarter to quarter due to differences in the book versus tax expense deductions. These vesting events are treated as discrete items and accounted for fully within the period that they occur rather than adjusting for the differences on an anticipated annualized basis.
As I noted, all the adjustments from GAAP to non-GAAP are reconciled in our earnings press release.
We ended the fiscal year in a strong financial position with $18.8 million of cash compared to $1.5 million of debt. During fiscal 2019, we generated $17.8 million of cash from operations and invested $2.5 million in capital expenditures. During fiscal 2020, we anticipate a lower level of capital expenditures as our incremental investment in the LV app will moderate.
Finally, we used $4.7 million in cash to repurchase approximately 400,000 common shares under our share repurchase authorization. We have a rule 10b5-1 plan in place to facilitate further share repurchases in fiscal 2020. As of June, there remains $8.8 million available under the company's $15 million share repurchase authorization.
Turning to our fiscal 2020 outlook. We expect to generate revenue in the range of $235 million to $245 million, an adjusted non-GAAP EBITDA in the range of $20 million to $22 million with adjusted non-GAAP earnings per share in the range of $0.62 to $0.71. Our adjusted non-GAAP EPS guidance assumes a full year tax rate in the range of 19% to 22% compared to our effective non-GAAP tax rate of 13% in fiscal 2019.
Now let me turn the call back to the operator to facilitate questions. Operator?
Thank you. [Operator Instructions] We'll now take our first question from Doug Lane of Lane Research. Please go ahead, sir.
Q - Doug Lane
Hi. Thank you. Good afternoon, everybody. Can we stay, Steve, on the commission and incentives here just because I'm trying to understand that quarterly fluctuation that you're talking about? The 45.3% this year is the lowest of any quarter I have going back several years. And meanwhile, the fourth quarter of last year at 50.1% was the highest of that year of any of the 4 quarters. So what is it just in the fourth quarter of this year that's different than the fourth quarter of last year on commission and incentives?
Yes. So our -- that's a combination of 2 expense categories, Doug. One is the commissions and then the incentives. Our commission rate as a percent of our commissionable revenue has stayed very consistent year in, year out, quarter over quarter, et cetera. What really fluctuates on a quarterly basis is the incentive piece.
And the reason that fluctuates is that's where we include the cost and, in certain cases, accrual and estimates of costs for our incentive programs and other promotions that we might have underway as well as the costs associated with our Red Carpet program. Red Carpet, as we said, is kind of inherently lumpy, depending on how many people are in transition and how many we can attract in any 1 quarter. So there's just a higher level of, I can't say, seasonality, but inconsistency in that spend.
And we've seen that in prior quarters. It's just that in Q4 of this year, all on the incentive piece, we just didn't have as many expenses and cash outlays associated with our current incentive programs. So really, it's purely a timing issue.
That's helpful. And just as we look at 2020, just bigger picture, is there any change in the timing of any particular programs we should know about to try to gauge some of that fluctuation as we model out 2020?
Yes. I'd say no significant change from a commission and incentive standpoint. The one where Darren touched on kind of a change in our event cadence, and we will see -- or in total, we anticipate spending around the same amount for our events. And that includes a convention in all of the Elite Academies that we have. But because of the changed sequence of things, I would expect that Q2 G&A, which is where our events are captured -- event costs are captured, will be down, and Q1, Q2 and Q3 will be up, kind of offsetting that spend. So just in comparison to fiscal 2019, I would expect that kind of shift on a quarterly basis but driven again by events and the cadence we've laid out as not having to do with commissions and incentives.
Okay. So on the G&A, just to clarify, which quarter do you think the G&A will be down in 2020 versus this year?
Fiscal -- or Q2.
Okay. And then so 1, 3 and 4 will be up.
Yes, that's right.
Okay. And then shifting to the momentum of the business here. Looking at Asia/Pacific and Europe where last year, I'm looking at distributor count in the 18,000 range pretty much all year. And then you really started to get some good traction this year, 20,000 in the first quarter, 21,000 in the second, 23,000 in the third. And then in the fourth quarter, it flipped back to 22,000. So I wondered, in the Asia/Pacific and Europe region where a lot of your new markets are and a lot of your activity is, is there something in the fourth quarter that kind of stalled that momentum? Or is that sort of an expected pause in the business and we should see it reaccelerate next year?
Doug, I would say with that, a lot of it is just due to the natural cycle that we have both with the Red Carpet program. That is kind of using the same term as Steve, it's rather lumpy when we have groups that are joining the company. So that number fluctuates from time to time, and it also was driven by the events cycle. So I don't know that it's something that you could predict on at any particular quarter. Right now, we're seeing an uptick in the Red Carpet program for this quarter, which is very good. And yes, so I think it's just due to some of the natural fluctuations.
So just to talk about the geopolitics and the global macro pressures in the Asia/Pacific region, is that having an impact on your business? Or you're just not seeing that?
Doug, there's no impact on our business that we're seeing right now. Specifically, I'm sure most of you have been watching the news coming out of China, particularly, as well as Hong Kong. There's been a number of geopolitical things happening there from the riots in Hong Kong or the protests. Those affect to a small amount the number of people that actually walk into our showroom in Hong Kong. We probably expect this to be more of a limited basis.
There has been that 100-day review within Mainland China that was focusing on the selling and marketing and practices of health supplements. Most of that focus was on a couple of local direct-selling companies, and I know many of our peers have been hampered by the restrictions on meetings and such. But our model at e-commerce there in that market and as a matter of fact, the government is further reducing restrictions on that model and is encouraging the model in the country.
So we haven't been experiencing anything of what our competitors have been doing as well as the -- really, the area of strength that we've had within the Greater China region has been Taiwan. And Taiwan has remained unaffected by some of these issues that are occurring within Mainland and Hong Kong. So with us, it's been not much of an event at all.
Fair enough. Thanks, Darren. Thanks, Steve.
Thank you. [Operator Instructions] Our next question comes from Duran Hoffman of Rubeco [ph] Please go ahead.
Hi, gentlemen. Thanks for taking my questions and congratulations on good results. The kind of first question, maybe can you give a little bit of color how the fourth quarter results came in versus your expectations? And secondly, maybe secondly, your share-based compensation, obviously, that was a bit elevated this year. Can you provide some insights on your outlook for next year? And lastly, could you provide some comments just on your outlook on the longer-term product pipeline and product introduction outlook and perhaps how the recent appointment of a new SVP of R&D fits in here?
Yes. Sure. Let me -- I'll take the first couple, and then Darren will take the last on the product pipeline. So in terms of the fourth quarter, our guidance that we -- we came in right at the midpoint of our previously disclosed annual guidance from a revenue standpoint. It was right at the midpoint at $226 million, and our guidance was $224 million to $228 million. So it came in around where we thought it was. Our EPS, our guidance range was $0.50 to $0.54, and we -- on an adjusted basis, we reported $0.59. And so I'd say from a profitability in the fourth quarter, we were pleasantly surprised with a few things that occurred, but -- and part of which related to an annual non-GAAP tax rate that was lower than what we had anticipated.
So -- and then the second question related to the stock-based comp. This year, you're right, we did see an increase from fiscal '18. Fiscal '20, we anticipate no additional increase but our stock-based comp being relatively flat with our fiscal '19 stock-based comp expense.
And then with regards to the final part of your question dealing with products, first, as you mentioned, we've had the addition of Dr. Brian Dixon to our team here as the Senior Vice President of Product Development. And a welcome addition to us, he has broad experience within the direct-selling industry as well as in the nutritional environment. I believe that part of his doctoral dissertation was on oxidative stress and Nrf2. So he is an expert in the biohacking nutrigenomic oxidative stress areas of technology that are really central to the stories that we tell. So I think he will be an increasingly central person in helping us with the direction of where our product line is going.
Now with regards to the direction of the product line, I did mention in my remarks that we have announced that we're going to be making the addition -- an addition to our Protandim line of products. And that will occur, we anticipate, on October 5, which is at our Long Beach Elite Academy. This will be one of the first additions to our Protandim line, which is our premier line of products that we've made in the last couple of years.
And we are really looking at that as being a major driver to -- especially North America, the United States. It will be available in the United States immediately following the meeting. While we watch that meeting, and we'll make it very quickly right after available to all of our people in the United States, as well as we're going to make it available in Canada for not to resell. We have an announced -- have not announced a global rollout plan for this product, but obviously, we see that as what we call a Tier 1, our largest type of launch that we have, and we're really excited for it. It's -- we do think it will be a major driver for us.
Okay. Great to hear. Thank you very much.
Thank you. We'll now take our next question of Steven Martin from Slater. Please go ahead.
Hi, guys. You said stock-based comp would be comparable in 2020. So you're talking in the $5 million range?
And that's regardless of where the stock price goes? Because I understand, in this year, your stock went up a lot, so stock comp went up a lot. But if the stock sort of hangs out here, do we still get a $5 million hit for stock comp?
We do this year, yes. The nature of some of the prior awards, there's a fair amount of equity that will vest in at the end of Q2 that was performance-based. So it does tie to where the stock price ends at that point in time. But we are -- based on what we anticipate the price to be, we would expect that the total overall stock-based expense will be comparable this year.
And what does that mean for share count?
Well, I think our share count is going to remain relatively flat year-over-year. We will have an issuance, like I said, at the end of the second quarter. But we would also expect that the buyback program that we have in place will moderate any dilution that would occur from that.
So all the -- all that cash that's being expended for buyback is merely to offset the share issuance from compensation, so really not going to be seeing a share count decrease.
In fiscal '20, I think that that's a fair assumption.
All right. When do you -- what do you guys expect for the U.S. sales growth this coming year? Do expect that to reaccelerate with all the new products? Or are we going to have a relatively flat year in the U.S.?
Yes. So we grew 7.7% on a -- for North America. We don't disclose the U.S. separately. But for North America, we grew 7.7%. And we continue or expect to continue to grow in North America during fiscal '20. A lot of that growth will be triggered on the introduction of our new Protandim product that Darren has talked about as well as continued momentum in our Red Carpet program. Those are really the 2 biggest primary drivers of our growth in fiscal '20.
[Operator Instructions] We'll now take our next question from Jim Galloway.
Thank you for continuing to grow. I have 2 major questions. One is it used to be that we would get some outside university giving a scientific paper on Protandim or one of our products. What's in the works where we might be able to get some support scientifically from institutions?
Jim, this is Darren. I believe that with the addition of Dr. Brian Dixon to our team, I know that we have budgets set aside for doing scientific research and doing more papers. It seems like, as I sit and watch our -- the news feed, it seems like new studies are just popping up all the time on the Protandim that are being done independent. But obviously, we are a scientific company. We continue to be focused on that. And part of what Dr. Dixon's specialty in is the scientific research and doing -- and getting papers on just like what your explaining. So I would believe that we would continue with that same philosophy.
Okay. But we're not seeing in other magazines. I mean I don't see anything in Forbes, or I don't see anything in Bloomberg, or I don't see anything in support of our sales effort. How are we placing results?
With that, as I look at it personally, I mentioned -- I think you can take, just for example, our Protandim Nrf2 products. With the last count, I think we're up to 28 clinical studies that have been conducted on it or so. And right now, a lot of our efforts are focused on some of our newer products. As I've looked at the number of clinical studies coming out on, let's just say, Nfr2, if we continue to focus on that 1 product alone and do clinical studies, it seems like to me that there's kind of an exhaustion with the number of studies that are done in that we have the one from the National Institute of Aging that finished just a couple of years ago that had some pretty fantastic discoveries about what the product did. I mean it increased the life span of the male test animals by 8%. It was the first nutritional substance that ever tested during this testing protocol that they've had running for about 20 years. They've never seen that happen.
And so -- and it didn't have as massive of an impact as what we thought we'd have on it. So obviously, right now, a lot of our efforts are focused on substantiating and getting more information out on our existing product line that may not have as much scientific evidence that's been published on it. Especially right now, obviously, an area of a lot of interest would be to do studies and get them conducted on the new Protandim extension that we have that's going to be released on October 5. So that's where a lot of our effort is right now.
My last question is I'm concerned that this new Protandim product, I take them all, is going to expect to generate more revenue from our existing distributors. And I think we may be asking a lot of them on a monthly basis. I think for us to really grow, we've got to have a product that will get us a lot of new memberships and new customers. Is that the way this new product is designed?
I would agree with you. Any time that we release something to our flagship line, it should really be designed to drive membership growth, drive a story. We expect what we call a Tier 1 launch to actually be incorporated into the prospecting story where we -- where our distributors are approaching their customers with that story. And what I really like about this new Protandim expansion that we have is that with our current Protandim, the results are a little more clinical. You might or might not feel them. Or if you do, you typically feel the difference when you stop using them. This product is very different. I know that with my usage of it, my own experiences, what was with the experience of a lot of our test groups that have been trying it, the effect has been within the day of taking it, within the first day, if not within the first few hours. So when it really comes to that emotional connection, that sensory connection with the product, that is really big with this new Protandim extension in that people can immediately see the effect of it or begin feeling it, which then makes it a lot easier to sample and to share with friends and family and have them notice the impact very quickly, too. So we believe that this will be a very large driver for us in North America when it does come to looking at overall membership count both of customers and distributors. So I agree with what your assessment was.
Yes. I was just going to add on that I -- we believe that this new product will enable us to attract new distributors and customers. We hope and expect that most of our existing will -- distributors and customers will be interested in taking this product, but we also believe that it's unique enough that it will attract a new base business for us.
It doesn't appear we have any further questions at this time, I would like to turn the conference back over to Mr. Jensen for any additional or closing remarks. Thank you.
Well, thank you, everyone, for joining us today. We are pleased with the strong close to fiscal 2019 and look forward to continuing our business momentum into fiscal '20. We look forward to updating you on our next call. And have a great day, everyone. Goodbye.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.