LifeVantage Corporation (NASDAQ:LFVN) Q3 2020 Earnings Conference Call May 5, 2020 4:30 PM ET
Scott Van Winkle – ICR
Darren Jensen – Chief Executive Officer
Steve Fife – Chief Financial Officer
Conference Call Participants
Bill Sutherland – Benchmark Company
Jim Galloway – Private Investor
Good day, ladies and gentlemen. Thank you for standing by. Welcome to today's conference call to discuss LifeVantage's Third Fiscal Quarter of 2020 Financial Results. At this time, all participants are in listen-only mode. Following the formal remarks, we will conduct a question-and-answer session and 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, and welcome to LifeVantage Corporation's conference call to discuss results for the third quarter of 2020. 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 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'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 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 this date of this live broadcast, May 05, 2020. LifeVantage assumes no obligation to update any forward-looking projections 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. I hope you are all well and are staying safe during this unprecedented time. We appreciate you joining us today for our third quarter fiscal 2020 results. Overall, we are pleased with our financial performance amid a challenging environment in the U.S. and all of our international markets as the world battles COVID-19. During the quarter, we were able to maintain relatively consistent revenue together with strong growth in operating profit and adjusted EBITDA in each case as compared to the prior year period. As a result of these uncertain times and disruption to our business activities, we did see incremental pressure on our total active accounts with declines in both distributors and customers during the third quarter. Some of the impacts to business activities include disruptions to our event schedule, elimination of in person meetings, closure of service centers in several markets and difficulty to recruit in Japan where cyber recruiting is not allowed.
We have also seen disruptions to our product rollout schedule across our global markets. Despite these incremental challenges to new customer growth, we were able to hold revenue consistent with the prior year driven by the continued favorable impact of a launch of our Protandim NAD Synergizer and Protandim Tri-Synergizer bundle in November, which contributed to the increased average order sizes. In April, we initiated a free start kit promotion to make it even easier to join LifeVantage and further support new account growth.
We saw a favorable impact on our new distributor enrollments in the month of April, more than doubling our average monthly distributor enrollments during the prior year. In the quarter, we saw positive impacts from our price change and the launch of our free shipping program in January, further supporting our subscription model and increasing loyalty. Free shipping is now available to our subscription and non-subscription consumers in the U.S. Variations of our free shipping program have also been introduced into many of our international markets and have been well received.
We continue to see ongoing positive activity in our Red Carpet program and remain committed to enhancing our field leadership by attracting accomplished direct-selling veterans who are in transition. We also continue to plan to further simplify business building with a goal of making it easy to build at LifeVantage as it is to drive for Uber. Our key focus has been to leverage our earlier investments in building and enhancing our technology platforms. We continue to improve our LifeVantage app, which has even more compelling value to our distributors during this important time as they increasingly rely upon online tools to operate their businesses. In addition, in early March, we launched playbook, our online content library that is being successfully utilized to drive sales.
We rapidly transitioned all of our training and opportunity meetings to regional virtual events and are holding weekly trainings and opportunity meetings with robust participation that is exceeding our expectations and if we have needed to expand capacity. Today, we successfully launched daily pay into our compensation plan, which allows us to provide accelerated payments to our value distributors. We also plan to update and enhance our international compensation plan focusing on driving customer demand during June of 2020.
Now we walk through an update on the current situation in regards to COVID and how we're addressing it at LifeVantage. First and foremost, our attention has been on the health and safety of our employees, distributors and customers as well as ensuring a strong supply chain. We have been following recommended safety guidelines to ensure we can continue to safely and effectively deliver the products that our customers rely on across all of our global markets. We have transitioned 100% of our employees to working remotely and are very proud of the efforts of all of our staff to adapt to and thrive in the current environment.
Our supply chain is in very good shape with adequate inventory and all of our markets are open and operational. We are also working closely with our production and logistic partners to seamlessly support customer demand. With the inability to conduct in-person meetings, our distributors have enhanced the use of social media and video conferencing. And we have seen renewed interest in our LifeVantage app as our distributors are utilizing it to run their businesses remotely. To support our distributors, we accelerated payment during the most recent monthly commission cycle to help easy impact of financial burdens during this unparalleled time and we'll continue to provide tools to support the incremental income opportunity inherent in the LifeVantage business model.
We have also developed the plans and contingencies necessary in the event of any extended social distancing measures and we'll continue to adjust to the environment. We continue to move forward with preparations to open Singapore, which had been planned for the fourth quarter. However, given both global travel and social distancing restrictions, we've decided to delay the opening of the market and we’ll now look to schedule its opening at a time when we can more effectively support its launch. As we navigate this very uncertain time, we will monitor the environment and keep the health and safety of our LifeVantage family at the forefront of our thoughts and decisions. Our focus on heath with proprietary nutrigenomic products, while providing our distributors the opportunity for incremental income position us very well in today's unprecedented global pandemic. Our business model is resilient. We have a strong balance sheet with significant cash and no debt.
Our supply chain is secure. Our distributors have transitioned to online activities. Our employees are successfully working remotely and we have adjusted our marketing messaging to reflect consumers’ needs for a low cost, easy to enter business opportunities. I remain very confident in both our short-term and long-term outlook and our ability to not only survive, but to thrive under challenging conditions.
With that, let me turn it over to Steve to run through the financial results. Steve?
Thank you, Darren, and good afternoon everyone. Let me walk you through our third quarter results. Despite the current global situation, we are proud to report stable revenue and strong EBITDA growth. As Darren just noted, our business model is well positioned in today's challenging environment. Please note that I will be discussing our non-GAAP adjusted results. You can refer to the GAAP to non-GAAP reconciliations in today's press release for additional details.
Third quarter revenue was $56.1 million, up modestly on a year-over-year basis from $56 million in the third quarter of fiscal 2019. Revenue in the Americas declined 0.5% to $40.2 million, while revenue in Asia Pacific and Europe increased 1.6% to $15.9 million all year-over-year. Growth in the Asia/Pacific and Europe region reflected a consistent number of active accounts with continued strong performance in Australia and New Zealand, partially offset by weakening in Japan and our greater China market as a result of COVID-19. The decline in the Americas reflected the decline in active accounts, partially offset by the continued positive impact of the launches of our Protandim NAD Synergizer and Protandim Tri-Synergizer bundle and the price change completed during the third quarter all of which contributed to increase order size.
Gross margin was 83.8% compared to 83.4% in the prior year period. The increase in gross margin was driven by the initial impact of our price changes implemented in January and February 2020; lower inventory obsolescence and handling costs as well as changes to our geographic and product sales mix. Gross margin continues to be in line with our long-term targets. Commissions and incentive expenses as a percent of revenue decreased 100 basis points year-over-year to 47.6%. The year-over-year decrease is due to the timing of accruals for incentive and promotional programs as well as the current quarter activity in our Red Carpet program.
As a reminder, the commission and incentive expenses rate will fluctuate quarter to quarter 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%, fairly consistent with our third quarter performance. Adjusted SG&A as a percent of revenue was 30.2% compared to 30.5% in the prior year period.
The decrease in adjusted SG&A expense as a percent of revenue primarily reflects decreases in employee compensation related expenses, partially offset by increased depreciation expense associated with our investment in new technology that has been placed in service and increased expenses associated with third-party software and other professional providers. Adjusted operating income was $3.4 million, or 6% of revenue, compared to $2.5 million or 4.4% of revenue in the prior year period.
Adjusted net income was $1.9 million, or $0.13 per fully diluted share, compared to $2 million or $0.13 per fully diluted share in the prior year. The decline in adjusted net income was driven by a higher tax rate during the current period, which increased to 37.7% from 17.4% in the prior year period. We now expect our full year non-GAAP tax rate to be between 19% to 20% as compared to our non-GAAP tax rate of 13% for the full year of fiscal 2019.
On a GAAP basis, we expect that our tax rate will also be between 19% to 20% for the full fiscal year 2020, as compared to a GAAP rate of 19.5% for fiscal year 2019. Adjusted EBITDA for the third quarter increased 26.4% to $5.1 million, compared to $4 million in the prior year period. Please note that all of the adjustments from GAAP to non-GAAP I discussed today are reconciled in our earnings press release issued this afternoon. We ended the third quarter with a strong financial position with $13.5 million of cash and no debt as we repaid the balance of our term loan during the quarter and we continue to maintain $5 million of the availability under our revolving line of credit.
During the third quarter of fiscal 2020, we generated $3.2 million of cash from operations compared to $3.9 million in the prior year period. The decline in operating cash flow primarily reflects incremental investments in working capital. During fiscal 2020, we continue to anticipate a modestly lower level of CapEx compared to fiscal 2019 as our incremental investments in the LifeVantage app have moderated.
Additionally, we use $2 million in cash during the quarter to repurchase approximately 136,000 common shares under our share repurchase authorization. As of March 31st, there remained 3.4 million available under the company’s $15 million share repurchase authorization. Given the evolving COVID-19 situation, we are evaluating our near-term buyback strategy.
Turning to our fiscal 2020 outlook, we are reiterating our guidance for both adjusted net income and adjusted EBITDA and now anticipate our fiscal 2020 revenue to be modestly below our prior guidance range, reflecting the more challenging environment for attracting new customers. We continue to anticipate adjusted non-GAAP EBITDA in the range of $20 million to $22 million and non-GAAP earnings per share in the range of $0.74 to $0.79 with revenue modestly below the range of $235 million to $245 million.
Now let me turn the call back to the operator to facilitate questions. Operator?
Thank you. We'll now be conducting the question-and-answer session. [Operator Instructions] Thank you. Our first question is from the line of Bill Sutherland with Benchmark Company. Please proceed with your questions.
Hey, thanks, and hey guys.
I wondered in the guidance, are you – kind of what are you thinking about as far as the cadence of this quarter? Is it kind of sequentially moving in the wrong direction? Or the things feel pretty steady to you?
Well, Bill, thank you. This is Darren. When we look at – and I'm looking at it from an important metric, which is the number of new people that are coming into the business. And what we found with us that earlier in the third quarter was a lower time for enrollments. And as the months progressed in the quarter, March was our best enrollment month of the quarter and that seems to have continued on into the month of May. So if that's an indication that that at least appears to be a good sign for us. Now, understanding that it's a fluid environment right now, but what we're seeing right now, it appears pretty reasonable.
That's encouraging. And that’s mean that this pivot you've had to make away from in person meetings, et cetera, is – it took a bit to get traction and now seems to really be impactful.
Yes. We've been making the pivot for some time. And as a matter of fact, when we had made – when we had met with our distributor leadership and the decision was made to move our events online, we were able to act on that within a three day period and immediately jumped into it. And as a matter of fact, our first meetings were held online, we maxed out the Zoom conferencing capabilities that we were set up for. We'd only set up for a thousand people simultaneously on Zoom. So we had to expand that out to 3,000 to begin handling the number of people that would attend.
Yes, so they seem to pick it up. The field is picking up pretty good.
And then I'm thinking about the macro here and the unemployment numbers obviously going up and not coming down, at least immediately. Tell us what – how you think about that impacting your recruiting and enrollment as you look past the fourth quarter?
As I look at it, I believe that companies who are uniquely well positioned in today's environment are especially during the time of social distancing companies that are more direct to consumer and have that relationship with the customer, also companies that have a strong product portfolio, proactive nutrition, especially when so many people are focusing on wellness at this point. And then also companies that offer a micro entrepreneurial business opportunity to provide some type of opportunity during a time of sharply rising unemployment. So I think these three characteristics really positioned LifeVantage for future opportunity.
Have you seen any glimmer of what – I mean it makes sense to me. And as you said glimmer of that being – are starting to happen.
Well, in the sense of glimmering, it's interesting as we look at the type of people that are coming in, for instance as we're looking at our – the mix of people that are joining the business, before our people were typically approaching people about a product message. But as you know over the last six weeks, we've had in the United States about 30 million people go on unemployment, that message is beginning to shift. And the people that they're speaking with are more interested in an entrepreneurial activity. So we're seeing even a shifting within the mix of messages that are given and what people are interested in. So, typically, distributors translate into good business growth because they're out finding more customers to bring them in. So I think that's a good sign.
Yes. It makes a lot of sense.
And Bill, this is Steve. I just maybe add on to that that, historically, kind of the ratio of distributor to customer enrollment in any given month is maybe 80:20, so 20% are distributors, 80% are customers. And in April that number was about 45% distributors, 55% customers. So I think that to Darren's point, our messaging as well as people that are out there that perhaps have been adversely impacted by the pandemic and that might be looking for alternative sources of income at this point in time, our messaging is resonating with them. Now, that's one month, but it's a pretty good data point for us when we've looked at our historical trends from that standpoint.
Okay. And then last for me just as you'd be preliminarily looking into the next fiscal year, what are you thinking about as far as new product roadmap and capital allocation? Thanks.
I'll address the new product roadmap area. With the shifting in messaging more towards that our field is using towards the entrepreneurial aspect of the business, we're in the process of rolling out and really – really driving the Protandim NAD Synergizer, our most recent major product launch. We were really driving that into the culture of the company, so that that messaging has taken somewhat of a break as it's been overshadowed by current circumstances.
So I think from more of a marketing standpoint as soon as the situation begins to change somewhat, we'll return to that message and begin driving that important product deeper into the culture of the company and to the use of all of our consumers. And then, as we talk next quarter, I'm sure we'll give more of an idea of what we're going to do in our next fiscal year. But Steve, if you want to address the other half of this question?
Yes. From a capital standpoint, we do expect moderation in our CapEx associated with the development of our app where we think we've done a lot of the heavy lifting on that. We'll continue to invest in it to make enhancements of as any company does with their apps. But a lot of the heavy lifting is behind us and we'll continue to look at opportunities just from a cash standpoint either via a buyback or other opportunities to utilize the cash that we generate from our operations in a way that hopefully provides the best return to our shareholders.
Got it. Good quarter and thanks for taking the questions.
Thank you, Bill.
Yes, now I appreciate it, Bill. Thank you.
Our next question is from the line of Jim Galloway, a Private Investor. Please proceed with your question.
It looks like you guys are organized quite well to handle this COVID-19. Congratulations.
We've been spending a lot of money every quarter and including $2 million this last quarter on stock buybacks. So I was very surprised to see the S-3 filed on March 24th to potentially raise $75 million. Can you give me some insight into your thoughts?
Yes, Jim, you know, I guess as a company, as a board and we just feel like if it's just good corporate governance to have an S-3 a shelf in place. It provides us with the ability to act quickly if there's an opportunity that presents itself that could be a good set for the company. We currently do not have any immediate needs or use for the phones that were covered under that S-3, but it's just good governance for us.
Understand. Thank you.
Thank you. At this time, I'll turn the call to Darren Jensen for closing remarks.
Thank you for joining us today. We are pleased about our results so far this year and the hard work our employees, distributors and supply chain are doing to ensure we're able to deliver our LifeVantage products in the world during this uncertain time. We hope you all stay safe and healthy and look forward to updating you on our next call. Have a great day.
Thank you everyone. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.