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Edited Transcript of LFVN.OQ earnings conference call or presentation 2-Feb-21 9:30pm GMT

·20 min read

Q2 2021 LifeVantage Corp Earnings Call Feb 2, 2021 (Thomson StreetEvents) -- Edited Transcript of Lifevantage Corp earnings conference call or presentation Tuesday, February 2, 2021 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Garry M. Mauro LifeVantage Corporation - Independent Chairman * Justin Rose LifeVantage Corporation - Chief Sales & Marketing Officer * Steven R. Fife LifeVantage Corporation - Interim President, CEO & CFO ================================================================================ Conference Call Participants ================================================================================ * Douglas Matthai Lane Lane Research - Principal & Director of Research * Reed Anderson ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen. Thank you for standing by. Welcome to today's conference call to discuss LifeVantage's Second Fiscal Quarter of 2021 Financial Results. (Operator Instructions) Hosting today's conference will be Reed Anderson with ICR. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Anderson. -------------------------------------------------------------------------------- Reed Anderson, [2] -------------------------------------------------------------------------------- Thank you. Good afternoon, and welcome to LifeVantage Corporation's conference call to discuss results for the second fiscal quarter of 2021. On the call today from LifeVantage with prepared remarks are Garry Mauro, Chairman of the company's Board of Directors; Steve Fife, Chief Executive Officer and Chief Financial Officer; and Justin Rose, Chief Sales and Marketing Officer. By now, everyone should have access to the earnings release, which went out this afternoon at approximately 4:05 p.m. Eastern Time. I would also call your attention to a separate press release that followed the earnings release and announced the appointment of Steve Fife as CEO. If you have not received the releases, they are 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-K and 10-Q. 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, February 2, 2021. 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 Gary Mauro, the Chairman of the company's Board of Directors. -------------------------------------------------------------------------------- Garry M. Mauro, LifeVantage Corporation - Independent Chairman [3] -------------------------------------------------------------------------------- Thanks, Reed. Good afternoon, everyone, and thank you for joining us today. I'm thrilled to be able to introduce Steve Fife as our newly appointed Chief Executive Officer. He will also be assuming the position of President and will join the Board of Directors. As many of you know, Steve took on the interim CEO role in September, in addition to his responsibilities as Chief Financial Officer. He has done an outstanding job guiding the company through this period of transition. Steve joined LifeVantage as CFO in 2017, and his leadership has been a critical factor in our success. He has a wealth of experience and is passionate about our business and driving value for all our stakeholders. Please join me in wishing him the best. Now I'll turn the call over to Steve. -------------------------------------------------------------------------------- Steven R. Fife, LifeVantage Corporation - Interim President, CEO & CFO [4] -------------------------------------------------------------------------------- Thanks, Garry, and good afternoon, everyone. Thank you for joining us today. I am honored and humbled by this appointment. I appreciate the support, the distributors, customers and employees have provided over the past 5 months, and I look forward to leading the LifeVantage team and the opportunities that lie ahead for this great company. With me today is Justin Rose, our Chief Sales and Marketing Officer, who will join me with prepared remarks before we turn the call over for Q&A. During the second quarter, we saw a 31.6% growth of adjusted operating income and 12.6% growth of adjusted EBITDA, both on a year-over-year basis. The operating income and adjusted EBITDA growth was generated as a result of leveraging past investments and a reduction of stock and incentive compensation, events and travel expenses. Additionally, we delivered 7.6% sequential revenue growth and a modest 3.6% decline over the second quarter of fiscal 2020, which was the highest revenue quarter in the company's history. The sequential growth was largely the result of our virtual convention in October, coupled with an LTO that featured 6 new flavors of our Axio drink mixes, as well as several seasonal promotions. Before I turn to a discussion of the second quarter results, let me turn the call over to Justin Rose, our Chief Sales and Marketing Officer, to discuss our recent activities. -------------------------------------------------------------------------------- Justin Rose, LifeVantage Corporation - Chief Sales & Marketing Officer [5] -------------------------------------------------------------------------------- Thanks, Steve. And by the way, congratulations. Super excited for you and even more excited for LifeVantage. As Steve mentioned, we held a successful convention in October, reaching an estimated 20,000 participants from over 18 countries. At convention, we saw a strong response to the launch of limited time expanded flavor offerings of the Axio product line and a new Protandim enrollment pack as well as strong adoption of our new ITT distributor system, which stands for invite, tool, team. It's a digital tool aimed at standardizing, educating, training of new customers and distributors. During the quarter, we also saw positive results of promotions launched, including Operation 25 ITT, in which we challenged participants to test the ITT system by contacting a minimum of 25 people using a new digital tool during the month of November as well as our friends and family, share a $10, get a $10 program. It's a program which allows customers to earn for share in their LifeVantage experience without necessarily having to become a distributor. Additionally, we launched an enrollment pool, which has been met with a lot of excitement. The pool paid down an additional 5% of all new enrollment volumes to people who earn a share and approval. To earn a share, the distributor must have enrolled at least 5 people, customers or distributors in the month with a combined 500 points of new volumes or approximately $550 in revenue. They can earn multiple shares if they double or triple that requirement. As we look forward to the second half of the fiscal year, we remain steadfast on our focus on key drivers for growth, enrollment, retention and average revenue per account or ARPA. Our new ITT distributor system should provide a tailwind for enrollments. The program was launched in October with great energy and strengthened alignment throughout our field leadership organization. Building on this momentum, we've created a virtual training program called success mastery. Participants in this new program meet each Saturday virtually, allowing our top leaders the opportunity to teach and train our build on key topics that foster education and growth. Our efforts to improve retention should benefit from these new technology tools. We have partnered with an AI company that specializes in retention, creating a program that assists our leaders in identifying and intervening before a customer or distributor might churn. We are currently in the testing phase, running different initiatives that will help target the key factors aimed at retaining these accounts. And finally, our slate of innovation and new product introduction bodes well for increasing ARPA. Based on past introductions, we've seen great success in helping our distributors, and customers increased their purchases on a monthly basis. We have an aggressive launch schedule for new products as well as market folio expansions across all of our international markets. Overall, the field is energized. And we are encouraged by the recent adoption of the ITT program, the strong response to recent promotions and are confident in the outlook for the remainder of the year. Now let me turn the time and the call back over to our new CEO, Steve Fife, to run through the second quarter financial results. -------------------------------------------------------------------------------- Steven R. Fife, LifeVantage Corporation - Interim President, CEO & CFO [6] -------------------------------------------------------------------------------- Thank you, Justin. Before I review the financials, I want to share a few thoughts, articulating LifeVantage's strong competitive position and my optimism for the future. Our business is firmly aligned with consumers' increased emphasis on taking better care of themselves and living healthier lives. We have a broad portfolio of high-quality, innovative products, proven to help optimize health and improved performance at all stages of life. As Justin just discussed, our field is energized, and we are well positioned with approximately 70% of our sales generated on subscription, providing stability and revenue during times of volatility. We continue to weather the current storm of this pandemic with all of you. We remain focused on educating and delivering products for a healthier life to a population that has never been more aware of the importance of their health. We move into the second half of fiscal 2021 with a continued focus on the key metrics that drive out business as well as innovation to further enhance our product offering and expand our reach. To that end, we are very excited to announce the pending launch of a new daily wellness supplement, formulated to provide daily support to keep the immune system healthy and strong. This new product is designed with busy and active people in mind to give the extra immune support needed to address daily stressors and physical wear and tear on the body in addition to the seasonal challenges we face. With that, let me walk you through our second quarter results. 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 details. Second quarter revenue was $59 million, down 3.6% on a year-over-year basis. Revenue in the Americas declined 5.4% to $41.9 million, largely due to comparing it to a pre-COVID quarter, which was also the highest revenue quarter in the company's history, as a result of an in-person Global Convention as well as the launch of Protandim NAD Synergizer in the prior year period. These decreases were partially offset by the launch of limited time flavors of our Axio drink mixes, which led to an increased average revenue per account and increased sales associated with various seasonal product promotions during our second fiscal quarter 2021. In Asia/Pacific and Europe, revenues increased 1% and to $17.1 million year-over-year. Gross margin was 82.7% compared to 83.3% for the prior year period. The decrease in gross margin was driven primarily by increased shipping to customer expenses and shifts in geographic and product sales mix. Commissions and incentive expenses as a percent of revenue decreased 170 basis points year-over-year to 46%. Distributor commissions as a percent of commissionable revenue continue to hold constant on a year-over-year basis. As a reminder, the commissions and incentive expense 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. Adjusted SG&A as a percent of revenue was 28.1% compared to 29.3% for the prior year period. The decrease in adjusted SG&A expense as a percent of revenue primarily reflects lower event and travel expenses as well as lower stock and incentive compensation expense. Adjusted operating income was $5.1 million or 8.6% of revenue compared to $3.9 million or 6.3% of revenue in the prior year period. Adjusted net income was $3.6 million or $0.25 per fully diluted share compared to $4.6 million or $0.31 per fully diluted share for the prior year period. The company's effective tax rate increased to 31.6% in the second quarter of fiscal 2021 compared to an effective tax benefit of 24.5% in the prior year period. The increase in the current year tax rate negatively impacted adjusted earnings per share by approximately $0.20. On a year-over-year basis, the company's non-GAAP effective tax rate increased to 29.3% in the first half of fiscal 2021 compared to an effective tax benefit of 2.3% in the prior year period. The increase in the current year tax rate on a year-over-year basis negatively impacted adjusted earnings per share by approximately $0.22. Adjusted EBITDA for the second quarter increased 12.6% to $6.7 million compared to $6 million for the prior year period. Please note that all of the adjustments from GAAP to non-GAAP, I discuss today, are reconciled in our earnings press release issued this afternoon. We ended the second quarter in a strong financial position with $19.7 million of cash and no debt, having repaid the balance of our term loan during the third quarter of fiscal 2020. In addition, we continue to maintain $5 million of availability under our revolving line of credit. We used $4 million in cash during the second quarter of fiscal 2021 to repurchase approximately 365,000 common shares under our share repurchase authorization. As of December 31, 2020, there remains $17.4 million available under the authorization. We expect to continue to be active with our share repurchase efforts in the future. We've invested $1.5 million in capital expenditure during the first half of fiscal 2021 and anticipate CapEx net of leasehold reimbursements of approximately $3.5 million during the full fiscal year. Capital expenditures in fiscal 2021 are primarily for building out our new office space and further development of our digital tools. Turning to our fiscal 2021 outlook. We are reiterating our guidance for both adjusted net income and adjusted EBITDA and now anticipate our fiscal 2021 revenue to be at the low end of our prior guidance range of $240 million to $251 million, reflecting the timing of our product and geographic launches. We continue to anticipate adjusted non-GAAP EBITDA in the range of $25 million to $27 million and non-GAAP earnings per share in the range of $0.87 to $0.91. Now let me turn the call back to the operator to facilitate questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Doug Lane with Lane Research. -------------------------------------------------------------------------------- Douglas Matthai Lane, Lane Research - Principal & Director of Research [2] -------------------------------------------------------------------------------- Congratulations, Steve, on the new position or I guess the permanent new positions as you've already been interim CEO. Can you talk a ... -------------------------------------------------------------------------------- Steven R. Fife, LifeVantage Corporation - Interim President, CEO & CFO [3] -------------------------------------------------------------------------------- Thanks, Doug. -------------------------------------------------------------------------------- Douglas Matthai Lane, Lane Research - Principal & Director of Research [4] -------------------------------------------------------------------------------- Yes, you're welcome. Can you talk a little bit about the virtual convention this year and how that played out versus expectations and what your learnings are from October and how they might apply to your 2021 convention? -------------------------------------------------------------------------------- Steven R. Fife, LifeVantage Corporation - Interim President, CEO & CFO [5] -------------------------------------------------------------------------------- Yes, I am going to let Justin take the first stab at that. -------------------------------------------------------------------------------- Justin Rose, LifeVantage Corporation - Chief Sales & Marketing Officer [6] -------------------------------------------------------------------------------- Yes. Thanks, Doug. We actually were pleasantly surprised, especially with the turnout, the number of registered attendees and the number of events that took place for viewerships. However, we did see a decrease in the product launch that was associated with the convention that was virtual this year compared to last fiscal year, a difference of about $2 million. We were about $2 million less in revenue. And I would assume a little bit of that had to do of not having people in actual seats and being present. So -- but overall, very pleased with the number of attendees and the number of eyeballs that we were able to attract. -------------------------------------------------------------------------------- Steven R. Fife, LifeVantage Corporation - Interim President, CEO & CFO [7] -------------------------------------------------------------------------------- Yes. And I'd just add onto that, that we recorded all of that. And not only did we -- do we think we add over 20,000 that listened live, but it was also available for, I think, it was 30 days or 45 days afterwards so that they could jump back on if they missed anything and still have access to that. So I thought our reach was much greater than we've had in other in-person conventions. -------------------------------------------------------------------------------- Douglas Matthai Lane, Lane Research - Principal & Director of Research [8] -------------------------------------------------------------------------------- So how does that change or impact your outlook for what you're going to do? I know it's early days and the environment is still fluid. But from where we sit today, how does that impact what you're going to do in October of this year? -------------------------------------------------------------------------------- Steven R. Fife, LifeVantage Corporation - Interim President, CEO & CFO [9] -------------------------------------------------------------------------------- Yes. I think in October -- we have an Elite Academy that is scheduled in March just in a couple of months and we -- that will be a virtual event, and we're still kind of evaluating what happens in October. But I think we learned that we can be really effective with our reach on virtual events. But it's really difficult, at least after our first one to replicate the elements of recognition and just the comradery at the LifeVantage community when we're doing it remotely. The power of being together is really tangible. And so I think going forward, whenever the new normal was out there, I could see that we'll have virtual events and we'll have in-person events just to be able to leverage, especially that power of being together. -------------------------------------------------------------------------------- Douglas Matthai Lane, Lane Research - Principal & Director of Research [10] -------------------------------------------------------------------------------- That makes sense. And then putting your CFO hat back on for a minute. What is the priorities of free cash flow? I guess from your commentary, I would assume stock buyback is moving to the top, and then you have a certain level of CapEx, but no real CapEx bubble, if you will, coming down the pike. What about acquisitions and dividends? -------------------------------------------------------------------------------- Steven R. Fife, LifeVantage Corporation - Interim President, CEO & CFO [11] -------------------------------------------------------------------------------- Yes. You're right. We had a healthy buyback during the quarter. We repurchased $4 million during Q2. And I think that will continue to be a priority for us, especially where our stock is right now. We think that it's undervalued. CapEx will be a little higher this year because of cost associated with moving into our new office space. And I think as we've talked about before, we are being more acquisitive and looking at opportunities. We haven't found anything yet that is the right fit for us. But if the right opportunity were to come along, we would clearly use our cash. And then as you know, we have a shelf in place as well for $75 million that we would utilize for the right opportunity. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from [Jim Galloway], private investor. -------------------------------------------------------------------------------- Unidentified Shareholder, [13] -------------------------------------------------------------------------------- Steve, congratulations on becoming the CEO, and good luck. A couple of different questions. First one is, I think you're doing a great job virtually, but we're still losing customers and distributors. Do you see any forecast as to a cessation of that and maybe some growth? -------------------------------------------------------------------------------- Justin Rose, LifeVantage Corporation - Chief Sales & Marketing Officer [14] -------------------------------------------------------------------------------- Yes. Jim, this is Justin Rose. So yes, we actually -- we saw an increase in the second quarter in enrollments almost 20% increased there. And we expect that to continue throughout Q3 and Q4. And we're really basing that list off of the new ITT system that's been put in place, where I think people are very much now learning the system, training on the system each Saturday on the success mastery calls and really putting it into practice. So we do expect that to continue to increase. -------------------------------------------------------------------------------- Unidentified Shareholder, [15] -------------------------------------------------------------------------------- Good. My other question relates to R&D and studies on our products. I remember the good old days where we had a number of universities analyze the Nrf2 and the Protandim. I don't know if we have any studies going on right now that you can relate to. And I'm concerned that the new wellness product has some independent research behind it because there are just so many wellness products out there. I want to make sure that this really is one that the distributors can back up scientifically. -------------------------------------------------------------------------------- Steven R. Fife, LifeVantage Corporation - Interim President, CEO & CFO [16] -------------------------------------------------------------------------------- Yes. So just touching on the wellness product first. It is -- there is a hero agreement -- sorry, ingredient in this product that is very well researched. I think you and others will find it a very compelling product when it's launched. It'll be available to distributors here in a few weeks and then to customers about a month after that. And so having a science-based products is kind of core to LifeVantage, and we continue to both look at ingredients as well as the combination of our products together. If you recall, when we when we launched our Protandim NAD Synergizer just over a year ago now. We had done studies of it as well as in combination with our Nrf2, Nrf1 products. And the combination of those 3 is really what led us to position and brand the Tri-Synergizer to bring all of that benefit together from a science standpoint. And I also believe that over the last year or two, there's been additional studies in research on our Nrf2 product. So I think we are sitting now at over 30. I think it's 32 separate independent studies on Nrf2 itself. -------------------------------------------------------------------------------- Unidentified Shareholder, [17] -------------------------------------------------------------------------------- Any way of getting some publicity of that out into the general population? -------------------------------------------------------------------------------- Steven R. Fife, LifeVantage Corporation - Interim President, CEO & CFO [18] -------------------------------------------------------------------------------- Yes. We -- all of those are published on PubMed, and we do our part to try to get that out into the public domain. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- There are no more questions at this time. I would like to turn the call back over to CEO, Steven Fife, for any closing comments. -------------------------------------------------------------------------------- Steven R. Fife, LifeVantage Corporation - Interim President, CEO & CFO [20] -------------------------------------------------------------------------------- Thank you, and thank you, everyone, for joining our call today. In closing, I just want to take the opportunity to thank all of our employees for their hard work and dedication every day as well as our outstanding team of distributors. We remain confident in our business model and are focused on delivering the LifeVantage products our customers depend on. We hope you all stay safe and healthy and look forward to updating you on our next call. Have a great day. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Thank you for your participation. This concludes today's call. You may disconnect your lines at this time, and have a great day.