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Edited Transcript of NLS earnings conference call or presentation 6-May-19 8:30pm GMT

Q1 2019 Nautilus Inc Earnings Call

Vancouver Jun 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Nautilus Inc earnings conference call or presentation Monday, May 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* M. Carl Johnson

Nautilus, Inc. - Interim CEO & Non-Executive Chairman

* Sidharth Nayar

Nautilus, Inc. - CFO

* William B. McMahon

Nautilus, Inc. - Special Assistant to the CEO

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Conference Call Participants

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* Brennan James Matthews

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Frank Anthony Camma

Sidoti & Company, LLC - Senior Research Analyst

* George Arthur Kelly

Imperial Capital, LLC, Research Division - VP

* Michael Arlington Swartz

SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst

* Michael Milton Yuji Kawamoto

D.A. Davidson & Co., Research Division - Research Associate

* Ryan Ronald Sigdahl

Craig-Hallum Capital Group LLC, Research Division - Associate Analyst

* John Mills

ICR, LLC - Partner

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Presentation

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Operator [1]

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Good day, and welcome to the Nautilus Inc. First Quarter 2019 Earnings Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to John Mills with ICR. Please go ahead, sir.

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John Mills, ICR, LLC - Partner [2]

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Thank you. Good afternoon, everyone. Welcome to Nautilus' First Quarter 2019 Conference Call. Participants on the call from Nautilus are Carl Johnson, Interim Chief Executive Officer; Sid Nayar, Chief Financial Officer; and Bill McMahon, Special Assistant to the CEO. Our earnings release was issued earlier today and may be downloaded from our website at nautilusinc.com on the Investor Relations page.

The earnings release include a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures. Remarks on today's conference call will include forward-looking statements within the meaning of the securities laws. These include statements concerning financial projections; operating trends; anticipated growth and profitability; anticipated timing and market acceptance of new product introductions and the impact of new product introductions on our future financial results; planned capital expenditures; and anticipated results of new product, business development initiatives and strategic partnerships. Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from these statements.

Additional factors that could cause Nautilus' actual results to differ materially from these forward-looking statements include legal and anticipated demand for new or existing products; our ability to timely acquire inventory that meets our quality control standards from sole source foreign manufacturers at acceptable costs; experiencing delays and/or greater-than-anticipated costs in connection with the launches of new products, entry into new markets or strategic initiatives; our ability to hire and retain key management personnel; changes in consumer fitness trends; changes in the media consumption habits of our target consumers or the effectiveness of our media advertising; a decline in consumer spending due to the unfavorable economic conditions; and softness in the retail marketplace. For more information about these risks and uncertainties, please refer to today's earnings announcement and our most recent annual report on Form 10-K and supplemented by our quarterly reports on Form 10-Q. Nautilus undertakes no obligation to update or otherwise publicly release any revision to forward-looking statements to reflect new information, events or circumstances after they were made or to reflect the occurrence of unanticipated events. All information and comments regarding our operating results pertain to our continuing operations unless otherwise noted.

And with that, it is my pleasure to turn the call over to our interim CEO, Mr. Carl Johnson.

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [3]

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Thank you, John. Good afternoon, everyone, and thank you for joining our call today. I would like to start today's call with a brief summary of my experience with Nautilus and my background. Although, I was new to Nautilus management when I was appointed interim CEO on March 2nd, I was not new to the company. I joined the Board of Directors in 2010 and have served as Chairman of the Board since 2011. During my tenure, annual sales have grown from about $170 million in 2010 to about $400 million today, with a significantly increased market cap. Over this time period, we have strengthened our balance sheet and have grown market share in both the Retail and Direct segments. We have done this by building a robust knowledge of consumer insights, investing in advertising and media and by investing in a new product development, including a state-of-the-art innovation center. In addition, we have continued to add to the team by hiring great innovation talent in a variety of roles. These investments have resulted in a series of high quality, unique fitness offerings, with a robust pipeline ahead.

From a historical perspective, we have faced challenging fitness and market situations before. And due to the talent of the Nautilus team and our strong brands key advantage strengths, we have been able to overcome these challenges successfully in the past. As I will outline in a few minutes, I am fully confident that we'll do the same this year and in 2020. We know what the temporary challenges are, and they are certainly solvable.

Now just a few words about my background. I've been privileged to have worked in my career for some of the most iconic consumer products with companies in the world including Colgate-Palmolive, Kraft Foods, Campbell Soup and, most recently, Del Monte Foods and Big Heart Pet Brands. I have run small- and medium-sized businesses and large multibillion-dollar organizations. My expertise beyond general management is in consumer marketing and strategy, the areas in which we believe Nautilus' current challenges are centered.

And with that, I will now provide a general overview of our first quarter 2019, discuss our business segments as well as new product activity and then turn the call over to Sid Nayar to review our financials in more detail. I will close with a few final remarks before opening the call up to your questions.

During the quarter, the same issues that affected us in the fourth quarter of 2018 continued into 2019. As expected, we experienced soft sales in the Direct segment due to the slow ramp of the refreshed Max Trainer product and our new digital platform, while the Retail segment was impacted by temporarily elevated inventory stocking levels with the key retailers. To combat the challenges in Direct, as a highest priority, we have initiated short- and longer-term actions to address the underlying issues. We are working in the immediate term to boost performance in Direct through a broad range of tactical digital, social media and PR programs to support the Bowflex Max Trainer, the digital platform and other Direct products.

To recap the underlying issues in Direct, we have identified through research and analysis that the miss with Max Trainer starting in the fourth quarter traces to suboptimal advertising creative that did not resonate with consumers and resulted in low awareness and insufficient communication of the differentiated digital capabilities of the platform. Our team is working to develop effective new positioning and advertising for Bowflex, the Max Trainer line and our digital platform using leading-edge consumer insights techniques.

Important to note, early adopters of the latest Max Trainer product offerings with digital capabilities have overall provided very positive meaningful insights that we believe will translate into improvements in both the system and the messaging. By September, we expect to have a vastly improved advertising campaign and media spin strategy rolled out so we are ready for the next holiday and fitness season and can return the Direct business to a profitable growth trajectory as we exit 2019. In our Retail segment, sales were temporary affected this quarter due to the expected realignment of inventories at select strategic partners. However, we continue to see strong sell-through and expect a healthy fall and a holiday season for the Retail segment.

Turning now to the digital platform. Even though it is not happening as quickly as we have previously expected, we continue to see improved adoption and subscription rates with Max Intelligence. To further increase our customer engagement, we recently begin offering a 2-month free trial to all new users of the digital platform. This move has the added benefit of giving all users access to the customized and personalized workout features, which can help them better achieve their fitness goals and allowing them to try RunSocial, a video app that combines social running with high-definition videos of amazing running routes; Bowflex Radio and workout videos to better understand the value of these features. We believe we have a sticky platform, and once we get customers using it and seeing the increased functionality, they will likely become loyal subscribers.

We also began expanding the capabilities of our digital offering to further enhance the customer experience. We are utilizing direct communication and feedback with thousands of users on our platform to quickly add highly requested features, and we will continue to do so with the intent of developing the best and most engaging individualized user experience in the industry. This includes more advanced coaching, further deployment of our artificial intelligence capabilities, features to allow sharing on social media and even more music choices. Our the course of 2019, and with our partners Samsung, Vi and Feed.fm, we expect to introduce additional features such as language localization, tracking enhancements, a tighter integration of RunSocial into the platform, custom workout upgrades, fitness scores and much more. Innovation has always been a top priority for this company, and we have plans to roll out a range of new products across all of our sales channels in the fall of 2019.

Most importantly, we are pleased to announce the launch of our newest flagship product, the new Bowflex Max Trainer M10, combining an amazing cardio solution with upper-body strength training. The M10 provides the balanced full-body workout that helps build strength, burn fat and take control of their personal fitness. One of the best features of a new M10 is the built-in Samsung 9.5-inch LCD display, which seamlessly connects with the latest-generation Max Intelligence digital platform. With artificial intelligence coaching that learns from past performance, the app offers motivating, trainer-led custom workouts designed to help build healthy exercise habits and deliver effective personalized experiences. Other 2019 new product introductions include Bowflex treadmills with custom workouts and advanced personalized artificial intelligence coaching incorporating Vi technology; Octane commercial Max Trainer; and the Octane XR6000S, an upgrade to the latest elliptical line. We will continue to provide you with more detail on these new products and more as they come to market in the back half of the year.

And now Sid will provide an overview of the financials for the quarter. Sid?

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Sidharth Nayar, Nautilus, Inc. - CFO [4]

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Thank you, Carl. Good afternoon, everyone. I'd like to review the details of our financial results for the first quarter of 2019. Net sales for the first quarter totaled $84.4 million, a decrease of 26.5% as compared to the same period in the prior year, reflecting a 34.4% decline in Direct segment sales and a 14.4% decrease in the Retail segment. First quarter gross margins in the Direct segment decreased by 650 basis points to 56.5% and were down by 790 basis points in the Retail segment to 23.3% when compared to the same quarter last year. Margins in both segments were negatively impacted by unfavorable overhead absorption related to the decline in sales coupled with unfavorable product mix.

On an overall basis, total company gross margins for the first quarter of 2019 decreased by 880 basis points to 42.5% versus the same period last year, reflecting the lower rate in both segments and a shift in channel mix to an increased percentage of Retail segment revenue.

Total operating expenses for the first quarter of 2019 as a percentage of net sales increased to 54.5% from 42% in the same period last year, primarily reflecting the decrease in sales. Sales and marketing expense for the first quarter of 2019 was $34 million or 40.3% of net sales as compared to $36.8 million or 32% of net sales in the same period last year. The decreased dollar spending reflected a reduction in media spend along with lower financing fees related to the decrease in sales. The increase in sales and marketing as a percentage of sales reflects the decrease in sales.

General and administrative expenses were $7.7 million or 9.1% of net sales for the first quarter of 2019 compared to $6.9 million or 6% of net sales in the same period last year. The increased dollar spending in G&A primarily reflects increased legal cost partially offset by lower stock compensation expense. Research and development expenses in the first quarter of 2019 were $4.3 million or 5.1% of net sales compared to $4.5 million or 3.9% of net sales in the same period last year. The dollar decrease reflects lower third-party app development spending.

Operating loss for the first quarter of 2019 was $10.2 million as compared to operating income of $10.7 million in the same quarter of last year. The decrease reflects the decline in sales and gross margin rates partially offset by the decrease in operating expenses. EBITDA loss from continuing operations in the first quarter of 2019 was $8.1 million versus $13.1 million in income for the same quarter of the prior year. Loss from continuing operations for the first quarter of 2019 was $8.5 million or minus $0.29 per diluted share as compared to income of $8.1 million or $0.27 per diluted share for the same period last year.

The effective tax rate for the first quarter of 2019 was 20% compared to 23.7% in the same period last year. Total net loss including discontinued operations for the first quarter of 2019 was $8.6 million or minus $0.29 per diluted share, which includes a $0.1 million loss, net of taxes, from discontinued operations. This compares to the first quarter last year when we reported total net income including discontinued operations of $8.1 million or $0.26 per diluted share, which included a net loss from discontinued operations of $0.1 million.

Turning now to our segment results. Net sales in the Direct business totaled $46.7 million for the first quarter of 2019, a 34.4% decrease over the same quarter last year. Direct segment sales were primarily impacted by a decline in Max Trainer sales. Gross margin for the Direct business declined to 56.5% for the first quarter of 2019 compared to 63% in the same quarter of last year due to unfavorable overhead absorption related to the lower sales coupled with unfavorable product mix due to lower Max Trainer sales.

Operating loss for the first quarter of 2019 in our Direct business was $4.5 million compared to income of $11.3 million in the same quarter prior year. Operating income was negatively impacted by the lower net sales and gross margins in the first quarter of 2019 partially offset by reduced marketing expenses.

Net sales in our Retail segment for the first quarter of 2019 were $36.8 million, a decrease of 14.4% compared to $43 million in the first quarter of last year. The decrease was primarily due to lower order volume from certain customers working through reductions in inventory stocking levels. Gross margins for the Retail business decreased by 790 basis points to 23.3% in the first quarter of 2019 as compared to 31.2% for the same quarter last year, mostly from unfavorable overhead absorption related to the lower sales coupled with unfavorable product mix. In the first quarter of 2019, operating loss for the Retail business totaled $0.7 million as compared to income of $3.9 million in the same period of last year. The decrease is attributable to lower sales and gross margin rates.

Now turning to the consolidated balance sheet. Cash and investments totaled $23.6 million as of March 31, 2019, with $20.5 million of debt. This compares to $63.5 million in cash and investments and debt of $32 million at December 31, 2018. While there will be seasonal working capital requirements for the business, we anticipate ending the year with a net cash balance. Inventories were $60.9 million as of March 31, 2019, compared to $68.5 million at December 31, 2018, and $37.7 million at March 31, 2018.

As noted in our Q4 2018 release, we ended 2018 with more inventory than planned for, and we are strategically reducing inventory throughout 2019. Trade payables were $40.7 million as of March 31, 2019, compared to $87.3 million at the end of 2018, reflecting seasonality of purchases as well as lower new inventory purchases during Q1 2019. Capital expenditures totaled $1.1 million for the 3 months ended March 31, 2019, with spending primarily on new software systems and production tooling and equipment. We anticipate full year CapEx to be in the range of $8 million to $10 million.

At this time, I'd like to turn the call back over to Carl for his final comments. Carl?

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [5]

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Thank you, Sid. To sum up, over the past few months, we have done a thorough assessment of both our internal and external situations given the changes in our revenue trends and competitive landscape and weaker media ROI performance. This assessment has led to a revised set of 2019 priorities on which the whole company is focused and which are designed to get Nautilus back on a profitable growth trajectory. It is a testament to the hard work, flexibility and ingenuity of our employees that positions us to be able to do so while staying the course and maintaining a healthy balance sheet. And I thank all of our Nautilus team members for their dedication and excellent efforts.

Our strategies over the next several months are clear and focused. We have multiple initiatives underway to return the Direct business to profitability by the fourth quarter of this year, including significant investments in creative, messaging, market research and commercial production, plus new products that we anticipate will directly influence traction within this channel. In our Retail segment, we are introducing several new products that should provide further opportunities for market share growth in this channel as we head into the fitness season during the back half of the year. And we believe this will lead to retail growth in the third and fourth quarters. Initiatives including a workforce reduction, broad cost-containment controls, value-engineering initiatives and simplification of processes have been executed or are underway and will support improving our current operating margins and rescale our operations to be more profitable at current revenue levels and to lay the foundation to restore growth to the sales base.

While we are not now in a position to provide full year guidance pending visibility into the traction gained from these various initiatives, we expect to see the changes we are making to the business start to impact results positively in the latter part of 2019. I believe we have the right plans and people in place to work through our temporary setbacks and position Nautilus for continued growth and success in the years ahead. We have a distinct place in the fitness world and in our customers' lives, and we will continue to serve both through innovative and quality-driven products.

And now I'd like to open the call up to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question today from Michael Swartz with SunTrust.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [2]

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I guess my first question is just to -- it sounds like you've done some work around diagnosing maybe what's some of the challenges have been on the Direct business and perhaps, more specifically, with Max Trainer and Max Intelligence. I guess I'm just trying to get a sense from a comfort standpoint of the -- it's a messaging issue maybe rather than something in the competitive environment or just with the way media is being consumed today. So maybe give us a little help understanding what you've diagnosed and how you course correct that?

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [3]

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Fair enough. This is Carl. First of all, we have used leading-edge consumer insights technique to get what the underlying issues are with the Direct business. And so we have confirmed that the drivers behind the shortfall relate to suboptimal positioning in messaging and advertising. And the steps we are taking longer term are directly designed to address those shortcomings. Certainly, the level of advertisings we said past, in the past -- over this past month and past quarter -- at the last quarter's call, the high level of spending by competition undoubtedly affected us to a certain extent. However, we were still spending at fairly heavy levels. And while awareness may have been a factor, the primary factor is our own messaging and advertising.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [4]

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Okay. Okay. That's helpful. And then, just with the -- Sid, could you just give us a little bit more color on the inventory position at current? It seems it's still elevated year-over-year. When should we begin to see some of that improve and start to see the cash generation come in?

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Sidharth Nayar, Nautilus, Inc. - CFO [5]

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Sure. So I probably would split it out by channel again. So we do believe some of the -- certainly on the Direct side, it's just the -- comes back to the hangover of certainly not meeting our expectations for Q4 and Q1, and we expect some of that product will just flow through the balance of this year. So there won't be a significant ratchet down till we get through -- back into the Q3, Q4 season. On the Retail side though, it's a little different. There were certain products that we felt we had an excess situation on which we are strategically and pretty significantly ramping back down, and we should anticipate getting through most of that by the end of the second quarter or latest by the early part of third quarter.

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Operator [6]

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Next, we'll hear from Frank Camma with Sidoti.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [7]

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Just dovetailing on the inventory question. Could you just talk about the split a little bit? Is it heavier in Direct than Retail as you would expect? Or is it pretty even? What's the...

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Sidharth Nayar, Nautilus, Inc. - CFO [8]

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It's a little heavier on the Retail side. When you sort of just look at the -- and maybe, I would say you're talking about probably at $10 million number, and it's probably split more like $7 million to $3 million between Retail and Direct.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [9]

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Okay. Great. And you made a comment that in Retail there was still strong sell-through. Can you talk about what categories and/or products specifically you're seeing that sell-through at?

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Sidharth Nayar, Nautilus, Inc. - CFO [10]

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Yes. I think it's really broad based, the sell-through that we are seeing. It's bikes. It's treadmills. It's pretty much -- it's kind of products across the board, I would say. We've seen some softness in Max Trainer sales at Retail, but all of these other categories have been really strong.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [11]

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Yes. I was going to ask about that, the Max Trainer that you have at DICK'S, for example. Can you just talk about that initiative in general and how that's going? And what do you think that's doing for the business?

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William B. McMahon, Nautilus, Inc. - Special Assistant to the CEO [12]

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Yes. Frank, this is Bill. I think -- yes, we still love the relationship with DICK'S Sporting Goods on allowing folks to try the product before they buy it, which is a real strategic advantage for us. Certainly, DICK'S might have been -- there seems some slowdown in Max Trainer. But some of that is in anticipation of evolving to the new product, which our current plans would be that DICK'S Sporting Goods would plan to carry our new Max Trainer products in the fall. So we continue to feel like that's a very strong category and a great relationship. And I think it has helped the business in terms of creating awareness.

As Michael before you had mentioned changing media landscape, so I mean it's an opportunity for us to get more visibility to that product line out, and we think ultimately more visibility to the Max Intelligence Platform. And I think Carl has something to add on that.

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [13]

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I was going to make the last point you just made, Bill, and that's -- for the first time, we'll have the digital platform on the Max 6 and 8 out in retail at DICK'S. And we'll be obviously demonstrating those capabilities in store. So we're quite excited about that proposition as is the customer.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [14]

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Good. And I guess last one if it gets through is just on Max Intelligence itself. Do you have any stats so far just on how many people or percentage or whatever are actually subscribing to the platform after they get the trial done?

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [15]

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We do. And those subscription rates and usage rates continue to grow continuously. So we're quite happy with that.

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Frank Anthony Camma, Sidoti & Company, LLC - Senior Research Analyst [16]

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That's only 6 months data though right now, right? Is it about right?

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [17]

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Yes.

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Sidharth Nayar, Nautilus, Inc. - CFO [18]

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Yes. A fair measure of stickiness would require an annual comp on that, but we're happy to see the trend improving. And that's what we're trying to do. Despite our challenges and awareness in messaging, we're pleased with adoption of Max Intelligence. But I'd say we have more work to do there, just as we do in everything related to Direct.

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [19]

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That's right. We're also seeing the average time spent on the platform and on the machine growing, which is another very encouraging sign for obviously mid- to longer-term adoption.

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Operator [20]

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Next, we'll hear from Michael Kawamoto with D.A. Davidson.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [21]

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Yes. Can you just talk about what the M10 is? Is that another iteration of the Max Trainer? Or is that a new modality altogether?

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [22]

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Yes. Let's see. It's obviously an upgrade to the line. The machine itself will be much more of a whole-body workout where the strength aspect of it is greatly ramped up. And so as far as the digital platform, it will have a 9.5-inch Samsung LCD screen on it and all the continually upgraded digital features. So it's quite impressive machine, and we're excited about the potential.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [23]

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Got it. And so will the price point on that one be a little bit higher than the M8?

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William B. McMahon, Nautilus, Inc. - Special Assistant to the CEO [24]

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Yes. A little bit higher than M8. So it'll make sense in the line of the product, and it will have more to say on that as we get closer to launch.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [25]

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Okay. Yes. And then you've talked about kind of accelerating Direct launches. I think you started talking about that last year. Is that still the plan going forward to kind of do one big launch a year?

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William B. McMahon, Nautilus, Inc. - Special Assistant to the CEO [26]

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Yes. In terms of the Direct business, we would like to get -- move up to once a year versus every few years. We have additional products in the Direct pipeline that are near. They're certainly physical and they exist, and we're testing them now. I don't think we're ready to talk about them quite yet as the majority of our focus is really on the upfront addressing our Direct profitability challenges in the media and messaging. So I think once we conquered that, we'll have more to say about additional products to layer on, but they are coming. And I would anticipate a launch in 2020 of a new Direct platform that's wholly new to the Direct space.

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [27]

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Right.

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Operator [28]

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Our next question comes from Steve Dyer with Craig-Hallum Capital Group.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [29]

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Ryan Sigdahl on for Steve Dyer. So I notice you aren't giving formal guidance, but just to back in a few things you've said. So you expect to exit the year with positive net cash, which you currently have, while generating positive working capital from $10 million of inventory reduction. This plus other commentary it seems to imply that profitability is fairly unlikely or it will be a challenge in 2019. Am I way off target there? Or am I adding those right?

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Sidharth Nayar, Nautilus, Inc. - CFO [30]

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Yes. I can't comment on the '19 numbers, Ryan.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [31]

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Okay. Switching gears. So as it relates to the new marketing strategies, are you changing advertising channels between digital, TV, social media? Or is it more of a change in the content in messaging or maybe both? Maybe a little color there?

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [32]

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Sure. I would say both. The key thing is we've got to get the positioning and messaging right. And so the primary focus is there, but obviously, you have to have a media strategy going along with it. We do a fair amount of digital today, and we would expect that we would also do that and potentially use PR and organic social to a greater extent than we have historically. But those plans are still being worked on. I'd say the primary thing is to get the messaging correct, but suffice to saying that we'll be making changes -- improvements in both. I would also note that we will be using an outside creative agency we are quite excited about. We're working on that path right now.

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Operator [33]

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We'll move on to our next question from Brennan Matthews with Berenberg.

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Brennan James Matthews, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [34]

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So one thing I just wanted to ask about was it -- I think during Q4 you had kind of highlighted I think it was like some ERP issues in relation to the international business as well as commercial. And it sounds like you guys had fixed that in the fourth quarter. But any commentary on kind of the trends you're seeing in those 2 channels? And did the issues -- the ERP or integration issues you have there, I mean have they led to anymore kind of longer-term issues with your customers in those channels?

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Sidharth Nayar, Nautilus, Inc. - CFO [35]

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So we did had a little trailing factors coming out of that into the first quarter, but what I would say broadly is the international channel is doing well. And we, just at a very high level, expect that to continue to grow in 2019. We did see some challenges in the commercial side of the commercial specialty channel, which we think was really more timing related at this point. But we did have some continued service issues in that channel in Q1, which I would say most of those are behind us.

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Brennan James Matthews, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [36]

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Okay. And then one -- just kind of one other question. I just wanted to understand a little bit better about kind of launching another Max Trainer product, I think this will be the sixth, especially kind of given some of the communication and messaging issues you guys have. Why not -- I guess maybe why not wait until you've got that kind of messaging and communication piece out there? Or any concerns that just adding another product to that lineup could create any confusion?

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [37]

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Well, I would say that when we launch the M10, it will be backed by our new messaging creative and, obviously, support it with significant media investment in both TV and, call it, the digital world. The Max 10 is actually a significant differentiated product from its other brothers and sisters in the line. And so we think the combination will be powerful, but clearly, the repositioning, the new messaging creative will be the primary driver.

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Operator [38]

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(Operator Instructions) We'll now hear from George Kelly with Imperial Capital.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [39]

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So just a few questions. First, I remember on your prior calls you talked about allow -- coming out throughout this year with sort of upgrades for your existing Bowflex machines, the non-Max Trainer machines to make them suitable for the intelligence platform. Is that still something that you're planning on doing this year?

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [40]

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Yes. We're looking at 1 or 2 options for some of the other modalities, but we're not ready to announce that yet. Do you have anything, Bill?

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William B. McMahon, Nautilus, Inc. - Special Assistant to the CEO [41]

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Yes. I'd just say we do have upgrade kits that are available now for M7 and M5, the existing Max Trainer lines. But as Carl noted, we are also looking at other modalities. And we look at that in conjunction with it's our -- it is our plan and we will show in the near future expansion of the Max Intelligence line to other modalities. And as we look at those modalities, we're also looking at [all case], we have an existing base of customers. It's a great opportunity to introduce them to the platform, how can we help them with that. And so modality by modality, we'll tackle that problem, but it remains in the plans to do so where appropriate.

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [42]

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Yes. I would just add that the upgrade kits to digital that Bill mentioned we're actually marketing those directly to owners of the Max 5 and Max 7. And so that is one of the short-term, call it, more tactical efforts that we're doing to boost sales and engagement in the platform more broadly across our franchise.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [43]

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Okay. Okay. Got you. And then a couple of questions just around the media advertising. Can you quantify what it was in the quarter? Or just talk sort of directionally about how it compared to last year? And what's the plan for the next couple of quarters until the new -- the Max 10 comes out?

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William B. McMahon, Nautilus, Inc. - Special Assistant to the CEO [44]

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Yes. So for this past quarter, George, we spent a total of $19.7 million compared to the prior year quarter, which was $21.3 million. And again, I think what I can say is that till we get -- as Carl mentioned, till we get the messaging sorted out and ready to be repositioned, we probably will be looking at slightly scaled-back media in -- certainly for Q2 and the early part of Q3. What I would say is media in Q1 was probably high because we came out in January really with -- behind the new digital offering. We continued to spend fairly heavily during the fitness season to continue to try to build awareness and scale back really only later in Feb and March.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [45]

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Okay. Okay. And then, I guess last question for me. Just on -- 2 more questions. First, I understand you're not providing full year guidance, but can you just -- it sounded -- I don't know if I heard you right in your prepared remarks, but it sounds like the trends in the second quarter in both the Retail and the Direct segments are somewhat similar with what you saw in the first quarter, and then you laid out a lot of initiatives you're working on that you hope will improve the trajectory of both businesses in the back half. Am I hearing that correctly?

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Sidharth Nayar, Nautilus, Inc. - CFO [46]

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Yes. Certainly on the Direct side, I think that's fair. Retail is just more a quest -- as we work through the inventories, we should see improving trajectories in Retail.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [47]

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And that could happen sooner than the back half, is what you're saying? The second quarter might be a better -- the inventory situation won't take forever to work through?

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Sidharth Nayar, Nautilus, Inc. - CFO [48]

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Yes. Exactly. It's just a question of whether it's sort of late second quarter or early third quarter for that to bounce back to normalized levels.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [49]

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Okay. Great. And then last one for me, just the approvals in the Direct business. What were they in the first quarter?

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Sidharth Nayar, Nautilus, Inc. - CFO [50]

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Approval rates still remained pretty decent. We're at 54.3%. It was up about 80 basis points versus the same quarter last year.

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Operator [51]

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That will conclude today's question-and-answer session. At this time, I'd like to turn the conference over to Mr. Carl Johnson for any additional or closing remarks.

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M. Carl Johnson, Nautilus, Inc. - Interim CEO & Non-Executive Chairman [52]

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Thank you for joining our call today and your continued interest in Nautilus. We look forward to providing you with another update on the business in a few months on our second quarter earnings call. Have a great rest of the day. Thank you.

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Operator [53]

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That will conclude today's conference. Thank you for your participation.