LifeVantage Corporation (NASDAQ:LFVN) Q2 2023 Earnings Call Transcript
LifeVantage Corporation (NASDAQ:LFVN) Q2 2023 Earnings Call Transcript February 2, 2023
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to today's Conference Call to discuss LifeVantage's Second Quarter Fiscal 2023 Results. Hosting today's conference will be Reed Anderson with ICR. As a reminder, today's conference is being recorded. And now, I would like to turn the conference over to Mr. Anderson. Please go ahead, sir.
Reed Anderson: Thank you. Good afternoon and welcome to LifeVantage Corporation's conference call to discuss results for the second quarter of fiscal 2023. On the call today from LifeVantage with prepared remarks are Steve Fife, President and Chief Executive Officer and Carl Aure, Chief Financial Officer. By now, everyone should have access to the earnings release, which went out this afternoon at approximately 4:05 p.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of LifeVantage's website at www.lifevantage.com. This call is being webcast and a replay will be available on the company's website as well. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions.
These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of LifeVantage's most recently filed Forms 10-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 have 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, 2023. LifeVantage assumes no obligation to update any forward-looking projections that maybe made in today's release or call. Now, I will turn the call over to Steve Fife, the President and Chief Executive Officer of LifeVantage.
Steve Fife: Thanks, Reed and good afternoon, everyone. Thank you for joining us today. It's an incredibly exciting time at LifeVantage. Our Rock the Rhythm event held earlier this month on January 18 and simultaneously broadcast to our U.S., Japan, Australia, New Zealand markets served as the public announcement for major transformation initiatives designed to forge a new, more modern chapter in our company. Over a year ago, myself, along with the executive team, took a hard look at where we were as an organization and what was needed to propel sustainable growth. LifeVantage has always had a reputation for having superior products, which delivered years of stability, but it was time to get back to being the company to watch.
Our team dug deep into consumer trends. We met with top industry advisors. We evaluated the options we had to support growth opportunities and multiple paths to earn for our consultants, previously known as our distributors. The strategic plan that emerged from this comprehensive analysis was called LV360, because to really deliver the outcomes we were looking for, we needed to take a holistic approach with innovations happening across all the major touch points of our consultant and customer experience. One of the biggest components of LV360 is Evolve, our new industry-leading modern compensation plan. Evolve focuses on driving key consultant behaviors, including product sales with commissions possible through new three-tier pricing structure and graduated bonus incentives.
Evolve outlines three progressive stages of the consulting paths: share, build and grow, and lead. And this clearly defines the earning opportunities at each stage. Evolve meets consultants where they are on their respective journeys, rewarding them for working in the way that works for their personalities and lifestyles. It is a simple path that is attractive to both direct sales professionals and those who simply want to earn by sharing products they love. A new customer loyalty program called Rewards Circle is another key element of LV360. Like our updated compensation plan, Rewards Circle is structured in a simple and efficient manner, which enhances its value proposition. With each subscription order, LifeVantage customers earn towards reward credits, which once earned can be applied as a discount on future orders.
Insider status is unlocked once a certain subscription spend threshold is met. Once insider status is earned, reward credits double in value. Other program benefits include a free full-size product on a customer's second consecutive qualifying subscription order as well as a product gift on their anniversary. Existing customers on subscription as of March 1 will automatically have insider status in the loyalty program. Both Evolve and Rewards Circle are scheduled to launch in the U.S., Australia, New Zealand and Japan on March 1. These initiatives are planned to rollout to our other markets where LifeVantage products are sold and distributed over the next 12 months. Another important element of LV360, our product innovation initiative kicked off last calendar year with strong activation positionings across the portfolio.
The product initiative includes last year's launch of liquid collagen. And in October, at Global Convention, we launched our activation paths: optimize health, achieve more, look radiant and evolve possibilities, to make it easier for consultants to guide customers through their wellness journey. At Rock the Rhythm, three new products were launched in the U.S., Japan, Australia, and New Zealand markets. The Rise AM & Reset PM system is a multi-nutrient blend of vitamins, minerals and adaptogens intelligently designed with time-wise nutrient delivery, a system that aligns with the natural circadian rhythms of your body to deliver the right nutrients in the right amounts at the right time. The formula supports cell signaling and gene activation to help maximize the effectiveness of the Protandim line.
To demonstrate the important role of micronutrients in cellular communication and activation, we performed a clinical study targeting key genetic markers such as catalase, glutathione and sirtuins. The combination of Rise AM & Reset PM with Protandim Nrf2 Synergizer increased gene expression in glutathione peroxidase by 67% over Protandim Nrf2 Synergizer alone. The combination of Rise AM & Reset PM with Tri-Synergizer increased the total sirtuins activity by 68% over Tri-Synergizer alone. These and other results from the study combined with data from Mintel showing that 76% of Americans rely on dietary supplementation to fill nutritional gaps, positions this product well with our current Protandim users as well as opens the door to new market share as we reach new customers currently purchasing a multivitamin elsewhere.
Also added to the product line, LifeVantage D3+ does more than simply supplement you with Vitamin D. It is also an excellent source of vitamin K2, magnesium and calcium to support strong bones, immune and cardiovascular health, muscle and nerve health as well as improves mood. LV360 includes major enhancements to our digital experience as well. Starting on March 1 and continuing over the next couple of months, we will be introducing a revamped e-commerce experience as well as major enhancements to account and subscription management, which will continue to elevate our overall user experience and drive engagement. We are thrilled to unveil LV360 and the initiatives designed to drive growth for our company. Several new promotions and incentives have already kicked off in advance of the March 1 launch to help consultants prepare for the exciting new opportunities that lie ahead.
Photo by Devin Avery on Unsplash
We are executing on a well-thought-out training plan, which includes over 50 road shows and virtual training sessions worldwide. These trainings hosted by a corporate team and partnered with our top leaders are aimed at developing confident consultants excited to share their best-in-class opportunity with others. Current LV360 trainings will culminate at regional Evolve events, which will be held in March in the U.S., Australia and Japan to continue field support and kick off the next phase of field training and development as well as a new recognition program. It was important for us to work towards the public announcement of LV360 while laying a strong foundation for the initiatives to build on. Second quarter revenue of $53.7 million was up 2.8%, our first year-over-year increase in 10 quarters.
And on a constant currency basis, revenue was up 7.4%. The U.S. was the key driver with second quarter revenue up 15.4%. Internationally, our Philippines launch continues to show progress, and we are encouraged by recent trends in several other key markets. Liquid collagen remains the top performer and contributor to the U.S. revenue gains. Supply chain challenges surrounding the products were able to be resolved in Q2. Recall that we first launched this product in June and in the first full quarter of sales, which would have been our fiscal year ending in September, orders sharply exceeded forecast, resulting in a significant backlog. The breadth of the demand for our unique collagen product bodes well for future quarters as well as our overall product strategy.
Customer penetration was 24.1% in Q2, up from 18.2% in Q1. And consultant penetration reached 27.2%, compared to 25.3% in Q1. On a blended basis, penetration was 24.8% in Q2, compared to 20.3% in Q1. Customer acquisition similarly benefited from our liquid collagen product, which accounted for approximately $9.1 million or approximately 17% of Q2 revenues. We will be launching liquid collagen in Japan, Australia, New Zealand in March in a fashion similar to the U.S. launch in June. We look forward to sharing results from those launches with you in future quarters. The launch of Protandim NAD in Japan, Australia and Mexico enabled us to introduce the Protandim Tri-Synergizer stack in these markets. Consisting of Protandim Nrf2, Protandim Nrf1 and Protandim NAD, the Tri-Synergizer stack has been a top performer in the U.S. and initial results in these markets show similar potential.
Our blended penetration rate in Japan was 13.4%. In Australia, it was 4.8%. And in Mexico, it was 12.5%, showing strong early adoption. Energy levels in the field remain high as we continue to elevate and sharpen our brand messaging. Trends have remained very favorable across our social media channels, with November's total user engagement with brand content up 178% and December up 226% compared to those months in 2021. The MVP Builder incentive and collagen cash have continued to drive key behaviors for consultants as well as set them up for success with our new evolved compensation plan. In Q2, we also introduced the sharing bonus for NAD and Axio that is structured similar to collagen cash for new products in Australia, New Zealand and Japan.
Our newest incentive, Run to Pro 4, is also designed to help consultants earn with Evolve. Finally, the upward advancement of consultants provides further proof of our strong momentum and as eight individuals recently qualified for their first Elite Retreat. In summary, the evolution of our business model and culture solidifies our leadership as the activation company and positions us for growth and improved profitability. We've invested over $2 million during calendar 2022, which further demonstrates our commitment to the LV360 initiatives and strategic plan. We are very pleased with our latest results, including a return to top line growth in the second quarter, but recognize it is still early in our transformation journey. Organizationally, the alignment between corporate and the field is more unified than ever, giving us a high degree of confidence in our future trajectory.
Top leaders within this field are driving implementation within their teams as well, which is creating so much energy and excitement. There has never been a better time to be part of this company. Now let me turn the call over to Carl Aure, our Chief Financial Officer, to review our second quarter financial results.
Carl Aure: Thank you, Steve and good afternoon everyone. Let me walk you through our second quarter financial results. 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. Second quarter revenue was $53.7 million, up 2.8% on a year-over-year basis and up 3.6% sequentially from the first quarter. Foreign currency fluctuations negatively impacted revenue by $2.4 million in the second quarter. Excluding the negative impact of foreign currency fluctuations, second quarter revenue was up $3.9 million or approximately 7.4% compared to the prior year period. Revenue in the Americas region increased 14.4%, including a 15.4% increase in the United States, compared to the prior year period to $39.7 million, driven primarily by the launch of our TrueScience Liquid Collagen product and partially offset by a 7.1% decline in total active accounts in the region.
Revenue in our Asia-Pacific and Europe region decreased 20.2% to $14 million, driven by a 12% decrease in total active accounts and negative impacts from foreign currency exchange rate fluctuations. Excluding the negative impact from foreign currency fluctuations, second quarter revenue in our Asia Pacific and Europe region was down 7%. The foreign currency impact was primarily related to currency fluctuations in Japan, which drove lower revenue in the country. Despite the foreign currency headwinds, we continue to be encouraged by the results we are seeing from our launch of the Philippines due to continued distributor leadership, development and advancement. Gross margin was 78.1% for the second quarter, compared to 81.5% in the prior year period.
The decrease in gross margin was primarily due to elevated shipping expenses, the negative impacts of foreign currency fluctuations as well as shifts in geographic and product sales mix. We are actively pursuing cost savings initiatives across our entire supply chain to help offset the recent cost increases that have negatively impacted our gross margins. Commissions and incentive expense in the second quarter decreased $1.9 million year-over-year. As a percentage of revenue, commissions and incentive expense decreased 490 basis points to 43.9% versus 1 year ago levels, which was primarily driven by the timing and magnitude of various promotional and incentive programs. Non-GAAP adjusted SG&A expense was $19.4 million versus $16.7 million in the prior year quarter and was up 400 basis points as a percentage of revenue to 36.1%.
This increase was primarily a result of higher event-related costs, increased travel expenses, higher employee compensation-related expenses and outside professional service fees related to the upcoming initiatives launching in the second half of fiscal 2023, all as compared to the prior year period. Adjusted operating loss was $0.9 million, compared with adjusted operating income of $0.3 million in the prior year period. Adjusted net loss was $0.8 million, or $0.07 per fully diluted share, in the second quarter, compared to adjusted net income of $0.6 million, or $0.05 per fully diluted share, in the comparable period last year. We recorded a tax benefit of $17,000 in the second quarter, compared to a tax benefit of $0.6 million a year earlier.
The decrease in tax benefit was primarily due to the favorable impact of discrete tax adjustments relating to taxes on foreign income recorded in the comparable period last year. For fiscal year 2023, we expect our effective tax rate will be approximately 31%. Adjusted EBITDA for the second quarter was $0.8 million, or 1.5% of revenues, compared to $1.9 million and 3.6% in the same period a year ago. 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 second quarter in a strong financial position with $17.4 million of cash and no debt. We also continue to maintain $5 million of availability under our revolving line of credit. Capital expenditures totaled $0.8 million in the second quarter.
We anticipate total capital expenditures for fiscal 2023 to be approximately $3 million. Now turning to our fiscal 2023 outlook, we anticipate our fiscal 2023 revenue will be in the range of $202 million to $212 million, and adjusted non-GAAP EBITDA in the range of $11 million to $13 million with adjusted non-GAAP earnings per share in the range of $0.22 to $0.28 per share. And with that, let me turn the call back over to the operator for questions. Operator?
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