Q2 2024 LifeVantage Corp Earnings Call

Participants

Reed Anderson; IR; ICR Inc.

Steve Fife; President & CEO; LifeVantage Corp

Carl Aure; CFO; LifeVantage Corp

Doug Lane; Analyst; Water Tower Research LLC

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to today's conference call to discuss LifeVantage second quarter of fiscal 2024 results. (Operator Instructions) 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 first quarter of fiscal 2024. 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 PM 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'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, January 30, 2024. LifeVantage assumes no obligation to update any forward-looking projection that may be made in today's release or call.
Now I will turn the call over to Steve Fife, the President and Chief Executive Officer of LifeVantage.

Steve Fife

Thanks, Reed, and good afternoon, everyone. Thank you for joining us today. During our second quarter, we continued to advance our strategic transformation and execute well against the core elements of LV360, significantly improving profitability was a key takeaway from our latest results, adjusted EBITDA increased 289% year over year to $3.1 million in the second quarter.
And our adjusted EBITDA margin was up 450 basis points to 6%, reflecting ongoing efforts to strengthen our core business and drive productivity. We are very pleased with the trends we are seeing in revenue per consultant in each of the last four quarters, which coincides with the introduction and implementation of several key of the 360 initiatives, our revenue per consultant has grown at a solid double digit rate. For example, in the second quarter, revenue per consultant increased over 13% year over year, while total revenue in the second quarter were down slightly versus last year.
Robust demand for true science liquid collagen, coupled with the positive trends we are seeing in consultant productivity and our performance in markets like Japan, where Q2 revenues were up 3.9% on a currency neutral basis, give us a high degree of confidence in our long-term growth outlook. Revenue attributable to liquid collagen, including the healthy, grow essential stack, which bundles liquid collagen withProtandim Nrf2 sanitizer exceeded $13 million in the second quarter, an increase of over 44% versus a year ago.
In the Americas region, where the product was first introduced in June 2022, we continued to experience strong growth, with sales up approximately 13% on a year-over-year basis. In the US consultant penetration of liquid collagen rose to 31.6% in the quarter, up from 27.2% in Q1, with a continued focus on healthy glow essential stacks.
Customer penetration was 27.2% in the US during Q2 compared to 28.1% in Q1 and 26.9% in Q4 of fiscal '23. International sales of liquid collagen accounted for approximately 22% of Q2 liquid collagen revenue, mostly reflecting results from Australia and New Zealand and Japan, where the product was first introduced in March 2023.
In late September 2023, we expanded the international launch of liquid collagen with the initial rollout into Mexico, and this was followed by introduction to the Philippines and Canadian markets in November we are also pleased with the recent progress on other new innovative products. For example, early in the second quarter, we introduced true science to renew daily firming complex, a clean cosmetic retinol alternative that has proven to tackle 11, the visible signs of aging. Importantly, this unique product is a perfect complement toProtandim Nrf2 sanitizer and true science liquid collagen further building on the power of our core positioning around being the activation company, along with creating momentum for our true science activated skin care line.
A couple of weeks ago, we held our annual global kickoff event where we unveiled the launch date for the next phase of LV360, along with new sales incentives and additional consultant tool rise era was announced as the theme for the year with a strong call to action to consultants to rise and build on the strong foundation LV360 has laid for the future. We streamlined and simplified the message for consultants to drive growth and success by focusing on three basic behaviors of network marketing, enrolling, retaining and rank advancing for ERA.
This focus is supported by a new rise era and center that enables consultants to earn enticing lifestyle and business prices, including shareable items like luggage and travel vouchers based on achievement in enrolling, retaining and advancing Cape Town. South Africa, including an African safari, was revealed as the first ever executive destination trip under the new evolve compensation plan. Qualification criteria for this once-in-a-lifetime trip is based on aero behavior and achievements through the year with travel scheduled for February 2025.
New consultant tools were also launched at our global kickoff events, including the new Evolve possibilities pathway, which emphasizes for pivotal consultant ranks within the Evolved compensation plan and what is unlocked at each stage to inspire and motivate rank advancements. Our major events continued to be an important element, driving consultant behavior and capitalizing on the strength of our broader LifeVantage community.
The global kickoff in January set the tone for calendar 2024, and we will build on this excitement with up our upcoming in-person momentum academies in March, the next phase of our LV360 transformation will commence in a few days at the start of February evolve our contemporary compensation plan that rewards circle.
Our unique customer loyalty program will be launching in Mexico, Canada and Europe. Recall we first launched these programs in the US, Japan Australia and New Zealand in March 2023 as part of LV360, and they have been key elements of our success over the past year.
In addition to our rise era initiatives. In our Phase 2 launch, we've established an optimization team to lead ongoing strategic efforts to build our active account base. The team is focused on three areas. First ensuring our enrollers, the group of consultants actively enrolling consultants and customers each month is increasing. Arming our enrollers with a strong dollar per our earnings potential message for the business is seen as an enticing business opportunity for those.
Looking for a side hustle second, that there is a clear replicable path to enrolling someone in your first 30 days as a consultant and finally that we are making it easy for our radio products, fans to share their incredible results and our unique product story in new, innovative and compelling way. We will be updating you on the progress of these optimization efforts in coming quarters.
In summary, we are pleased with progress on our strategic transformation LV360. Our improved outlook for profitability in fiscal 2024, despite a still challenging top-line environment underscores our confidence in the trajectory of key initiatives as well as the strength of our competitive position. Engagement levels remain high across our entire organization, and we look forward to our business momentum continuing to build as we expand our efforts across all our international markets over the next several quarters, we remain focused on executing our plan while remaining agile to ensure we are optimizing the key elements of LV360 to drive sustainable, profitable growth and value for shareholders.
Capital allocation continues to be a key area of focus. And during the second quarter, we remain steadfast in our balanced approach of returning excess capital to shareholders through dividends and share repurchase Carl will cover this in more detail in his section.
Now let me turn the call over to Carl already, our Chief Financial Officer, to review our second quarter financial results. Carl?

Carl Aure

Thank you, Steve, and good afternoon, everyone. Let me walk you through our first 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 $51.6 million, down 3.8% on a year-over-year basis and foreign currency negatively impacted revenue by $0.2 million. Excluding the negative impact of foreign currency fluctuations, second quarter revenue was down by $1.8 million or 3.4% as compared to the prior year period.
Revenue in the America's region decreased 1.6% to $39.1 million in the quarter, primarily driven by a 9.5% decrease in total active accounts, partially offset by higher average revenue per account resulting from changes in product mix due to continued penetration of our two science liquid collagen products.
Revenue in our Asia Pacific and Europe region decreased 10% to $12.6 million in the quarter, driven by an 18.2% decrease in total active accounts. The closure of our e-commerce business in China and the 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 8% as compared to the prior year period. The foreign currency impact continues to be driven by fluctuations in Japan accounting for $300,000 of the impact.
Adjusting for this impact, revenue in Japan increased 3.9% on a constant currency basis in the quarter as compared to the prior year period. Gross margin was 78.6% for the second quarter compared to 78.1% in the prior year period. The increase in gross margin was primarily due to changes in sales mix, along with lower shipping related expenses in the quarter resulting from changes in shipping methods. Commissions and incentive expense in the second quarter decreased $1.8 million year over year as a percentage of revenue, commissions and incentive expense decreased 180 basis points to 42.1% versus one year ago levels, which was primarily driven by changes in sales mix impacts from our Evolve compensation plan as well as the timing and magnitude of promotional and incentive pay.
Non-gaap adjusted SG&A expense was $17.4 million compared with $19.4 million in the prior year quarter and was down 230 basis points as a percentage of revenue to 33.8%. Adjusted non-GAAP operating income was $1.4 million compared with a loss of $0.9 million in the prior year period. Adjusted non-GAAP net income was $1.4 million or $0.1 per fully diluted share in the second quarter compared to adjusted net loss of $0.8 million, or $0.07 per fully diluted share in the comparable period last year, we recorded a tax benefit of $0.5 million in the second quarter of 2024 compared to $17,000 in the prior year period. The increase in tax benefit was primarily due to changes in taxable income and the favorable impact of discrete items. We expect that our effective tax rate will fluctuate slightly during the remainder of fiscal 2024 as the impact of discrete items and other permanent differences are recognized.
Adjusted EBITDA for the second quarter was $3.1 million or 6% of revenues compared to $0.8 million and 1.5% in the same period a year ago. Please note that all of the adjustments from GAAP to non-GAAP that I discuss today are reconciled in our earnings press release issued this afternoon. We ended the second quarter in a strong financial position with $17.3 million of cash and no debt. We also continue to maintain $5 million of availability under our revolving line of credit and capital expenditures totaled $0.5 million in the second quarter we anticipate total capital expenditures for fiscal 2024 to be approximately $2.5 million.
In addition to maintaining a strong balance sheet, we continue to focus on our capital allocation priorities to drive value for stockholders. During the second quarter, we used approximately $1.9 million in cash to repurchase approximately 288,000 common shares under our share repurchase authorization. And through the first six months of fiscal 2024, we have used approximately $2.7 million to repurchase approximately 433,000 shares.
As of December 31st, 2023, there is $24.2 million remaining under our stock repurchase authorization. We also announced a quarterly cash dividend of $0.035 per common share of stock for approximately $450,000. In the aggregate. This dividend will be paid on March 15, 2024 to stockholders of record on March first since the beginning of fiscal 2024. Including this latest dividend announcement, we will have paid cash dividends of $0.505 per share for approximately $6.4 million in the aggregate so far this fiscal year, we will have returned over $9 million in total value to our stockholders through share repurchases and dividends Turning to our fiscal 2024 outlook, we anticipate our fiscal 2024 revenue will be in the range of 207 to $213 million from the previous range of 216 to $226 million.
Additionally, we continue to anticipate adjusted non-GAAP EBITDA in the range of $16 million to $18 million, with adjusted non-GAAP earnings per share in the range of $0.57 to $0.67 per share, increasing from the previous range of $0.52 to $0.62 per share. For fiscal year 2024 we expect our annual effective tax rate to be approximately 22% to 24%. Included in our fiscal 2024 guidance is over $2 million of nonrecurring expenses related to an expiring sponsorship agreement and costs associated with the rollout of LV360. Our remaining markets we remain committed to improving our adjusted EBITDA margins, and we believe we are on track to reach our long-term target of low double digits.
And with that, let me turn the call back over to the operator for questions. Operator?

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. (Operator Instructions)
Doug Lane, Water Tower Research.

Doug Lane

Yes, thank you, and good afternoon, everybody. I'm looking at the focusing on the top line here. Are we at some sort of inflection point between growth coming from mostly Americas. You'll have anniversaries the launches last year and now really maybe we see a shift towards international being a bigger driver and going forward?

Steve Fife

Yes, you know, we had some we had a very successful launch year and a half ago or so in the Philippines and that market has stabilized and more recently and actually has had some challenges to retain some of its some of its leadership. But as we look back on LV360, we really slowed down our international expansion to focus on the compensation plan, our product strategy and other aspects of LV360. I anticipate that here in the future where people would pickup again of the focus on opportunities internationally, we think that remains a growth opportunity for us. But right now, we're seeing some strength primarily in the US and our Japan and really our phase one markets as those markets adopt Phase one and FIT adopt our LV360 and the Evolve compensation plan, right, right.

Doug Lane

So there really is two stories internationally. You've got the Philippines and what's going on in China kind of working as a headwind versus the US launches in China, I mean Japan and Australia, New Zealand, you expect to get some traction.

Steve Fife

That's exactly right.

Doug Lane

Okay. And how do we I mean, China is small, I get it, but how do we see that playing out? Are we and how far into that discontinuation of the business, weher are we?

Steve Fife

China, or Philippines?

Doug Lane

In China.

Steve Fife

Will drive no charge and we're through that in some. Yes, we had relatively close to zero in this current quarter.

Doug Lane

Okay. That's more than one issue that sort of resolved itself and on the other.
And what about the Philippines is there's still more still more volatility there?

Carl Aure

No, I think that we have stabilized the leadership group there, and we're starting to see some positive signs. And we've got some new corporate team members in place as well as we've we're attracting some new consultant leaders that I think we have upside in calendar '24 in that market. It's a you know, the business model can be very attractive within the Philippine market, Tim and luckily, we had some success. We lost a couple of leaders that I I'm cautiously optimistic that we're in the process of rebuilding that.

Doug Lane

Right. Okay. That's helpful. On the know a lot of trends here that has been fairly persistent is a sort of steady decline in your active customers, but pretty nice increase in your revenue per active customer so or I guess you say accounts because you include everybody in that number. So is it deliberate? I mean, is this wouldn't it be the model in the foreseeable future or are there plans in the works to focus on the active accounts and getting those numbers heading north?

Carl Aure

Yes. First, I'd say that focusing on that active revenue per account was a key element of the very beginning of LV360. We knew and anticipated that the launch of our liquid collagen product that has been a huge success would help drive that average revenue per account. That's been continued as we have found additional synergies and bundling ourProtandim Nrf2 synergize or with liquid collagen. And so that focus on increasing the revenue per customer on was a was a very early and conscious decision. Now having said that, I think there the drop-off in our customer accounts, I think there's a real strong macro economic play in place here. We've seen it correlate pretty strongly with what's going on in the broader economy. And I guess, period, but we're also seeing kind of a stabilization within our consultant base as we now kind of come through the initial transition of our evolved compensation plan, we're seeing that base stabilize and are really focusing our attentions right now and supporting that consultant base and providing them with the tools to. And those tools are, you know, videos, there's some other trainings and products is an important element of that as a and to enable them to go out and to attract new customers as well. So we are at an inflection point with that consultant base having stabilized and now being equipped with some new tools to go out and attracting new customers as well as obviously other consultant.

Doug Lane

Okay. That's good color. And then certainly the margin story came through nicely. Our I guess versus what I put together, the big upside was in commissions and incentives are still running a little bit behind what I sort of see as of mid-40s kind of longer-term trend call, do you think this, but are we going to get back into that mid 40s soon? Or are we going to have, are we still at this sort of low 40s run rate for a few more quarters?

Steve Fife

Yes. I mean, part of it's quite minimum. It's likely to increase a little bit over time here. But one of the impacts here in Q2, as you look at in comparison to the prior year quarter, we're still seeing a larger not essentially bucket of non-commissionable revenue that's influencing that percentage as a percentage of total revenue. And so that that definitely was an impact here in Q2. But looking forward, as we roll out as evolve gets rolled out to the other international markets in the plan starts to mature in the existing markets. It's likely that we'll see a bit of an up a bit of an uptick there. But I think that that range of the low mid low 40s there is probably where it's going to settle.
And just at the non commissionable revenue, that's that primarily coming in from convention related revenue and shipping-related revenue, those types of of revenue items that as they grow or become a greater percentage of our overall revenue from a percentage standpoint, it makes it look like the commission payout of that lower, but it's really just comparing when you compare it to total revenue, there is included in that some non-commissionable revenue.

Doug Lane

But that non commissionable revenue is unusually high these days and should normalize going forward?

Steve Fife

Yes, in the quarter, we had a higher percentage than in previous quarters, but I don't know that there is enough to say that there's a trend or anything going on that just in the quarter.

Doug Lane

Okay. Fair enough. And then on the outlook on I get the sales change and the EBITDA is the same and then you move EPS up. So I assume that's mostly the tax rate there.

Steve Fife

Yes, that's mostly there's probably two things in the EPS component. The stock-based comp is down slightly in our in our forecast for the rest of the year, and then it's primarily tax. And then just the impact of interest income in the other income section. So those three items are really what's driving the change in EPS.

Doug Lane

Okay. That's helpful. Thanks. And then just on looking out the next several quarters. What are the key new product drivers that you guys are working on that? Just trying to get a feel for timing of product launches in obviously, if they haven't announced and you're not you're announcing now, but just to get a feel for timing of new product launches over the next three or four quarters?

Steve Fife

Yes, you know, we have a very robust pipeline. And I mentioned in March, we will be having in-person momentum Academy and those are some country events or every one of our countries will be holding in advance and we will be announcing a new product in those momentum Academy. So next product will be coming in in March. So that's soon.

Doug Lane

Okay. All right. That's very helpful. Thank you.

Steve Fife

Thanks, Doug.

Operator

There are no further questions at this time. I would like to turn it back to Steve Fife for closing remarks.

Steve Fife

Thank you for joining us. As we conclude, I want to express my appreciation to our committed employees outstanding and independent consultants, shareholders and safe faithful customer base. The strength of our distinctive platform, coupled with the competitive edge of our business model that empowers individuals to establish businesses on their own terms is complemented by a steadfast leadership team and diverse range of unique products and engage consultant community and a robust financial position. This collectively emphasizes our strategic positioning for the future, enabling us to pursue long term goals while we consistently build substantial value for our shareholders. Thanks for participating today.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.