LifeVantage Corporation (NASDAQ:LFVN) Q4 2022 Earnings Conference Call August 23, 2022 4:30 PM ET
Company Participants
Reed Anderson – ICR
Steve Fife – Chief Executive Officer
Carl Aure – Chief Financial Officer
Conference Call Participants
Operator
Good day, ladies and gentlemen. Thank you for standing by. Welcome to today’s conference call to discuss LifeVantage’s Fourth Quarter and Full Fiscal Year 2022 Results. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up.
Hosting today’s conference will be Reed Anderson with ICR. As a reminder, today’s conference call is being recorded.
And now, I would like to turn the conference call over to Mr. Anderson. Thank you, sir. Please go ahead, sir.
Reed Anderson
Thank you. Good afternoon, and welcome to LifeVantage Corporation’s conference call to discuss results for the fourth quarter and full fiscal year 2022. On the call today from LifeVantage with prepared remarks are Steve Fife, 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, August 23, 2022. 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 Steve Fife, the Chief Executive Officer of LifeVantage.
Steve Fife
Thanks, Reed and good afternoon, everyone. Thank you for joining us today. With me is Carl Aure, our Chief Financial Officer, who will join me with prepared remarks before we turn the call over for Q&A.
Fourth quarter results were in line with our expectations and we are very pleased with early progress on key initiatives around innovation and driving engagement across our base of customers and independent distributors.
Revenue was $51 million was within our guidance reflecting a challenging operating environment including $2 million of FX headwinds.
Excluding the impact of currency, revenue was down approximately 3% on a year-over-year basis. On a sequential basis, fourth quarter revenue rose approximately 2% and was up over 4% excluding the negative impact of foreign currency. We also delivered 100 basis points of improvement in gross margin on a sequential basis.
Profitability in the quarter was impacted as COVID-related cost savings primarily from events and travel savings realized in the past couple of years are now coming back into play as we build to a new normal business model. These costs come back in advance of the anticipated revenue – revenue growth, the strength of our balance sheet including $20 million in cash and no debt allows us to continue invest in our future while also providing shareholders a return through our dividend and repurchase programs.
So, a bit more about our quarterly revenues. Results in our international markets continue to show solid momentum in the fourth quarter. Our APAC Europe region revenue increased 4% sequentially compared to the third quarter and was up over 11% excluding the negative impact of foreign currency aided by an 8% increase in active independent distributors.
As the market in the Philippines continues to gain traction from leaders globally, we held our grand opening in June, which brought more excitement to the distributors force in the country. Since then, we have seen an increased focus on leader rank advancements, which is encouraging for long-term market stability.
We are also seeing a strong response to our new collagen product, which launched in June in conjunction with Activate 2022 our recent distributor meeting in Salt Lake City. This is a liquid based product that activates the body’s collagen production, replenishes depleting collagen levels and maintains those levels by reducing collagen breakdown in the body.
It also helps protect against the damaging effect of oxidative stress caused by free radicals. Our unique formulation of proprietary ingredients has been clinically shown to deliver visible support to skin health and hydration in eight weeks or less including skin that looks smoother, softer and has improved elasticity.
Based on early results, we are very excited about the potential for our liquid collagen product to drive customer and distributor activity, as well as revenue growth. Month two revenue for liquid collagen exceeded the launch month evidence seen exceptionally strong follow-through relative to the typical ramp for new products.
July outsold our product forecast and June revenue by 70%. In June, our customer to distributor ratio of liquid collagen purchases was one customer for every 1.38 distributors. July shows a shifting to customer acquisitions leading for this new product with 1.08 customers for every one distributor. Liquid collagen is also proving to be a must have for current active accounts.
As of August 15, customer penetration of liquid collagen is 9.6% and distributor penetration is 12.3% for a blended rate of 10.6% making it one of our top performing products in this important metric. Liquid collagen also help propel the execution of our new social strategy to attract more customers to our brand with more compelling engaging content.
We saw a 73% engagement increase on Instagram with the launch of TrueScience liquid collagen at Activate 2022 with engagement across all social channels also up significantly year-over-year. The product was launched through several hundred shareable tools including graphics and videos designed to help independent distributors create curiosity amongst consumers and build their business.
Also fueling attraction to the product was our customer trial where over 100 participants received liquid collagen six weeks prior to launch and track their product experience with before and after images, as well as testimonial videos. This content was extremely influential in the early success of the product as efficacy was clearly demonstrated through the images gathered within the test group.
In the U.S., we also launched a product-focused series call Activate Thursday for distributors and customers alike. This call which lives on social media discusses various aspects of our products and their unique differentiators. The series generated our highest performing post of the calendar year. We are looking forward to several big product launches for our international markets in Q2 of fiscal 2023.
Japan will be launching Protandim NAD and our Australia market will be adding both Protandim NAD and AXIO to their available products. Successful strategy is used for the U.S. event and product launch will serve as guides for these launches, as well as other Q1 and Q2 initiatives. Plans to launch liquid collagen in many of our international markets for later this fiscal year are in progress.
Activate 2022 was also a huge success and it intensified distributor engagement and deepened our organizational alignment around the core focus areas. There were three general sessions, activate your business, activate your confidence and your activation plan that provided a new template for future gatherings with an increased focus on aligned promotions and incentives, social experiences and training enhancements.
Activate 2022 also gave us an opportunity to share our key differentiator of activation and how our product strategy will continue to demonstrate that message. The Activate 2022 event ended with a RSO experience where distributors celebrated the collagen launch at our Annual Title Night Match. Our MVP qualifiers had additional recognition by participating in the opening ceremonies.
Activate 2022 set the stage for our eminent global convention in Phoenix, Arizona being held this October. Promotions and incentives have been carefully designed to bridge us through the summer leading the field into convention with strong activity, we continue to focus on our MVP promotion which bolsters our end company message.
The MVP builder program has provided a blueprint for distributors to build strong organizations based on repeat product purchases, while enhancements to MVP seller program helps increase the income opportunity to customer gatherers. Global convention also gives us the opportunity to reinforce our Activate Wellness message with our international audience building upon the momentum in the U.S. is experiencing with that message.
We continue to transform our business model to be more agile, more inclusive and create multiple pathways to entrepreneurial success focusing on the three growth areas that underpin our growth strategy, people, products and consumer experience.
Let me share some additional updates relative to progress we are making with our digital initiatives. During the quarter, our digital team delivered a coupon code which allows newly enrolled distributors to share a discount code with three new enrolling customers or independent distributors.
Simplified our subscription management process and enhanced our independent distributors’ ability to share LifeVantage branded content with their team and customers, as well as improving reporting capabilities to help distributors track and achieve incentive goals, intensified refocusing home page and site navigation on shopping and the discovery of LifeVantage products, as well as aligning the users’ experience across mobile platforms.
We are also working to simplify mobile responsive subscription management online to make it easier for customized subscriptions.
Now let me turn the call over to Carl, our Chief Financial Officer to review our fourth quarter financial results.
Carl Aure
Thank you, Steve, and good afternoon, everyone. Let me walk you through our fourth 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.
Fourth quarter revenue was $50.9 million, down 7% on a year-over-year basis, and up 1.9% sequentially from the third quarter. Foreign currency fluctuations negatively impacted revenue by $2.1 million in the fourth quarter.
Excluding the negative impact of foreign currency fluctuations, fourth quarter revenue was down $1.7 million or approximately 3%. Revenue in the Americas region declined 10.5% compared to the prior year period of $33.7 million, primarily driven by a 10.9% decrease in total active accounts.
Revenue in our Asia Pacific region increased 0.7% to $17.2 million year-over-year, despite a 2% decrease in total active accounts driven by an increase in average revenue per account. We continue to be encouraged by the positive results we are seeing in the Philippines, due to continued distributor leadership development and advancement as well as the continued growth in Thailand, Taiwan and China.
This was partially offset by lower revenue in Japan, which was primarily attributable to the negative impact of foreign currency. On a constant currency basis, revenues in Japan decreased by approximately 2%.
Gross margin was 81.7% in the fourth quarter, compared to 82.1% in the prior year period. The decrease in gross margin was primarily due to increased raw material and manufacturing-related cost, increased inventory obsolescence expenses, elevated shipping expenses, along with shifts in geographic and product sales mix.
Commissions and incentive expense in the fourth quarter increased $1.1 million year-over-year. As a percentage of revenue, commissions and incentive expense increased 140 basis points to 48.1% versus year ago levels, which was primarily driven by an increase in the number of qualifiers and related cost associated with the recently completed incentive program.
Non-GAAP adjusted SG&A expense was $16.6 million, versus $13.6 million in the prior year quarter and was up 780 basis points as a percentage of revenue to 32.6%. This increase was primarily attributable to higher event-related cost, an increase in labor and benefits expenses, higher stock-based compensation expense, and certain severance-related cost incurred in the quarter.
Adjusted operating income was $0.5 million compared with $5.8 million in the prior year period. Adjusted net income was $0.2 million or $0.01 per fully diluted share in the fourth quarter compared to adjusted net income of $4.3 million or $0.31 per fully diluted share in the comparable period last year.
We recorded income tax expense of $48,000 on non-GAAP income before tax in the fourth quarter, compared to tax expense of $1.6 million a year earlier. For fiscal year 2022, our annual effective tax was 24.3% on a non-GAAP income before tax. Adjusted EBITDA for the fourth quarter was $1.7 million or 3.4% of revenues compared to $6.6 million and 12.1% 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 fourth quarter in a strong financial position with $20.2 million of cash and no debt. We also continue to maintain $5 million of availability under our revolving line of credit.
We used $0.5 million in cash in the fourth quarter to repurchase approximately 103,000 common shares under our share repurchase authorization. As of June 30, 2022, there remains $27.1 million available under the authorization.
Capital expenditures totaled $0.3 million in the third quarter. Total capital expenditures for fiscal 2022 was $1.5 million.
Turning to our fiscal 2023 outlook, we anticipate our fiscal 2023 revenue to be in the range of $200 million to $212 million and adjusted non-GAAP EBITDA in the range of $12 million to $14 million with adjusted non-GAAP earnings per share in the range of $0.27 to $0.39 per share. For fiscal year 2023, we expect our annual effective tax rate to be approximately 26%.
And with that, I’ll turn the call back to Steve.
Steve Fife
Thanks, Carl. The actions we are taking to transform LifeVantage and reenergize growth are starting to gain traction despite a challenging environment. Over the next several quarters, we will continue making focused investments in information technology, marketing and selling initiatives. This should put us in a strong position for accelerated revenue in the future.
We have a unique portfolio of high quality, innovative products supported by a large global base of independent distributors, a strong balance sheet and a talented and experienced management team committed to driving long-term value for our shareholders.
With that, let me turn the call back over to the operator for questions. Operator?
Question-And-Answer Session
Operator
Steve Fife
Thanks, John, and thank you, everyone for joining us today. I closing I just want to take the opportunity to thank all of our employees for their hard work and dedication, as well as our outstanding team of independent distributors and loyal customers. We remain confident in our business model and are focused on delivering the LifeVantage products, our customers depend on. We hope you stay safe and healthy and look forward to updating you on our next call.
Have a great day.
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