Scott Van Winkle – ICR Darren Jensen – Chief Executive Officer Steve Fife – Chief Financial Officer.

Frank Faiella – Sidoti Steven Martin – Slater.

Good day, ladies and gentlemen, thank you for standing by. Welcome to today's conference call to discuss LifeVantage's Third Quarter Fiscal 2018 Financial Results. At this time, all participants are in a listen-only mode.

Following the formal remarks, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up. Hosting today's conference will be Scott Van Winkle with ICR. As a reminder, today's conference is being recorded. And now, I would like to turn the conference over to Mr. Van Winkle. Please go ahead, sir..

Thank you. Good afternoon, ladies and gentlemen. Welcome to LifeVantage Corporation's conference call to discuss results for the third quarter of fiscal 2018. On the call today from LifeVantage with prepared remarks are Darren Jensen, Chief Executive Officer; and Steve Fife, Chief Financial Officer.

By now everyone should have accessed to the earnings release that went up this afternoon at approximately 4.05 PM Eastern Time. If you did not have received release, the release it’s available on the Investor Relations portion of LifeVantage’s at www.lifevantage.com.

This call is being webcast; a replay will be available on the Company’s website as well. Before we begin, we'd 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 the Company’s, 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-Q and 10-K.

Please note that during today's call, we'll 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, May 9, 2018. LifeVantage assumes no obligation to update any forward-looking projections that may be made in today's release or call. Now I would like to turn the call over to the Company's CEO, Darren Jensen..

Thank you, Scott, and good afternoon everyone. I’m pleased to join you today and share our third quarter results and update you on the progress of our fiscal 2018 initiatives. During the third quarter, we generated $50.6 million of revenue, representing both 12.3% growth over last year and a 2.2% increase from the second quarter.

The growth was broad-based with all geographies posting sequential growth with the exception of Japan, which was following its typical seasonal pattern. Additionally, revenue built month-over-month throughout the quarter, and we had a good start to the fourth quarter with April relatively consistent with March.

We generated adjusted earnings per share of $0.12, up significantly from $0.03 a year ago and up 9% from the second quarter. As Steve will discuss, we're now anticipating 2018 EPS to be at the high end of our prior guidance.

We're encouraged by the improved momentum and have begun to see our recent initiatives contribute favorably to our results during the third quarter. March represented our largest recruitment month since May of 2016, and first-year retention continues to improve.

Distributor retention measured by first-year activity during the quarter increased to 51% up from 38% a year ago. And preferred customer retention increased to 49%, up from 46%. We're seeing higher average basket sizes, and we have already exceeded our targets for our stacking product initiative.

While our initiatives are already contributing, we believe we're still in the early stages of realizing these benefits and look for incremental contribution to our growth goals over the coming quarters and years. Let me run through our recent progress to date. As we've discussed on previous calls, our key initiatives are focused on three goals.

Increasing average order size, geographical expansion and distributor and customer acquisition. First, let me begin with increased average order size, which is built around our product stacking strategy. During the quarter, we launched our Vitality Stack Packets.

This completes the second phase of our Vitality Stack launch, combining four of our daily-use product into packets for ease of use and improved portability. I'm very pleased to report that our stacks already represent 16% of our total revenue, exceeding our initial targets of 15% by fiscal year-end.

The success of the stack's launch has led to a 23% increase in average order size year-over-year. We continue to plan for additional stack releases in the future, which are becoming the primary protocols to support the biohacking culture we are creating across the company.

Turning to geographical expansion, we have several initiatives focused on growing global sales, which also support our customer acquisition goals. In Mainland China, we formally launched our innovative social selling and e-commerce model, on February 1.

Recall that this is not direct selling, but rather a model deployed through a third-party e-commerce platform and powered by in-country social marketers. Given the timing of the launch, there was a very modest contribution to third quarter results, but our business in China is slowing beginning to build.

The business is now beginning to attract new e-commerce and social selling experts who have the relevant skills for this type of model. We are encouraged by the quality of entrepreneurs our business is attracting. Our Greater China strategy also includes expanding our business in Hong Kong and developing Taiwan.

We're currently leveraging our Hong Kong operations through the launch of a customer program in Taiwan that has seen strong results to date. The strong interest we're seeing from customers in Taiwan adds to our confidence for a successful formal launch of our direct selling operation in that market planned for the middle of this calendar year.

Near the end of the quarter, we rolled out our global customer acquisition program. The program initially launched in eight markets including Taiwan, with plans to expand to additional markets over the coming quarters.

This is an initiative designed to expand the number of countries where preferred customers can purchase and use our products for personal consumption only. This program allows us to enter additional markets at little incremental costs and enables our distributors to leverage their international relationships outside of their home countries.

To further drive customer acquisition, we launched our auto-assign customer program, which for the first time allows our new customers to order directly through lifevantage.com without being required to go through a distributor on their initial order. After the initial order, these new customers are then assigned to distributors for ongoing support.

This program will provide consumers easier access to our innovative products while providing referrals to our distributor force. Supporting our distributor acquisition initiatives, we continue to see a strong response to our Red Carpet program, with related sales tripling during the third quarter when compared to the second quarter.

We're attracting the compass sales leaders from around the globe. Recently, we had significantly increased leadership enrollments, improved retention and should see improved active distributor accounts as a result of this program.

Red Carpet is designed to attract new distributor leadership by identifying experienced leaders who are in transition and attract them to LifeVantage. We've now completed the initial rollout of our LifeVantage digital platform with the release of our new LifeVantage app, which is now available for download on iTunes and Google Play Stores.

This custom-developed platform is pioneering new ways for us to attract or to interact with our distributors and customers and gives us and our distributor leadership unprecedented insight into the activities of our distributor base.

The initial rollout delivered the tools and communications to simplify business activities, walking new distributors through starting their business, improving prospecting and closing new clients and distributors. There is more to come on the LifeVantage digital platform.

The next phase to be rolled out will integrate artificial intelligence in an effort to further increase distributor productivity and sales success. Finally, I'm pleased to announce that we have completed the implementation of our ERP system enhancement, which was done on time and without disruption.

To sum up, we're excited to see measurable traction across our initiatives and believe there is further opportunity ahead. With that, let me turn it over to Steve to run through the financial results.

Steve?.

Thank you, Darren, and good afternoon, everyone. I am pleased to report our third quarter results. We generated improved revenue growth and good margin performance that is driving stronger earnings, EBITDA and cash. We feel good about where our global business is today and are optimistic about our opportunities for continued growth.

Let me run through the numbers for you. Third quarter revenue was $50.6 million, representing a 12.3% increase year-over-year and a 2.2% sequential increase. Revenue in the Americas increased 10.6% to $38 million, and revenue in Asia Pacific and Europe increased 18% to $12.6 million, including 10.1% increase in Japan all year-over-year.

On a sequential basis, revenue in the Americas increased 3%, while revenue in Asia Pacific and Europe decreased 0.3%, as Japan followed its typical seasonal pattern. The gross margin during the third quarter was 82.4%, up from 81.7% a year-ago.

This increase is primarily a function of decreased costs associated with inventory obsolescence and changes to product and market mixes. Commissions and incentive expenses as a percentage of sales decreased 265 basis points to 48.1% compared to 50.8% in the prior year period.

This quarter's commission and incentive rate is in line with our target and recent trends. SG&A expenses as a percent of sales were 29.7%, compared to 30.5% a year ago. On a non-GAAP adjusted basis, SG&A expense as a percent of sales were consistent with the prior year at 29.3%.

Operating income for the third quarter of fiscal 2018 was $2.3 million, up from $0.2 million, last year. On an adjusted basis, non-GAAP operating income was $2.5 million compared to $0.7 million in the prior year period. Adjusted EBITDA for the third quarter was $3.4 million compared to $1.6 million in the prior year.

Third quarter net income on a GAAP basis was $1.6 million or $0.12 per fully diluted share, up from breakeven in the prior year, and on an adjusted basis, third quarter adjusted non-GAAP net income was $1.8 million or $0.12 per fully diluted share, which is up $0.03 from the prior year period.

All of these adjustments are spelled out in our earnings press release. Turning to the balance sheet. We ended the third quarter of fiscal 2018 with $14 million of cash and $6 million of debt, which represents a $1.7 million sequential increase in net cash.

Cash benefited from a $1 million reduction in inventory, as we continue to improve our inventory returns. Additionally, last week, we extended the maturity of our revolving credit facility to 2021 from 2019.

During the third quarter, we generated $3.1 million of cash from operations, invested $1.2 million in capital expenditures and repurchased $250,000 of common shares under our $5 million share repurchase program.

For fiscal 2018, we anticipate CapEx of approximately $4.3 million to support our digital and technology investments, including upgrades to our core business systems to support our transformation efforts. With that, let me turn to our fiscal 2018 guidance.

As Darren mentioned, we are quite confident with our earnings outlook and now expect to be at the high end of our prior range. As such, we are narrowing our non-GAAP adjusted earnings per share guidance to $0.45 to $0.50 from our previous range of $0.40 to $0.50.

Our new 2018 adjusted EPS guidance represents a 67% to 85% growth rate versus the $0.27 of adjusted EPS we reported in fiscal 2017. This implies fourth quarter non-GAAP adjusted EPS between $0.14 and $0.19. We anticipate fourth quarter revenue will again be up both sequentially and year-over-year.

Now, let me turn the call back to the operator to facilitate some questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Frank Faiella with Sidoti. Please go ahead..

Hi, guys. I had a question on the stack packets. You mentioned that, that's helped drive the average order size up.

I was wondering if there was any particular success or traction with that on a region-by-region basis that you could talk about?.

Frank, this is Darren. Thank you for the question. Right now, where we have a rolled that product out, specifically, the Vitality Stack that you're talking about, the one with improved portability is primarily in the United States.

As we get additional products that are part of that package or that sachet approved in international markets, we'll continue our global rollout with it. But we've been able to make the success that we've had, it's 16% of our global revenue, primarily off of just the United States, so it's been quite successful here.

And we anticipate that we'll be successful in the other markets due to other stacking strategies that we've used that are not quite to the same extent that the Vitality Stack is..

Thanks. That’s all I have for now. Thanks..

Thank you..

Our next question comes from Steven Martin with Slater. Please go ahead..

Hi, guys and congratulations..

Thank you..

Thanks, Steve..

You were just commenting on inventory.

How much more room now that you're sort of – you had a go at it for a while? How much more room do you think there is to reduce it?.

Yes. I think it really is tied back. Steve, to as we continue to expand our product lines internationally. We're fighting the build of inventory that naturally comes with that, but we still have – I'd say, our raw material are at a level that is higher than it ultimately needs to be.

So I would anticipate our mix of raws and finished goods still continuing to transition over the next several quarters and ultimately probably be down on a net basis but not as much as you might anticipate because of our international expansion and the build of finished goods that will occur with that..

Right. And I assume because of – you have a broader – the combination of the broader product line and the international expansion makes it tougher and tougher..

That's right. That's right..

And different regulatory requirements from country to country and different blends we may have to create, yes..

Our raws – like I said, our raws are still higher than I think they ultimately will be, but that will be traded off as we expand a little bit internationally..

Okay.

It looks like you've stabilized the distributor accounts? Can you talk about that?.

Yes, I mean from a distributor's standpoint – our business basically is roughly the same size as it was this time last year, so our distributor accounts, as you can see, are fairly stable at that. What we have seen, and what is positive leading indicator for us, has been our retention rate is going up.

That's been a great leading indicator, we've – that's primarily based on the first year. But also we've seen sequentially over the quarter, a 3000-distributor increase from last quarter or from the last couple of quarters, so it's been very positive for us..

And would you expect that trend to continue so might – when you report the fourth quarter, might distributor accounts actually be up on a year-over-year basis?.

Yes. Right now, the leading indicators primarily with retention rate and from what we're seeing between last quarter, I would say that yes, the leading indicators are pointing in that direction as well as the other programs that I mentioned in my prepared remarks are all geared toward driving increased distributor accounts..

Okay..

Yes, and I'll just add – I'll just add onto that, Steve, that in Darren's remarks, we talked about monthly – our monthly trend actually is improving, and so we ended the quarter quite high and April, we were fairly consistent in April as well, so these trends we're seeing within this continued growth..

Yes, I've mentioned in my remarks that March was our best recruitment month since May of 2016, and April was consistent with that. .

Okay. Gross profit looked good, and commissions and incentives looked good. SG&A was one of the line items was a little higher.

When you – when we go, I ask you this every quarter as we model out, so when we model fourth quarter, how should we look at those line items?.

Yes. So our SG&A, it was flat year-over-year, and one of the things, when you're just looking at our quarters, that becomes a challenge is that in the quarters where we have an event, our SG&A is higher, because all of the cost of that event is within the quarter that it occurs.

And for – as an example, in the fourth quarter this year, we do not have any event, and you should anticipate that our SG&A will be down as a result of that in comparison to our Q3 SG&A. And now if you look back over….

Okay. That's what I was getting at..

Yes. If you look back over the last several quarters, you'll see that pattern very consistently..

Okay. On your guidance, would you – you've sort of given us some idea on the revenue and you've given us some idea on the revenue and you've given us some idea on EPS.

Could you hazard a guess as to some EBITDA – an EBITDA number or range for the fourth quarter?.

Yes. I could probably hazard a guess. Year-to-date, our EBITDA is – adjusted EBITDA is right around $10 million, about $3.4 million of that came in Q3, I think just based on our EPS guidance. You could easily anticipate that our – we're expecting our EBITDA to be higher than $3.4 million that we did in Q3, maybe in the $5 million plus or minus range..

Okay. That's what I was hoping for, and last but not least, buyback. You didn't buy back a whole lot of stock.

Your cash balance is actually building, so I was just wondering, if you had any thoughts or what you're thinking was about when the stock was in the 3.5 range?.

We actually, as you are well aware there are some limitations around how much we can buy back based on the average trading volume in our stock. And based on where that volume is currently, we're limited as to how much we can buy back. We're focusing on doing as much as we can right now down, and you know we believe that our shares are undervalued..

Okay. Keep in mind, if I'm not mistaken, negotiated blocks don't count against those various calculations..

Yes. We have not yet entered into 10b-5 plan, so we're limited to what we can do in an open trading window..

Okay, thanks a lot, guys. Look forward to next quarter..

Thanks Steve..

Our next question comes from Ron Lyman who's a Private Investor. Please go ahead..

Hi, good afternoon. I was just curious to see what the philosophy for the company as far as paying dividends..

Yes, I'm sorry, I missed your first name?.

Ron. R-O-N..

Okay, hi, Ron. This is Steve Fife. Sorry about that. We – I think, as a company we are looking at that. Right now, we're focusing our attention really on – our excess cash on our share repurchase program.

And if you look at our EBITDA and the multiple of 3.7 that EBITDA, we think the best use of our cash is on our share repurchase, but we'll continue to evaluate dividend as time passes..

Okay, very good. Thank you for your time. Appreciate it..

Thanks Ron..

Our next question comes from Henry List who is a Private Investor. Please go ahead. And Mr. List, your line is open. Please check your mute button. And Mr. List, if you can hear me your line is open. Please check your mute button. Okay. And it appears we have no further questions, so I would like to turn the call to Mr.

Darren Jensen for any additional or closing remarks..

Thank you, everyone, for joining us today. This is an exciting time at LifeVantage. And as we continue to progress through this transformative year making strides with our 2018 initiatives, we're beginning to see the fruits of our labor and are encouraged as a better position the company for the future. We look forward to updating you on our next call.

Have a wonderful day..

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect..