Good day, ladies and gentlemen. Thank you for standing by. Welcome to today's Conference Call to discuss LifeVantage's Second Quarter Fiscal 2019 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.

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, and welcome to LifeVantage Corporation's conference call to discuss results for the second quarter of fiscal 2019. 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 access to the earnings release which went out this afternoon at approximately 4.05 p.m. Eastern Time. If you've not received the release, it's 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'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 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 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, February 4, 2019. 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 the company's CEO, Darren Jensen..

Thanks, Scott, and good afternoon to everyone. It is a pleasure to join you today to discuss our second quarter results. And I'm very pleased to inform you that LifeVantage generated its highest quarterly revenue in the company's history. Net sales increased 18% year-over-year driven by growth in nearly all of our markets.

We saw continued strong growth of our active member counts with total members up 8% year-over-year driven by 6% distributor growth and 9% customer growth. As a result of the continued sales momentum we are increasing our revenue guidance for fiscal 2019 and are on track to report the highest annual revenue company in our company's history.

Over the last year we have realigned the company's incentive programs to more closely align our employees and management with shareholders.

We believe we are seeing the benefits of these programs materialize into accelerated revenue growth, as a result we're recognizing higher non-cash share based compensation running through our income statement reflecting the significant increase in our stock prices beginning of the fiscal year.

As Steve will discuss we are also updating our adjusted earnings per share guidance to reflect this impact.

Our accelerating revenue is driving strong free cash flow and EBITDA growth which is further strengthening our financial positions and providing incremental opportunities to return value in cash to shareholders through increased share repurchases.

On Friday, our Board of Directors increased our share repurchase program from $5 million to $15 million reflecting the strong growth we're seeing in EBITDA and free cash flow. I'm very pleased with the results of this alignment between shareholder and the LifeVantage team.

We continue to see favorable impacts to our growth rate from each of the key initiatives that we've implemented over the last year and have additional growth drivers planned for the second half of the year. We remained focus on increasing average order size, geographical expansion, product innovation and driving distributor and customer acquisition.

During the second quarter, we had another strong contribution from our Red Carpet program which is focused on distributor acquisition.

Our Greater China strategy is delivering accelerated recruiting and sales growth following our very successful launch in Taiwan in mid calendar in 2018 and we saw an enthusiastic response in robust initial sales of our new True Science hair care system launched at our Global Convention early in the second quarter.

Each of these successful initiatives contributed to our record quarter. As we entered the back half of the year, we have additional geographical growth planned across Europe. After opening Australia early in the fiscal year, we're now on track to open five European markets this year.

Spain will be the next markets to open which we're targeting for March launch. Additional markets expected to open this fiscal year include France, Belgium and Ireland. We call that we launch the customer acquisition program during 2018 that made our products available for purchase on a personal use basis in several markets.

This initial experience with customer sales allows us to enter new markets with existing demand. We're now broadening the markets for our True Science hair care systems available. We have additional product, innovation ready to launch that will augment and enhance one of our existing core product line.

At Elite Academy in Charleston, South Carolina later this year we will introduce enhancement to our PhysIQ weight management system. This system has been updated to reflect the evolving demand of biohackers and to keep us at the forefront of Smart Weight Management.

Turning to our distributor and customer initiatives, we saw strong number growth during the second quarter as I earlier noted. The success of our Greater China strategy led by the launch of Taiwan was a key driver of the 17% active distributor growth in our Asia Pacific and Europe region during the quarter.

The success of our Red Carpet program is also driving global growth of active members and contributing to our sequential revenue growth. We're also experiencing strong adoption of our LifeVantage digital platform which continues to develop and is enhancing the success of our distributor activities.

We've now launched the app in Canada and Australia and are set to launch in Japan in late February. The app continues to grow in penetration among active members and is enhancing distributor effectiveness among users.

We're measuring success through penetration among active purchasers each month, the time in which a distributor earns his or her first commission and the retention of new member or subscriptions.

To reiterate, our goals for fiscal 2019, we plan to drive global business with the acquisition of new distributor leaders, launch of new and updated products, expanded availability to existed products internationally. New market development and by driving adoption of our LifeVantage digital platform.

I'm pleased to report that we've progressed as expected which is driving our higher net sales guidance for 2019 and our strong performance in the first half of the year. With that, let me turn it over to Steve to run through the financial results.

Steve?.

Thank you, Darren, and good afternoon, everyone. I'm also pleased to report our second quarter results. We generated another of both year-over-year and sequential revenue growth and are confident with our business trends and opportunities for additional growth. 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 a record $58.2 million representing 17.6% increase year-over-year and a 4.6% sequent increase when we compared to the first quarter of fiscal 2019.

Revenue in the Americas increased 15% to $42.4 million and revenue in Asia Pacific and Europe increased 25% to $15.7 million all year-over-year. Both regions also reported growth on a sequential basis with revenue in the Americas increasing 3.3% while revenue in Asia Pacific and Europe increased 8.2% led by our growth in Greater China.

Gross margin was 83.2% compared to 81.6% in the prior year period primarily reflecting the benefit of a price increase during the second half of fiscal 2018 and changes to product and market mix.

Commissions and incentive expenses as a percentage of sales increased 110 basis points year-over-year to 48.4% but moderated from the first quarter level of 50%. The year-over-year increased due in part to the success of our Red Carpet program and incentives as well as other typical variations that occur based on revenue mix.

Importantly the commission and incentive expense rates will fluctuate based on the timing and magnitude of promotion and incentive programs as well as investment in our Red Carpet program. Adjusted SG&A as a percent of sales were 32.8% compared to 29.2% in the prior year period. The increased SG&S expense reflects the following.

First, cost associated with our global convention in October which did not occur in the prior year period. Second, increased stock compensation and employee incentive expense as a result of our increasing stock price, year-to-date financial performance and realignment of our corporate incentive program.

And third, higher staffing levels reflecting additions made in the second half of fiscal 2018. Since those additions, we have maintained our staffing levels. Adjusted operating income was $1.1 million compared to $2.5 million in the prior year period.

Adjusted EBITDA for the second quarter was $3.3 million compared to $3.7 million in the prior year period and consistent with the first quarter of 2019. Given the higher non-cash stock based compensation as well as an increase in our fully diluted shares both resulting from our increased share price.

We continue to believe EBITDA will be a better reflection of our cash profitability growth this year. We anticipate approximately 15% to 24% growth in an adjusted EBITDA during fiscal 2019. During the second quarter we reported $1 million tax benefit on an adjusted basis.

The tax benefit was driven by the timing of incentive compensation [indiscernible] that led to a larger deduction for our tax calculation.

We anticipate a full year tax rate of approximately 20% plus or minus a couple of percentage points although our tax rate may continue to be subject to variations resulting from significant discrete items occurring in future quarters.

Adjusted net income was $1.9 million or $0.13 per fully diluted share up from $1.6 million and $0.11 per fully diluted share in the prior year. As I noted, all of the adjustments from GAAP to non-GAAP are reconciled in our press release.

Turning to the balance sheet, we ended the second quarter of fiscal 2019 in a strong financial position with $19 million of cash compared to $4.4 million of debt. Subsequent to the quarter end, we paid down our term loan by $2 million and expanded the capacity of our revolving line of credit from $2 million to $5 million of which [indiscernible].

During the second quarter of fiscal 2019 we generated $4.6 million of cash from operations compared to $2.2 million in the prior year period. We invested roughly $200,000 in capital expenditures paid down $500 million on our term loan and funded $600,000 of convertible notes with our app development partner.

We now anticipate CapEx to be approximately $2.5 million for the full year. Which includes additional expenditures with our app development partner? During the second quarter, we repurchased 1.5 million of our common shares under our share repurchase authorization.

As Darren noted, the Board of Directors has increased our share repurchase authorization from $5 million to $15 million. Turning to our outlook, we're increasing our fiscal 2019 revenue guidance to a range of $222 million to $232 million up from our prior range of $215 million to $225 million.

We're updating our adjusted diluted earnings per share guidance to a range of $0.46 to $0.52. As Darren noted, the increase in our stock price since the beginning of the fiscal year along with the realignment of our corporate incentive programs have both led to an increase in our non-cash share based compensation.

The increasing share price has also led to a higher diluted share count, which increased by approximately 800,000 shares year-over-year during the second quarter. We estimate that stock based compensation cost will be $2.2 million to $2.6 million higher during fiscal 2019 than the prior year.

We are also expecting to get leverage on adjusted EBITDA which excludes the impact of these items. We're anticipating adjusted EBITDA to grow in the range of 15% to 24% during fiscal 2019. Now let me turn the call back to the operator to facilitate questions.

Operator?.

[Operator Instructions] And we'll take our first question today from Doug Lane with Lane Research..

First the top line looked right on target to look what I was looking for and right in line what you've been talking about. So I really - as analyst will do when run to the numbers that I'm still trying to reconcile in my mind and that's the changes to the SG&A and tax rate and the shares outstanding from the incentive programs.

So [indiscernible] get the moving pieces right, you've got an increase in the stock price which affects the SG&A line and also increases the shares outstanding but then also with the source of benefit on the tax line, is that basically what happened with that?.

That's correct, Doug..

So I don't see why that dynamic shouldn't continue to work, right. Where your SG&A is impacted if you stock price goes up and of course you share is out, but will you also have a reduction in your tax rate on a go forward basis, if you continue to get pressure from a higher stock price..

Yes that will continue, we have vesting that occurred during the quarter that contributed a very high kind of book to tax difference and we don't necessarily expect that's going to recur in future quarters because of the amount of stock that vested during the quarter was greater than what we would anticipate in the future..

Listening to you commentary, looking at the release. It does seem like a big change here in your reduction of adjusted EPS number, is the stock price going up. I mean you knew about the convention, you had the hires in your budgets for this year.

So it was the stock going from call it, $10 to $12 up to the mid-teens here that took $0.68 out of your adjusted number.

So is that the sensitivity here, so if the stock went I don't know 20 or 22 would that be another $0.68 out of ongoing kind of run rate on EPS, I mean how should I think about that because this sounds like a dynamic that's going to continue for a while..

No it won't because again and we've made some modifications to our stock based comp plans internally that should provide us with much better visibility in terms of the impacts of rising or declining share price.

Previous plans had a significant amount of compensation that both tied to external performances as well as indexes and which made it difficult to predict what the impact would be, we also have added a fair amount of the overall compensation converted it from a cash based compensation to a share based compensation which again the impact of that was greater this year then I would anticipate it being in the future periods.

In fact, I would estimate that our stock based comp will go down next year, all things being equal..

Okay, that's good to know. Okay. That's helpful. Let's move to the new market Spain and the other markets you mentioned. How much do you think incremental we could see in remainder of this fiscal year from opening those markets? I'm guessing they're not going to be as impactful as Taiwan was, but maybe if you could just help me out there..

Doug, this is Darren speaking. With our European markets, we've talked about previously that we have in 2018 we launched a customer acquisition program and where we allowed people to purchase products for personal consumption in some of these European markets. We had not extended our business opportunity there, but we still had customers.

So basically we've taken many of those markets and converted them over to make them open to our business opportunity. I would say that they wouldn't have a massive impact, we do have a higher hopes for Spain.

Spain is one of the better network marketing countries in the world and we've had a fair amount of demand for that from our distributor base, but expect a little more out of Spain than I would some of the other markets like Belgium, that a quite small in population.

So I wouldn't expect them to be of the magnitude of Taiwan, but Spain should be reasonable for us..

Yes it's a pretty big market. Thanks Darren. Just one last thing, can you update us on how you're viewing China with the ecommerce [indiscernible] there..

So basically with China, first of all we're excited that launched Taiwan which is we felt it was a critical step in our overall Greater China strategy and we really are looking for Hong Kong, Taiwan and Mainland to drive synergy across the entire region so we're very pleased with the growth.

Now we continue to focus on our cross border ecommerce model and we continue to refine it. We knew that was going to be - been a brand new model, a slower start for us because we're basically having to create new platforms and new models for it.

But we're getting the growth that we had forecasted and hope for from the regions just out of Taiwan itself, so it still leaves a tremendous upside for us and we're seeing a lot of improvements in Mainland. So I see a ton of upside for us there, we're still refining the model though..

Okay, thank you..

Next we'll hear from Eric [indiscernible] with SEC [ph] Research..

Last conference call, you talked about the hair care product. Your immediate reaction was extremely positive, has that carried through going forward.

How are we seeing demand for that?.

So with it, we have mentioned that it was very positive. As matter of fact, when we launched it at our global convention we sold out, on our first initial order of it. Our second one, I think sold out and so we're in stock now of it and its only available in the United States currently.

We just made a change I believe last week where we're beginning to incorporate that into some of our bundling strategies that we have because before it was just basically you would purchase the system or individual product.

So really the true extents of it, we don't know yet because it's not in some of our main drivers of our sales like I mentioned our bundling, our enrolment pack and those it's been incorporated now as well as we're working aggressively to expand that throughout our global distributor network and but right now it's still has been one of our most successful launches and we would imagine that it would be, I think it will end up being a very good producer for us from a category.

It goes to show that, what we call no permission products so lower cost products that are daily used definitely have a value out there as well as these are very demonstrable on social media, so it's been good. And we still very high hopes and expectations for it..

And just one more price increases, so you guys have use price increases and you've also created the pack to a little bit lower price.

What is the new response to price increases? Having that push back when you [indiscernible] them or customers who are already using your product, what are you seeing in terms of that?.

Well what we did, when we sat down with our leadership and talked about various strategies that we could use from a margin standpoint and basically they agreed with the price increase, it was moderate, it was $0.99 on each of our products and it was across the board.

And virtually at that point we had very, very little push back from either customers are distributors. We had not adjusted our pricing I think in our history, but most understood everything is not statistic when it comes to pricing and from time-to-time you've got to update it..

Interesting. Okay guys. Thank you and congrats..

[Operator Instructions] we'll now hear from Jerian [ph] Hoffman with Robicove [ph]..

Two questions.

Could you give a little bit more color on the customer trends between Q1 and Q2? There was a little bit of slow down there because of [indiscernible] which markets were doing well for you which [indiscernible] some of the weakness? On the SG&A development between Q1 and Q2 so the majority of this ramp up through the SG&A expense between the quarters, is that the stock base comp plus the global compensation cost?.

You're talking sequentially, right?.

Yes..

Not year-over-year. Yes let me talk about the G&A first. It is almost exclusively the stock based comp and that is driving the increase along with in Q2 we had our global convention. Q1, we had what we referred to as an Elite Academy.

So it's still when we bring together our distributor force and but the global convention is done a much larger scale and it caused us quite a bit, almost double the cost of Elite Academy. So those two items were the primary drivers for our G&A increase and from a customer standpoint sequentially we were about flat.

There is some seasonality in our customer acquisition process in that. Around the holiday's we do see that slowing down a little bit, so calendar Q4 or our second quarter is typically and seasonally a slightly lower acquisition time period for us from a customer standpoint..

Okay, great.

Thanks maybe you won additional thing, the Real Salt Lake partnership, can you provide an update there?.

This is Darren, yes with that. We spent a year or even more than a year looking at that relationship and I do want to say right out the gate that we highly value the relationship and RSL has been tremendous partners with us.

We brought in an outside sports marketing agency, I think from New York to help us really evaluate the relationship to see how we monetize it and so we went through that process and we worked on it for an entire season and based off of what we were able to find, we have made the decision not to opt out, but continue with that relationship through the end of the contract.

And one of the main benefits or one of the primary benefits that I can see for this, is that we're - the industry overall is coming under tremendous pressure to almost move into an uberized [ph] way of doing business in that in the Uber [indiscernible] customers to their drivers and vice versa with many of the blitzscaling dial companies.

And the Real Salt Lake relationship gives us the ability and has put us in a position where we leverage that relationship and all of the customers that are channeled to us from that relationship, we in turn pass those back to new distributors in our business at key port periods in their distributor lifecycle and we feel that drives distributor longevity as well as the total lifeline value both of our distributors and of our customers.

So we see this relationship as an important part of our strategy in helping us compete against some of these entrepreneurial generating companies like an Uber, like an Airbnb and it gives us really position that many other companies within our channel do not have..

Thanks very much..

Our next question will come from Will Hamilton with Manatuck Hill..

Just another question on the SG&A. so in terms of the impact of the higher stock price, is that simply a function of that the incentive compensation was a designated share amount and then because they were being issues of a certain price between that when the market price went up cost increased..

Yes, that is perfect. That's correct for I mean the biggest element that is driving this increase that's exactly correct..

So is it possible that we restructure this because it means it's great to see that the share price increase obviously in the shareholders, but that it is an incentive compensation is a dollar amount and thus then the rest of our shareholder are not diluted as much or impacted on SG&A earnings by share count..

That's exactly what are changes that we've made, Will is looking at the overall incentive compensation as on a value or a dollar basis compared to our peers.

We engage third party compensation firm and each year as part of our proxy process we look at that and this year we've made some changes to focus more on total dollar value which impacts the number of share.

If our share price is going up then candidly there is a smaller pool of shares that will be distributed because it's based on the total value as of that point in time.

We follow that guidance in November equity grant to the leadership of the company, directors and above and that's going to be philosophy of the company going forward which should limit significantly, the impact that we saw here from this prior year..

Okay, but this - it could not have been adjusted for whatever was set before because it came obviously quite expected [ph]..

Yes no it could not be adjust in retro..

Okay..

But you know - although it was expensive to us this year again we're pleased with the benefit that it drove. We really do think that our incentive program now is focusing the executive and the employee base to focus on our performance of the stock companies performance and driving benefit for all of our shareholders..

Right, it just came out a little bit more expensive than I think all of us would have hoped this time around. Anyway, in terms of I just wanted to better understand going forward or if you can provide sort of guidance for SG&A for the full year. If I include stock comp we're now looking like roughly $10 million year-over-year increase..

Yes I think that's probably a reasonable range, probably a little less than that, but that's [indiscernible]..

What is [indiscernible] and what is the number you're using for adjusted EBITDA in 2018 to guide us to the 15% to 24% for this year of growth?.

The adjusted EBITDA in 2018 was just under $15 million or $2.9 million..

Okay, all right. And just a couple other regional questions. So China is still being included in the Americas region..

No, it's been the Asia..

Asia. Okay..

The Europe..

So you had indicated it with us under US, so I just want to - so that's now been moved under Asia..

Correct..

That would fall under the Europe and other, if I look at yours..

Yes..

Okay. Or did it go? The non-Japan..

Correct..

Okay, got you.

And then in terms of Japan I know you've been working on various ways and trying to turn that around, you had a better year last year down a little bit so part of this year, so could you talk about some of the issues that are going on there, what do you think about that market?.

Will, this is Darren.

Yes with that some of our management that oversaw the area we have been in multiple areas unfortunately they have been spending a lot of their time working on the Greater China area and we wanted to bring greater focus to both areas so we've restructured internally the way that we manage those areas and set up separate teams so that they can really focus and drive productivity in both areas.

So we've already made those changes internally as well as stepped up our programs for product launches and for additional development within Japan itself. So later this month we have a major event, we have two large events in Japan each year on in the kind of the winter, spring time and then one in the fall.

So we're going into this launch period coming out with some exciting announcements. We're going to launching our digital platform there for our app and so we're bringing a lot more focus back on Japan because it's such a critical part of our business..

One last one if I may. Just back on - I was thinking about little bit more.

Is stock comp is going to add say $2.5 million to the year-over-year increase? And we think it's going to be roughly serving out say maybe some of the other the one-time cost like the class action, so? We think it's been $10 million you bucket the other $7.5 million or so? And the events being one of them..

Yes, the events is a big portion of it and then there is cash incentive comp for the employees. We're tracking while we won't disclose that. But it's a portion that we'd dodged [ph] we felt short of our expectations in the prior year.

Internally we're tracking ahead of our plan based on the performance of the company that you've seen for the first half and so there is a portion of the SG&A growth that is also tied to cash bonuses that will be paid out based on our employee incentive compensation plan..

Okay, all right. Thanks..

That will conclude today's question-and-answer session. I will now turn the conference over to Mr. Jensen for any additional closing remarks..

Thank you, everyone for joining us today. We're pleased with the sales and business momentum and remain confident in our 2019 outlook and we wish you all a great day. Thank you..

That does conclude today's conference call. Thank you for your participation. You may now disconnect..