MED
#Thank you, <UNK>.
Good afternoon, everyone.
We're pleased to discuss our third quarter 2017 financial results with you today.
I will provide a brief overview of our financial and operational business performance.
Tim will then review our financial results in more detail and share our fourth quarter and annual 2017 guidance.
Tim and I will then be available to answer your questions.
Our third quarter results reflect some early successes of our strategic growth initiatives, and we're pleased to report revenue and earnings above our expectations.
The successful execution of our growth and operations initiatives positions us for the revenue and earnings acceleration we achieved in the third quarter.
Third quarter revenue of $77.2 million, up 12.6% was above our revenue guidance of $72 million to $75 million.
We also continue to see operational efficiencies across the organization, as we've aligned and focused our resources behind our key growth initiatives.
Combining this improvement with our accelerating sales, we experienced a 90 basis point improvement in SG&A costs as a percentage of revenue, which drove third quarter diluted earnings per share of $0.55 ahead of our $0.48 to $0.51 diluted earnings per share guidance.
As we have done this, we have also created a powerful and focused transformational message around optimal health and wellbeing that has resonated across our business.
This has helped us fuel excitement, energy and enthusiasm from our corporate team, our field leaders and their clients.
We're experiencing solid business momentum, and we have never been better positioned for the future.
As we discussed on our Q2 call, we hosted our largest ever convention in Dallas, Texas this past July.
At this convention, we officially rebranded our Take Shape For Life business unit to OPTAVIA and completed the rollout of our essential line of OPTAVIA products.
We've been extremely pleased with the incredible positive response we received from OPTAVIA coaches and clients, and this has directly translated into tangible results.
Revenue through our OPTAVIA Coach model posted the largest quarter in the company's history.
The third quarter also represented a record number in the number of active earning OPTAVIA coaches, which grew for the first time to over 14,000.
We have a powerful message with distinct, exclusive OPTAVIA products, enhanced business tools and an incredible, focused OPTAVIA Coach community working together to take our business to its next level of growth.
Focusing on our Q3 operating results in more detail.
OPTAVIA reported its eighth consecutive quarter of year-over-year quarterly revenue growth, up nearly 18%.
Sequentially, this was up from a nearly ---+ the nearly 11% revenue growth we reported for OPTAVIA for the second quarter of this year.
We entered Q3 with 14,200 active earning OPTAVIA coaches, an increase of nearly 11% over the third quarter of last year.
In August and September, we set a new high mark for the company, as more OPTAVIA coaches joined our coach community than at any 2-month period in our company's history.
During the third quarter, we also continued to generate increased coach productivity resulting from higher new client acquisition and a higher average order value year-over-year.
Just a couple of weeks ago, I had the pleasure of attending the OPTAVIA Leadership Retreat held in Sundance, Utah.
This annual retreat brings together some of our most talented and successful business leaders for our ---+ from our OPTAVIA Coach community.
The retreat focused on building the leadership skills to enable our mission of bringing the world life-long transformation one healthy habit at a time.
It was wonderful to hear their inspiring stories of success and aligned together behind the fourth quarter and 2018 initiatives.
We've worked hand-in-hand with our OPTAVIA Coach community to develop enhanced business tools and resources to make it easier for them to grow their business and connect with new clients.
Beginning next month, we will launch Phase I of a new digital technology platform created to help OPTAVIA coaches be even more successful.
The new systems enable OPTAVIA coaches to share information more seamlessly, leverage social media content and receive real-time business activity insights to help the coaches, manage their business and improve client interaction.
With OPTAVIA we've created a powerful transformational message that is easily shared and is both inclusive and appealing to the diverse demographics, which, we believe, will enable us to expand our OPTAVIA community and positively impact more lives.
Looking ahead, our OPTAVIA Coach community is now stronger than ever, and very well positioned to build upon the current business momentum.
We continue to make progress in preparing for future growth, which includes deeper penetration of our existing U.S. markets as well as expansion into new markets over time.
OPTAVIA coaches inspire others every day as they share our vision and mission of offering the world life-long transformation one healthy habit at a time.
Last month, we also moved into our new corporate office in Downtown Baltimore, Maryland.
As Medifast continues to establish itself as a national leader in the health and wellness space, we're pleased to join this growing business community.
Our new headquarters will honor Medifast's rich history and will serve as a destination and home away from home for OPTAVIA coaches from across the country, who represent an integral part of the company's business and culture.
Now let me move to Medifast Direct.
The rate of the year-over-year quarterly revenue decline improved again in Q3.
Medifast's year-over-year performance is no longer a significant drag on our overall revenue trend.
Our team has been working to find the right balance of advertising spend, placement and messaging to ensure we have a sustainable model to acquire a growing number of customers to support the long-term profitable growth of the business.
We continue to test our Medifast Direct platform as a digital lead-generation tool that will support our OPTAVIA Coach community.
This ongoing testing is an example of our emphasis to move our direct response and OPTAVIA units to an integrated business model for the benefit of our coach community and our clients.
We believe that this alignment will help to enhance our long-term success and will facilitate the expansion into new markets over time.
In summary, we're very pleased with our accomplishments thus far in 2017.
This is demonstrated by our operational and financial results, the strategic initiatives to evolve our business have begun to generate an accelerated rate of growth in both revenue and profitability.
We have positive business momentum in our OPTAVIA business units and when combined with our scalable infrastructure and strong balance sheet, we are well-positioned for the future.
And with that, I would like to turn the call over to our CFO, Tim <UNK>.
Thank you, Dan, and good afternoon, everyone.
In the third quarter, revenue of $77.2 million exceeded our expectations.
OPTAVIA, formerly Take Shape For Life, accounted for approximately 84.1% of revenue; Medifast Direct accounted for 11.3%; Franchise Medifast Weight Control Centers accounted for 4.3%; and Medifast Wholesale accounted for 0.3% of net revenue.
Revenue in OPTAVIA increased 17.5% to $66.4 million from $56.5 million in the third quarter of the prior year.
As Dan mentioned, for the record number of active OPTAVIA coaches at approximately 14,200 in the third quarter compared to 12,800 in the same period last year and 13,500 in the second quarter of 2017.
Average revenue per active earning Health Coach for the quarter increased to $4,693 as compared to $4,421 in the third quarter of last year.
We launched the remainder of OPTAVIA Essential product line in July.
So nearly the full complement of OPTAVIA products were available for sale during most of the quarter.
While we don't plan to specifically report revenues by brand on a regular basis, we thought it would be helpful at this particular stage to report that 45% of our total revenues in the quarter were comprised of OPTAVIA-branded products.
Our Medifast Direct revenue decreased 3.7% to $7.8 million as compared to $8.1 million in the third quarter of 2016.
Total Medifast Direct advertising in the quarter decreased $100,000 from $1.7 million in the third quarter of 2016.
Revenue in the Franchise Medifast Weight Control Centers decreased to $2.8 million from $3.7 million in the same period last year.
The decrease in revenue was primarily driven by fewer franchise centers in operation during the period.
We ended the quarter with 35 franchise centers and 2 reseller locations in operation, compared to 55 franchise centers and one reseller location at the end of the same period last year.
Medifast Wholesale revenue, which is mostly comprised of revenue from health care providers, decreased to $200,000 compared to $300,000 in the prior year period.
Lower revenue is consistent with our previously communicated strategic direction.
This business unit will be fully integrated into our OPTAVIA Coach model during the fourth quarter of this year.
Gross profit for the third quarter of 2017 increased 11.5% to $58.2 million compared to $52.2 million in the prior year period.
Gross profit margin as a percentage of net revenue decreased by 70 basis points to 75.4% versus 76.1% in the third quarter of 2016.
This decrease in gross margin percentage was driven by an increase in manufacturing costs, as the company is no longer building inventory for the OPTAVIA launch.
As you may recall, we were overproducing in the prior year to build our initial inventory of the OPTAVIA brand.
Selling, general and administrative expenses in the third quarter of 2017 were $48 million or 62.1% of revenues compared to $43.2 million or 63% of revenues in the third quarter last year.
The increase in SG&A was primarily a result of higher OPTAVIA commission expense, based on the growth and success of our OPTAVIA Coaches.
Net income in the third quarter of 2017 was $6.7 million or $0.55 per diluted share based on approximately 12.1 million shares outstanding.
Third quarter 2016 net income was $6.1 million or $0.51 per diluted share based on approximately 11.9 million shares outstanding.
Our effective tax rate was 35.5% compared to 32.7% in the third quarter of 2016.
The increase in the rate was primary driven by an increase in state income taxes for the period.
Our balance sheet remains very strong with stockholders equity of $108.2 million and working capital of $89.1 million, as of September 30, 2017.
Cash, cash equivalents and investment securities as of September 30, 2017, increased $18.9 million to $95.7 million compared to $76.8 million at December 31, 2016.
Our Board of Directors declared a $0.32 quarterly dividend during the quarter, payable on November 9.
Returning to our guidance, we expect fourth quarter revenue to be in the range of $71.4 million to $74.4 million and earnings diluted share to be in the range of $0.46 to $0.49 per diluted share.
We are, therefore, narrowing our 2017 full year revenue guidance range to $295 million to $298 million and are raising our full year earnings per diluted share guidance to be in the range of $2.15 to $2.18 per diluted share.
Our fiscal year 2017 guidance assumes a 33% to 34% effective tax rate.
Well, that concludes our operational and financial overview.
We appreciate your interest in Medifast, and Dan and I are now available to take your questions.
Operator.
Yes.
We're ---+ this is a pretty common question.
We're ---+ where we are at this point is this ---+ in December, so next month, we will go live with our new platform that will be the final piece to enable us to actually make those decisions.
And we'll make more specific announcements post December.
We don't have an exact timeline at this point.
But certainly, as soon as we do, we'll be sharing that with you.
Yes.
I think to your point, I mean, there's typically a ceiling on productivity.
Two things are happening: one, we're seeing the transition of ---+ from the Medifast brand to the OPTAVIA brand among our coach community.
Those products have a slightly higher price.
So a portion of that productivity is related to the higher-priced product.
But I think the more important part of it, which makes up the majority of that improvement, relates to a ---+ the communication and the excitement related to the launch of OPTAVIA.
So while that number won't continue to go up, we should continue to see that number be at a very healthy level and maybe, see a little bit more growth in the near future.
Sure.
I think what you saw this past quarter is normal.
I think what you saw last year this time was, effectively, as we overproduced, you have a higher-level absorption of your overhead cost into your standard cost.
So when buying goes up, it's a good thing for margins, and it spiked.
So our utilization of our plant is still under 50%.
So there's a great opportunity, I think, to continue to improve margins with volumes.
But I think it's more of an indication of where we were last year this time than it is this year at this time.
Great question, <UNK>.
And I'd say that the ---+ what we completed at the convention was the complete rollout of the line, as it existed, kind of, from the flavor profile with Medifast.
Now what you'll see is a consistent refresh.
So as an example, these are fairly minor rollouts, but this past several weeks, we launched 2 ---+ several new snack products under OPTAVIA.
And we'll continue to roll out products to keep the flavors, kind of new and current, and we'll continue ---+ given ---+ from an graph extension standpoint, to look at other categories that may fit our positioning as a health and wellness company.
Yes, I mean, <UNK>, the consolidated revenue, bottom end of the guidance is 14%, high end of the guidance is 19%.
And the other business units have historically had a little bit of a drag.
So it's, certainly ---+ your math is not off.
It's certainly possible to be over 20%.
I think what you'll see in the future is probably around that level.
Our biggest initiatives for Medifast Direct is the testing we're doing to use Medifast Direct as a way of bringing new clients in for our coach community.
So we are then working on that for several quarters.
As we do that, it's possible, once we, kind of, identify the key levers in doing that, it's possible that we could wrap up again.
But I think for your modeling purposes in the foreseeable future, kind of keep it about where it is.
Yes.
So <UNK>, we initiated dividends at the end of 2015 and we initiated a 3% yield.
And last year, we raised it 28% and brought it back up to 3% yield.
Those decisions sort of not sure haven't been made yet.
That decision the board will evaluate coming up in December but I think what we said is we would like to be a strong dividend payer, and we have been ever since we initiated the dividend.
So the exact amount hasn't been determined, but I think that the growth story with a strong dividend is a powerful combination.
In the past 2 years, it has been.
So past 2 years, it was declared in December, payable in the first quarter.
Our projection is to go live December 1.
And I think like any company who is selling online, it won't be our final investment in IT.
But this is a significant one related to the OPTAVIA launch.
So that has some important branding components that will rolled out on December 1 that the coach community has been waiting for and then some basic enhancements on some of the general technology that we use to facilitate the business.
Yes.
That's Phase 1.
So there's not really a ---+ there's not Phase 2.
This is Phase 1.
And this will be complete for what we needed to do on the front-end.
Meaning, we've upgraded our shopping cart, as well as made it capable of being multi-country, multilingual, multicurrency.
So those are the most important elements that we're updating.
We're also giving our coaches a new back office.
So essentially, a way for them to look at and manage their business, much more simple and much more information rich.
So those are the ---+ there are also another ---+ a number of other elements that will help them share their story more effectively on social media.
So this will be the most important, kind of, technology introduction of the last year.
But again, we'll continue to invest in our systems as we go forward to make sure that we meet the expectations of how we do business and how we allow our coach community to leverage technology in their businesses, as they go forward.
Yes.
So we're coming out of third quarter.
We're very pleased with the momentum we have.
And our guidance in the quarter implies 14% to 19% growth coming off of 12.6% growth.
Historically, Doug, we've been a little seasonal in the fourth quarter.
So if you look year-over-year for as long as I've looked back, fourth quarter is a little softer, we think, primarily because of the holidays.
And what we don't exactly know is, we have very strong momentum right now, the way that we can blow through that seasonality.
But based on our modeling, we've historically seen some seasonality late in the fourth quarter.
So we have that factored in.
Yes.
You should expect to see that, as we determine exactly and finalize where we are going to go.
As you're pointing out, it's fairly typical to start making those plans in advance of any announcement and in advance of an opening, certainly because there's a lot of work to do to get there.
Yes, I think the major ones have been there.
I think that the first thing we've focused on is making sure that we have a platform ---+ technology platform that's capable of supporting a multi-country, multi-language, multicurrency, that will be complete with this rollout that we were just talking about.
The other thing that's been happening is testing to ensure that our products, our pricing, our concept, our message are well received in the potential target countries that's was ---+ that was completed portion of the phase ---+ what we need to do.
And the last thing that you're pointing out is getting the people to manage that.
And I think that's the right next sequence.
And that's the way we're thinking about it and looking at it as well.
Great.
We'd like to thank everyone for your interest in Medifast.
And appreciate the participation in today's call.
We look forward to speaking you again, as we report our fourth quarter and full year 2017 results and have a nice evening.
