Nautilus : FQ3 2023 Earnings Call Transcripts

Corrected Transcript

09-Feb-2023

Nautilus, Inc. (NLS)

Q3 2023 Earnings Call

	Total Pages: 12
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Nautilus, Inc. (NLS)	Corrected Transcript
Q3 2023 Earnings Call	09-Feb-2023

CORPORATE PARTICIPANTS

John F. Mills	Aina E. Konold
Managing Partner, ICR	Chief Financial Officer, Nautilus, Inc.
James Barr
Chief Executive Officer & Board Member, Nautilus, Inc.

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OTHER PARTICIPANTS

Sharon Zackfia	Steven Lee Dyer
Analyst, William Blair & Co. LLC	Analyst, Craig-Hallum Capital Group LLC

John-Paul Wollam

Analyst, ROTH Capital Partners LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Good day and welcome to the Nautilus, Inc. Third Quarter 2023 Earnings Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Mr. John Mills with ICR. Please go ahead, sir.

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John F. Mills

Managing Partner, ICR

Thank you, Paul. Good afternoon, everyone. Welcome to Nautilus' fiscal 2023 third quarter ended December 31 conference call. Participants on the call today from Nautilus are Jim Barr, Chief Executive Officer; and Aina Konold, Chief Financial Officer.

Please note this call is being webcast and will be available for replay for the next 14 days. We'll be happy to take your questions at the conclusion of our prepared remarks. Our earnings press release was issued today at 1:05 PM Pacific Time and may be downloaded from our website at nautilusinc.com on the Investors page. The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures.

Please note, we will be comparing results versus last year, fiscal 2022, and also versus fiscal 2020, as we believe comparing to the last pre-pandemic period is helpful in demonstrating our growth and progress. With today's call, we have a presentation that management will refer to during their prepared remarks. On slide 2 is our full Safe Harbor statement, which we ask everyone to read. You can access the presentation by going to the Investors page on our website and clicking on Events & Webcasts.

I would like to remind everyone that during this conference call, Nautilus management will make certain forward- looking statements. These forward-looking statements are based on the beliefs of management and information

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Nautilus, Inc. (NLS)	Corrected Transcript
Q3 2023 Earnings Call	09-Feb-2023

currently available to us as of today. Such forward-looking statements are not guarantees of future performance, and therefore one should not place undue reliance on them. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control and ability to predict. For additional information concerning these factors, please refer to the Safe Harbor statement and to our SEC filings, which can be found in the Investor Relations section of our website.

And with that, it is my pleasure to turn the call over to Nautilus' CEO, Mr. Jim Barr.

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James Barr

Chief Executive Officer & Board Member, Nautilus, Inc.

Thank you, John, and thank you all for joining us. Before I review our Q3 performance, I would like to highlight three key topics we will focus on during today's call. First, through our focus on operational excellence, we have implemented strategic margin management initiatives that drove significant gross profit and EBITDA improvement in the third quarter. Second, we are continuing to face headwinds in our Retail channel and have taken deliberate actions to address them and return to positive EBITDA in 2024. Third, we are confident in the long-term opportunity because we are on the right side of industry trends.

Turning to Q3, I'm pleased with the results we delivered. Q3 net sales were $98 million with Direct sales up 30% compared to Q3 fiscal 2020. Growth was driven by our broad portfolio of strength and cardio offerings, reinforcing our strategic advantage of being able to offer products in both. Our strategic actions to enhance supply chain and improve our inventory position are yielding margin improvement. As such, gross margins for the third quarter expanded 300 basis points year-over-year, largely driven by our planned improvements in inventory levels.

In Q3, we continued to reduce our operating expenses, driven by our efforts to optimize and lower advertising spend. These results translated to continued improvement in our adjusted EBITDA, with Q3 adjusted EBITDA loss reducing by 67% year-over-year.

We see continued momentum in our differentiated digital offering. We added more than 50,000 JRNY members in Q3, reaching approximately 450,000 total JRNY members, an increase of over 88% compared to the same period last year. Of these members, 156,000 were subscribers, representing 134% growth year-over-year.

While we continue to see solid demand in our Direct business, and with sales up 30% to Q3 fiscal 2020 and momentum on JRNY, the Retail headwinds that we've been discussing at length have persisted. This resulted in Retail net sales decline of 6% compared to Q3 fiscal 2020, excluding sales related to the Octane brand. Retailers continue to take a conservative approach across many categories, including home fitness, as a result of inventory positions and uncertainty in the near-term economic environment. So while sell-through to consumers at Retail is progressing, we are seeing lower levels of reorders, which is impacting our outlook for our Retail segment in the fourth quarter and likely into the first half of fiscal 2024.

We have taken additional near-term steps to rightsize our business to reflect our current expectations. With our strong market share and having significantly increased the number of retailers and retail doors over the past couple of years, we believe the Retail channel will remain an important long-term component of our business model as the macro environment stabilizes.

As part of our ongoing commitment to operational excellence, we have driven operational efficiencies across our business, including enhancements to our supply chain, improvements to our inventory management, and optimization of our advertising spend. As challenges in the Retail business persist, we have taken additional proactive steps to reduce our costs by an expected $30 million on an annualized basis.

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Nautilus, Inc. (NLS)	Corrected Transcript
Q3 2023 Earnings Call	09-Feb-2023

We operate an asset-light,semi-variable operating model, which enables us to adjust our cost structure to align with demand trends. Leveraging the flexibility of this operating model, we reduced our contracted labor. Separately, we also implemented a reduction in our workforce by about 15%. These actions, while difficult, are grounded in our priority to continue to align our cost structure with our revenue expectations and are aimed at driving profitability and improving cash flow.

We are also taking the necessary steps to strengthen our balance sheet. We continue to improve our inventory position per our plan. Inventory was $77 million at the end of Q3 fiscal 2023, down 40% versus Q3 last fiscal year. And we expect inventory levels to come down further in the coming quarters. We are implementing cost reduction initiatives aimed at improving cash flow, and we believe we have the right levers to pull to maintain our balance sheet.

We are actively managing near-term challenges within the business, while maintaining - while remaining committed to our North Star strategy, which is made up of five key pillars: adopt a consumer-first mindset; scale a differentiated digital offering; focus investments on our core businesses; evolve our supply chain to be a strategic advantage; and build organizational capabilities to win.

We have made strong progress on all these pillars over the past two years, and I firmly believe we have set the foundation for our path to becoming a leader in connected fitness by leveraging our equipment business and scaling a differentiated offering.

At our core we excel at equipment. We continue to see demand for our fast-movingtop-sellers and traction in our Direct channel. Our focus remains on providing consumers with a broad variety of superior products at a range of price points. We have an exciting pipeline of new products planned for calendar year 2023, with a strong lineup of updated connected fitness equipment carrying our innovative new Bowflex visual branding.

It's important to stress that we make money in the equipment business, and this will be key to our path back to profitability. At the same time, we've continued to enhance and scale our differentiated digital offering JRNY, enabling us to better serve our customers and capture long-term revenue and profit. While we have made - we have made tremendous progress in bringing hyper-personalized experiences to JRNY members. We recently debuted JRNY with Motion Tracking, which offers personalized form coaching and feedback, rep counting, and individualized workout recommendations.

This enhances our strength offerings with workouts that are designed for use with Bowflex SelectTech 552s and Bowflex SelectTech 1090 Dumbbells and can be used on Android and iOS tablets. We continue to target approximately 500,000 members by the end of the fiscal year, which implies approximately 54% year-over-year growth in fiscal 2023. We are also seeing progress on conversion to paid subscribers, which are growing faster [ph] than members (09:55).

The groundwork for JRNY is laid, thanks to our investments to date, which enables us to reduce near-term spend while continuing to drive consumer adoption. Moving forward, we will be disciplined in our investments in JRNY with a focus around quality, personalization, and adaptability. We have conviction in the long-term opportunity of home fitness. Our research shows that the shift to home exercise remains steady now for two-plus years. Over 65% of US adults recently surveyed continue to say they work out at home, up from 43% who reported the same at the beginning of 2020.

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Nautilus, Inc. (NLS)	Corrected Transcript
Q3 2023 Earnings Call	09-Feb-2023

In our target segments, this trend is even more pronounced, with about 85% working out at home. This is a prevailing shift in trends, and Nautilus is well-positioned to take advantage of this sustainable increase in demand in our long-term addressable markets.

I would also like to touch on our updated outlook, on which Aina will expound. Due to the current economic environment and the conservative position of our Retail partners, we are lowering our previous revenue and profitability expectations for the remainder of fiscal 2023. We are taking the necessary actions that will best position us to operate more efficiently, minimize cash consumption, return to profitability, and ultimately progress towards our goal of being EBITDA positive for fiscal 2024.

I will now turn it over to Aina, who will give us more detail on the third quarter results and the guidance for the full year. Aina?

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Aina E. Konold

Chief Financial Officer, Nautilus, Inc.

Thank you, Jim, and good afternoon, everyone. Today I'll be speaking to total company results for Q3 fiscal year 2023 and will provide guidance for full year fiscal year 2023. Please visit our Investor Relations website to view our press release and the slides accompanying this call for more information on Q3 and year-to-date results. Given the unique nature of last year's results, we'll be comparing this year's revenue to fiscal year 2020 to gauge our growth and overall company improvements versus more normalized pre-pandemic results.

Turning now to slide 8, total company P&L results for the quarter with comparisons primarily to last year. Net sales for the third quarter were $98 million, down 33% versus last year and up 9% versus the same quarter in fiscal year 2020, excluding Octane. Our Direct segment grew 30% versus the same quarter in fiscal year 2020, while the Retail segment declined by 6%.

Gross profit was $23 million, and gross margins were 23.3%. Gross margins were up 3 percentage points from last year and up sequentially 6 percentage points to last quarter. As Jim mentioned earlier, we've executed on several initiatives aimed at driving operational efficiency. In addition, we've lapped unfavorable pandemic-related supply chain costs. We are pleased that our equipment gross margins are beginning to return to more normalized levels.

I'll now review the drivers of this quarter's gross margin improvement from last year, up 2 percentage points due to improved product costs, and up 3 percentage points due to decreases in inventory adjustments. These improvements were partially offset by 1 point of deleverage of logistics overhead, 1 point related to higher outbound freight, and 40 basis points of deleverage in JRNY investments which were lower in dollars year-over- year.

Turning now to adjusted operating expenses, the next few lines of the P&L have been adjusted to exclude acquisition and other costs related to the purchase of VAY and last year's legal settlement. Please see our press release for a reconciliation to GAAP. Adjusted operating expenses were $33 million, down 33% versus last year's $49 million. The primary driver of the decrease was lower media spending, which was $10 million versus $22 million last year. Adjusted operating expenses, excluding advertising, were $23 million, down 13% versus last year, even with continued investments in JRNY, which dollar spend was down slightly versus last year.

We controlled variable expenses across all functions to ensure that they remained in line with lower sales. Adjusted operating loss was $10 million, compared to $19 million last year, and adjusted EBITDA loss from continuing operations was $5 million, a $10 million improvement compared to last year's loss of $15 million.

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