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spk01: Greetings, ladies and gentlemen, and welcome to the Nautilus Incorporated Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. It is now my pleasure to introduce your host, Mr. John Mills. Thank you. You may begin.
spk04: Thank you. Good afternoon, everyone. Welcome to Nautilus' Third Quarter Fiscal 2022 Conference Call. Participants on the call today from Nautilus are Jim Barr, Chief Executive Officer, and Ina Knoll, Chief Financial Officer. Please note this call is being webcast and will be available for replay for the next 14 days. We will be happy to take your questions at the conclusion of our prepared remarks. Our earnings press release was issued today at 1.05 p.m. Pacific time and may be downloaded from our website at nautilusinc.com on the Investor Relations 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, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2020. For today's call, we have a presentation that management will refer to during their prepared remarks. On slide two is our full safe harbor statement, which we ask everyone to read. You can access the presentation by going to nautilusinc.com, then click on the Investor tab, and then click on the Events and Webcast, and the presentation will be there. 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 currently available to us as of today. Such forward-looking statements are not guarantees your 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 Donaldson's CEO, Jim Barr.
spk00: Thank you, John, and thank you all for joining us. Before I discuss our quarterly results, I'll begin with a look at the home fitness industry, the market dynamics at play, and our positioning within the industry. The at-home fitness industry has been in the news quite a bit recently, largely due to two issues, speculation about long-term demand and challenges some of our competitors are currently facing. Here's our take on the market and Nautilus' positioning. We are confident that the at-home fitness industry has grown rapidly over the last two years and that the overall opportunity will remain significantly elevated for the long run. Second, we were not surprised that the industry seems to have regulated from its peak and is trending to a new normal level. It's been impossible to be 100% correct in our planning and decisioning at each stage of the pandemic, but we believe we have generally read the market well and have managed our business with disciplined execution through all phases of the pandemic. Third, we have a long-term strategy and a positioning that's quite different from others. And over the past two years, we've built a stronger team with new capabilities to tackle emerging opportunities and challenges. And then finally, as a result, we're emerging as a much stronger company than pre-pandemic. I'll now give you some flavor on each of these statements. Since the outset of the pandemic, there has been a renewed focus on health and overall well-being. And on a larger level, people have gravitated towards well-known brands with strong value propositions. Nautilus fits squarely at the intersection of both these tailwinds. At the center of health and well-being is home fitness, and the market has so far behaved largely as we expected. The market size more than doubled over the past two years, is regulating from its peak with more normal seasonality, and will settle at a new normal significantly above pre-pandemic levels based on profound evolution in consumers' habits. We've been telling you for several quarters that our surveying shows that about 25% of former gym goers say they do not ever intend to return to the gym. That figure actually ticked up to 29% during our third quarter and has held remarkably steady now for 18 months. Those attitudes manifested themselves in the formation of new long-term habits that favor at-home fitness. Pre-pandemic, about 40% of people for whom fitness was important worked out at home. Nearly two years later, that number is close to 70% and is holding steady. The evolution of the work model to working from home or a hybrid model is also a long-term driver of home fitness. Another important catalyst for the change in workout habits is the digital transformation that has been occurring over the past few years in home fitness and was accelerated by the pandemic. More people discovered that connected fitness not only can bring home many of the benefits of the gym, but the variety of programming, such as InJourney, fights boredom and keeps them at their fitness routine for longer. As a result of these changed habits and sentiments, We continue to believe much of the industry growth opportunity will remain at elevated levels relative to pre-pandemic. This results in stronger opportunity for our industry and for Nautilus. In the face of unprecedented challenges and uncertainty over the past two years, I'm proud of how we've managed our business through disciplined execution. Some examples include inventory management, skew rationalization, and regulating expense growth. We have stayed true to our asset light manufacturing model. We built inventories, then regulated our orders once we were ready for fitness season, but have not needed to close facilities or cease production. We are, in fact, now reordering for the first half of fiscal 2023. We focused on fewer SKUs that are largely our best sellers and worked down that inventory during the third quarter as planned. Utilizing our strong culture, noble mission, and a focus on improving the employee experience, we continue to attract and retain strong talent even through the so-called great resignation. We have stayed true to our most important areas of strategic investment, such as Journey and the Bowflex brand, but have regulated our other expenses, such as G&A, until we see where demand normalizes. Just under a year ago, We shared our new long-term strategic plan, our North Star plan. Our strategy differs from other competitors and is built on our key strengths, well-respected brands, a portfolio of products that include multiple modalities and price points, making them more attainable, and broad multi-channel distribution. Our strategy adds greater consumer centricity, a new target consumer, modernization of our Bowflex brand, an enhanced team with expanded long-term capabilities. It also improves and scales our differentiated Journey platform offering. Journey focuses on being your overall personal trainer, offering a variety of ways to work out on and off our products versus tilting towards any single use case, such as predominantly one modality or trainer-led classes. Journey is also more affordable. We are focused on investing in our company for the long term and have continued to keep our foot on the accelerator through our investments in Journey, our brand, and our digital transformation. Our commitment to our strategy continues to strengthen as we begin to see our strategic investments succeed. Our board and our management team are united in maintaining our key investments as we continue to balance the long-term and the short-term. We have also progressed during the pandemic by building enduring assets for the long-term, including Launching a complete suite of new multi-modality connected fitness cardio products, including innovative bikes, treads, and revitalized max trainers. And we have a pipeline of strength products leveraging our way acquisition. A new target customer base with nearly 500,000 new customers since the pandemic began, introduced to our brands. Encouraging early progress on improving and scaling our journey digital platform that makes our equipment even better. I'll share some exciting news about member growth shortly. Significant expansion of our already strong multi-channel distribution, including a vastly expanded and a more diversified set of retailers. New talent and capabilities throughout our business, including software, digital product, supply chain, financial analysis, and customer care, and of course, we have a new transformational North Star strategy. Pulling this all together by leveraging the enhanced long-term industry opportunity and through disciplined execution by staying true to our North Star and by building enduring assets, I'm confident in saying that we are emerging from the pandemic as a much stronger company. Next, I'll speak to our third quarter results. In the third fiscal quarter of 2022, Net sales were $147 million, which represents 63% growth versus two years ago, excluding Octane. While down from the pandemic-driven all-time high of $189 million in the same period last year, this quarter's sales performance remained historically strong. In fact, this was the second highest December quarter in the past 15 years for Nautilus. Our two largest sales channels, Direct and North American Retail, While down versus last year, we're both up over 60% compared to the same period two years ago. Notably, given our strong holiday performance, Direct had a $9 million backlog coming out of the quarter, stocking out on some of our more popular connected cardio products. One area that was softer than expected was international, which is about 10% of our overall business. We have a different operating model there. We work primarily through distributors. This model has an extra level of inventory and fewer levers for us to clear inventory. The UK and EU are our largest international markets, and the shutdowns impacted sell-through. We expect softness in international to continue through the end of this fiscal year. I would characterize our Q3 results to be relatively strong in dollar demand and fantastic from a unit sales perspective. As one response to the chip shortage, we pivoted to aggressively marketing and promoting strength products, specifically the incredibly popular Select Tech line, which also helped drive journey member growth. Impressively, I'm proud to say that we shipped more units in the quarter than any other in Nautilus history, showing not only continued strong demand for our products, but demonstrating new capabilities in our supply chain. We are pleased to report that for the first nine months of 2022, Net sales were $470 million, a 7% increase over the same period last year, and a 144% increase compared to the same period two years ago, excluding octane. The team is proud to have positively comped the year-to-date through three quarters. Gross margin continued to be affected by the widely discussed elevated global supply chain costs. In addition, this quarter's margins were impacted by lower net selling prices resulting from industry-wide discounting during a highly promotional holiday season. The bulk of the discounting that we observed during the fitness season, which typically runs through the end of January, have now concluded. We believe this gross margin pressure is largely temporary in nature. Ina will provide more detail on margins in her section. Importantly, despite the lower gross margins in the third quarter, our Q3 operating margin results were in line with our guidance for the second half. Moving on to progress on our North Star strategy. We've been working tirelessly to make Journey a leading fitness digital service that enhances our incredible lineup of equipment, creates an ongoing relationship with our members, and provides a recurring revenue stream. As we communicated last quarter, We made the strategic decision to accelerate our investment in Journey. The manifestation of our year-to-date investments in Journey include a new Journey update which allows customers to track workouts across cardio, strength, and whole body exercises. That means Journey members can now track their workouts across all the products they own, cardio and strength, and track whole body off-machine workouts on one fitness platform. We expanded the assortment of Journey-enabled products, building our connected fitness install base. We introduced the MaxTotal 16 in the U.S. and Velacor 16 in Canada at the beginning of November and have attached Journey to our Bowflex Select Tech 552 and 1090 dumbbell purchases beginning in mid-October. In the third quarter, we shipped three and a half times the number of Journey-enabled products versus the same period two years ago when we launched our first connected bikes. and 70% of our cardio units shipped this quarter were Journey enabled. Select Tech is one of the strongest selling offerings and attaching Journey to the strength modality has boosted our member base and is the first time we have combined a digital offering with our strength products. The results and feedback from our members have been very encouraging. We've expanded content. We continue to add more Explore the World experiences with over 150 locations around the world now available. Members love the immersive experience and the escapism. We continue to build our trainer-led video library, which now includes over 1,250 trainer-led videos, including new whole body workouts. We've added foundational advances such as journey.com, powered by a new subscription management and billing platform. We began providing a 12-month complimentary trial for a limited time to ensure the maximum number of consumers can use the platform. Here's the punchline. We grew our Journey member base to nearly 250,000 by the end of this quarter and are tracking to cross 300,000 total members by year-end fiscal 22, above the midpoint of our previous guidance. We've grown members by nearly 3x year-over-year and by 700% versus two years ago. As you know, Nautilus got a late start in connected fitness, and while it is still early in our digital transformation with Journey, The strong growth we've experienced to date is exciting. As such, we continue to invest in the platform. Digital is a key component of the future of Nautilus, and investing here will allow us to best leverage our assets and will position us for long-term profitable growth. A second pillar of Northstar is putting the consumer at the center of our decision-making. We are working to transform Nautilus from a product-led hardware company to a consumer-led digital company. This consumer-led approach has permeated our business, including Bowflex advertising. Our focused approach to advertising has punched above its weight, with measured share of voice nearly double our market share in the quarter. A few key highlights. We ran the first ever Bowflex Select Tech dumbbell campaign that included Journey. This also helped drive more Journey memberships. We continued investments in the Bowflex brand with incremental advertising to drive purchase consideration and position the brand in a more modern and inclusive way. In addition to taking a more customer-led approach to advertising, we bolstered our team by hiring a new director of customer success, our first-ever customer experience manager, and are adding critical staff in email and social marketing. Strength is another pivotal part of our consumer-centric approach. Bowflex has long been a leader in strength, and we are working to elevate the consumer experience through our connected strength products. In the second quarter, we completed the acquisition of Way, a leader in motion and vision technology. In the third quarter, we focused on integrating Way's motion tracking capabilities into Journey to further advance and accelerate our highly personalized workout experiences, including Automatic rep counting and form coaching, on and off, both Lex and Schwinn products. We expect to begin testing these features with select customers in the spring. We also focused on hiring more developers. Two years ago, we had about a dozen software developers and UX FTEs, and we're mostly a mechanical engineering company. But today, we have more than 250 people engaged in software development. We are accelerating our software development capabilities and adding new and innovative features to the Journey platform, moving us closer to our vision for Journey as your highly personalized, one-to-one personal trainer. And the last pillar of NorthStar that I'd like to touch on today is our supply chain. We continue to battle unprecedented challenges from container and electronic components availability, elevated commodity costs, and costs of shipping and storing inventory. However, our investment and efforts have bolstered overall supply chain capabilities and are enabling us to successfully manage through this period. Earlier this year, we made a strategic decision in light of the global shipping issues to pre-order inventory in preparation for the seasonally strong third and fourth quarters to ensure that we, along with our retail partners, would be fully stocked. As mentioned previously, driven by strength products, we moved more units in the quarter than any other quarter in the company's long history. In summary, we are emerging from the pandemic as a stronger company. We have new leaders, new tools, and new processes in place, providing us to make a much stronger and more agile company. I'll now turn it over to Ina, who will give us more detail on the third quarter financials and our guidance for the rest of the year.
spk08: Ina? Thanks, Jim, and good afternoon, everyone. Today, I'll talk to results for Q3 and year-to-date, and we'll provide guidance for the second half of fiscal year 22. I'll start with slide 14 on the presentation, total company results for Q3 22. As discussed previously, we delivered the two highest sales quarters in our company's history in the back half of fiscal year 21, fueled in part by pandemic-driven demand. As expected, demand has moderated in the second half as normal seasonality begins to return. Given the unique nature of last year's results, we'll talk about sales growth versus LY and versus LLY. to gauge our growth and overall company improvements when compared to more normalized results. Net sales for the third quarter were $147 million, down 22% versus LY, and up 63% versus LLY, excluding Octane. Our strong holiday performance resulted in a $9 million backlog for Direct. Gross profit was $30 million and gross margins were 20%, down 21 percentage points from LY. Eighteen points of the decline were related to higher logistics, product costs, and effects, plus increased discounting in the quarter. The remaining three points are related to increased journey investments. Turning to operating expenses, we closed on the acquisition of Way last quarter. The next few lines of the P&L have been adjusted to remove the impact of the deferred compensation related to that acquisition. Please see our press release for a reconciliation to GAAP. Adjusted operating expenses were $49 million or 33% of sales versus last year's $36 million or 19% of sales. Sales and marketing expenses were $32 million or 22% of sales. The $10 million increase to LY is primarily due to increased advertising. Adjusted G&A expenses were $11 million or 7% of sales, up $400K to LY. R&D costs were $5 million or 4% of sales up $1 million compared to LY, primarily driven by increased investments in Journey. In fiscal Q3, advertising was $21 million versus $10 million last year, and Journey OpEx was $6 million versus $3 million last year. Adjusted operating loss was $19 million, and adjusted operating margins were negative 13. Adjusted EBITDA loss from continuing ops was negative 15, or negative 10% of sales. Our presentation includes a waterfall chart in slide 16 that describes the year-over-year change in operating margins. The key drivers of the year-over-year change are lower gross margins, as discussed earlier, and planned incremental investments in journey op-ex and in advertising. Let me now turn to year-to-date results for the nine-month end of December 31, 2021, compared to the same period last year. Net sales are $470 million, up 2% on a gap basis. excluding Octane branded sales, revenue was up 7% versus last year and up 144% versus LLY. Gross profit was $127 million compared to $193 million last year, and gross margin rate was 27% versus 42% last year. Thirteen points of the gross margin decline was due to higher costs for logistics, product costs and effects, and increased discounting fiscal Q3. Two points of the plan was for increased investments in Journey. Turning to adjusted operating expenses, which excludes the impact of this year's legal settlement, the way acquisition and deferred compensation costs, and last year's loss and disposal grew for Octane. Adjusted OpEx was $125 million, or 27% of sales, versus last year's $94 million, or 21% of sales. The $30 million increase was essentially driven by advertising and Journey investments. Year-to-date advertising was $44 million versus $21 million last year. Year-to-date journey op-ex was $15 million versus $5 million last year. Adjusted operating income was $3 million or 1% of sales. Adjusted EBITDA from continuing ops was $14 million or 3% of sales. Please see slide 19 in the presentation for a waterfall chart walking through the year-over-year changes in operating margins. Turning now to the balance sheet as of December 31st. Cash was $20 million. Inventory was $128 million versus $68 million at year end. We're pleased that inventory levels at 1231 were down 21% versus 930 and came in better than planned. Inventory is concentrated in our best-selling SKUs and about 15% of it was in transit at 1231. AR was $94 million versus $89 million at year end. AP, $62 million versus $99 million at year end. and debt was 56 million versus 13 million at year end. And we had 55 million available for borrowing in our facility. Turning now to our expectations for second half fiscal 22. Please turn to slide 21 in the presentation to follow along. To gauge growth and progress against more normalized pre-pandemic results, we'll be comparing this year's sales versus the same period two years ago for the next few quarters. In addition, because fitness season straddles the last two quarters of the year, We believe it's prudent to consider results on a six-month basis from October 1, 2021 to March 31, 2022. The company now expects total company net sales in the second half of this fiscal year to be between $260 million and $280 million, an increase of 31% to 41% versus the same period two years ago. The decline versus previous guidance is driven by lower demand in international and increased discounting in the U.S. and Canada this fitness season. This year, the fitness season was much more promotional, driven in part by consumer expectations of good deals during this time period. The deep promotional events have concluded, and we are now back to more normal seasonal promotions. On slide 22, we provided a waterfall explaining the year-over-year change for operating margins. At the bottom of the slide, we've noted the second upside to be provided three months ago in November 2021. We now expect the impact of logistics, product costs, and higher promotions to be 15 to 16 percentage points, higher than previous guidance of 12 points, primarily due to the increased discounting during fitness season. As a rate of sales, we expect total journey investments to be six to nine percentage points higher versus last year, advertising to be eight to nine percentage points higher, and OpEx to be three to four percentage points higher, driven by Northstar investments and deleveraging of fixed costs and lower sales. Despite lower gross margins, we still expect operating margin loss in the mid-teens, and we're now guiding to adjusted EBITDA loss in the low teens. We're reiterating full-year CapEx will be between 12 and 14 million with the majority earmarked for Journey, and we expect the number of Journey members at year-end to cross 300,000, above the midpoint of our previous guidance. We continue to expect a return to positive adjusted EBITDA in fiscal 23, And because of our investments in the higher margin subscription business, we believe we're on track to achieving operating margins of 15% by fiscal year-end 25, with margins expanding to high teens by year-end 26. I'll now turn it back over to Jim for his final comments.
spk00: Thank you, Ina. I'll end our prepared remarks by saying that we are in the process of transforming into a digital leader in connected fitness, and that transformation is already yielding tangible results. We continue to execute in a disciplined way as we capitalize on the long-term opportunity and navigate the challenges. Further, we're executing against our North Star plan and we are succeeding. These investments are paying off and we are on track to surpass our goal of 300,000 members by the end of the fiscal year, moving us closer to our long-term goal of 2 million members in fiscal 2026. I would like to end by thanking all of our incredible employees and partners for their tireless dedication and support of our mission. And now I'd like to go open it up for questions. Operator?
spk01: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. One moment, please, while we poll for questions. Thank you. Our first question comes from Mike Swartz with Truist Securities. Please proceed with your question.
spk05: Hey, guys. Good evening. Mike, maybe just starting off on the cardio side of the business, I mean, it sounds like it was maybe a little bit softer than you had anticipated. So I guess I'm just wondering how much of that is, um, you know, the, the, the discounting environment that, that we saw through the holiday season versus your commentary around international. And I think you had also mentioned that you pulled back on advertising around cardio given some of the, uh, supply limitations. Uh, so second part of that would just be, when do you expect advertising to return to more normal levels for cardio?
spk00: Sure. Um, yeah, great question. Um, for sure. Like, I think the first thing we have to think about is the fact that, um, on cardio, we are comping a pretty good quarter last year, right? Our all time high quarter overall. And then, uh, we had just launched the Velocor bike. So we had a lot of, um, uh, great bikes in the market and we were coming back into supply for that. So first of all, I think it's a, it's a tough comp, uh, on the cardio side. Second thing is you're absolutely right. The ship, the chip shortage, forced us to pivot away from using the maximum number of chips and go into some of the strength products that don't require chips. So that was one thing. So that was kind of a bit self-inflicted there. I wouldn't say self-inflicted. It's something we really wanted to do. So that's a key part of it. And by doing that and attaching Journey to dumbbells, we got a lot of Journey memberships that way. We got a lot of people trying the product, which is what we really wanted to do. I think part of it is we were stocked out on a few of our best-selling cardio products, like one of the Velocores, I think maybe both of the Velocores at times during the quarter, the M9 and some of our treads. So we were stocked out, and so a little bit more limited on those, and we made a ton of dumbbells. And 60% of our of our cardio unit, of our backlog is actually cardio units too. So you'll see more of that coming through going forward. So I think, you know, it's really a combination of, you know, comp in a tough quarter, some stock outs, then promoting strength on purpose and really pivoting towards, you know, a new mix of products that help us deal with the chip shortage better. Now, we hope that chip shortage goes away. We would like to just go straight up on consumer demand. But I was actually quite pleased with how the team, you know, didn't take it lying down and just pivoted to the best way we could succeed this way. And in terms of advertising, yeah, I mean, we're still largely known for cardio. We're still running several Velocor commercials. We were just kind of highlighting that we had never really done a sort of a select tech focused commercial before, and we did that this time. So, We're just kind of balancing it a little bit better and we'll probably see that going forward that we'll look at both strength and cardio products in our advertising. So really good question. Hopefully that provides some color.
spk05: Yeah, that's very helpful. Thanks, Jim. And maybe a follow-up question for Ina. If we look at the guidance for the second half of the fiscal year, it looks like The expectation just of the headwind from advertising is a little lower. The headwind from journey investment is a little higher. How should we read that?
spk08: I think the way that I'd want you to read it is as we navigate the changing environment, we're going to pull all the levers available to us to achieve our strategic objectives but also meet our short-term target for operating margins.
spk01: Okay, thank you. Thanks, Mike. Thank you. Our next question comes from Sharon Zaxia with William Blair. Please proceed with your question.
spk07: Hi, good afternoon. Hi, Sharon. I appreciate the color on the international component. I guess I'm curious, do you think their inventory is going to be relatively clean at the distributor level by the end of March, so you're you're kind of more set up to win overseas as we enter fiscal 23. And I'd also appreciate if you have any insight into retailer inventory levels. I mean, are those relatively clean, or are they still working through any kind of excess inventory?
spk00: Sure. I'll start, and if you want to add anything, let me just start with the retail inventory. It looks pretty clean to us. The sell-through looks like it's going. Now, they did have a lot of inventory to start with, So that's why we promoted, and then of course our retailers have to, when you're on the channel, your retailers have to have the ability to promote to the same price you're promoting. So if we do it on one side, it gets done on the other. So they started out with a fair amount of inventory, as did we, but the sell-through numbers we've seen are quite healthy in that channel. We did want to call out international. It's not a huge part of our business. We don't talk about it too often, but I don't think people understand structurally how it works and that, you know, here in North American retail, for example, we can support our retailers with some discounts and other ways to have them lower the price and meet our price. So we have some levers here that they don't have over there. When you sell through a distributor, you've got inventory that's resident at the distributor level, and then there's also inventory at the retail level. So there's like an extra level there. I think in terms of calling the question, I mean, we continue, we did say we expect it to be slow through the end of the quarter. I don't know where it will end at the end of the quarter. I think, I mean, we've seen it slow down over there. People are still buying it, but a lot more lockdowns and things like that. So we're just not sure how long it's going to take to clear through those two levels of inventory. Now, fortunately, that's only 10% of our business, but it sort of had, you know, maybe half of the impact this time as well. So hopefully that gives you a little color.
spk07: Yeah, that's helpful. And then on the discounting side, I appreciate the commentary year over year, but can you talk about kind of the December quarter, how it looked relative to maybe December of 2019, if there's any kind of comparisons there and, you know, how that comparable period would look so far kind of during New Year's resolution timeframe relative to the like pre-COVID, early 2020 timeframe?
spk08: So when you compare to two years ago, so that would be the December 19 quarter, it's an interesting comparison because the company was in a much different place, but I would say that we intentionally chose to be very supportive of our retailers to allow them to clear the inventory kind of in concert with how we were clearing it on direct because we wanted to make sure that we entered the first half of fiscal year 20 through 23 with cleaner inventories.
spk00: Yeah, and then I'll just say, look, it starts out that, of course, that's the time of year everybody promotes, right? It didn't happen last year, but typically that's the way it was. And when I say we saw that, what we didn't expect maybe was our competition went deeper and longer than they typically do. And I guess if you kind of read what's out there, They have a lot of inventory. So they're trying to clear through a lot of inventory. So it's probably the smart thing for them to do in that period. If you don't sell it in fitness season, you might be holding it for a bit longer. So they did that. And around holiday season, you know, you really got to, I don't say if you have to match the competition, but you certainly have to play. Once you get out of fitness season, like where we are now, it'll be more normal discounting. We can decide, hey, do we want to match this type of price or Or would we rather go for margin over top line for this particular period? And when the volume's lower, you can sort of make that move. So I think more so than we've seen in a while, just because inventory positions at some of the competition were driving them to notably drop their prices, and we had to play a little bit. We mostly played with the journey with attaching Journey, but we also did lower our prices and did quite a bit of discounting ourselves.
spk07: Okay. And then last question for me. You know, the logistics and product costs, we've talked about that, I feel like, every quarter of this year for every company I follow. But you didn't really, it doesn't seem like you really changed your expectation for that component for the second half of this year. Does that mean or can I infer that you're starting to see that kind of at least level off? Or are you, I guess I'm just trying to get a sense of is it more predictable now or is it still volatile worsening? If you can give us any context there, Anna, it'd be helpful.
spk08: Thanks, Sharon. That's a great question. So I'll make sure I answer the three points. Yes, it's about similar to what, you know, it's fairly similar to what we talked about last quarter and then in the guidance. So that does mean that we're starting to see some stabilization. We're no longer kind of getting rocked by surprises. And our intent, and this is the path to getting to fiscal year 23 positive EBITDA, is we're going to use that lever to get us to positive territory next year for EBITDA. And it's really going to be about improving things like storage costs that we'll no longer be needing as we go into fiscal year 23.
spk07: Awesome. Thank you. Thanks.
spk01: Thanks, Sharon. Thank you. Our next question comes from Steve Dyer with Craig Hallam. Please proceed with your questions.
spk06: Good afternoon. Ryan, on for Steve. Hi, Steve.
spk02: Oh, Ryan.
spk06: Curious on Jeremy, I know you guys have been hesitant to give any paid subscriber metrics, but anything you can share at least qualitatively kind of relative to your internal expectations on the paid side within that total subscriber base?
spk00: Yeah, I mean, as you've alluded, we've said for quite some time that starting next quarter, and I think we really mean it, next quarter, we'll provide kind of a fulsome set of metrics to begin to analyze the health of our subscription business. So we don't have that right now. We can say, as we said in the script, that we were at 250,000 members at year end, at 1231. I can also add to that, since you asked me, that today, or as of Sunday, we were at 280,000. on our way, as we said in the script, to eclipsing our 300,000 goal for the year. So we're doing well there. Engagement is strong. I know that's not a metric, but we have metrics on that we haven't provided, so you wouldn't have context if I told you anyway. But there's strong engagement. Churn is going down. The things you'd want to see, still early, but that's all good. And yes, a sub component of that is paid subscribers, for sure. But you know, we're kind of in that stage where we're really just trying to get people to use it, where we relate to the game, you know, we're giving someone a reason, especially people who love our equipment. the reason to try Journey, and we're making it really easy for them to do that. So I think that's the right strategy. We look at some of our competitors that have done that early in their growth of their subscription base, and it has worked very, very well. So we'll continue to do that, and sorry I can't give you more of what you're exactly asking for, but hopefully that gives you a little bit of color.
spk06: Yep, that's helpful. I look forward to those metrics next quarter. Two kind of clarification points, just so I'm clear. For the guidance for the second half, the company expects adjusted EBITDA loss in the low teens. That reads like EBITDA dollars, but is that dollars or margin that you're talking there?
spk08: Oh, it's rate. I'm sorry. You're right. It's rate.
spk06: Okay. Thank you. And then secondly, Amazon had been a 10% customer for umpteen quarters in a row. It did dip a little bit below that in the quarter. Anything to read through there or is it just, yeah, anything there?
spk00: Yeah, no, I think it's less about Amazon and more about what I mentioned. One of those capabilities we've built during the pandemic and strengthened of ours is that retailer base. We've talked before about Best Buy not even selling our stuff before this started and now they're at the top. We continue very strong with Dick's. We continue strong with Amazon. We've got a lot of Costco and Costco Canada and many other valuable retailers there. So we've really diversified that base, and that's why you see a number like that where suddenly they're not a 10% anymore. But we think it's a healthy way to go, right? That just means there's more doors. I haven't looked at our doors lately, but I think in our last call we talked about that growing age. fairly large percentage. That just means you can get our products more places from us or from any of those great retailers that I mentioned and some that I didn't.
spk06: Great. Thanks and good luck.
spk01: Thanks, Steve. Thanks. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. Thank you. Our next question comes from Mark Smith with Lake Street Cafe. Please proceed with your question.
spk02: Hi, guys. First question from me. Just wanted to dig into the pricing trends just a little bit more for you and the industry. Can you talk a little bit about what you're seeing today as far as, you know, competitors pricing and maybe how promotional you have to be today to compete kind of post peak fitness season?
spk00: Yeah, I mean, most of it was during fitness season, and there's a few famous ones where a more expensive bike was lowered to under $1,500, a pretty famous one, stayed there for a while. That company has now gone back to more regular pricing, and they are also now charging for assembly and some things like that. So I think you're sort of seeing there that it's going back to a more normalized price way of going about it. I think some of the, you know, you'll still see some promotions as people try to squeeze the last little bit out of the season. But, you know, pretty soon this is not on consumers' minds the way that it's been in holiday season and, you know, New Year's resolution season. So it's coming down. I think the other thing we want to, you know, the way we think about it is you don't always have to follow, in game theory, you don't always have to follow your competitors when the volume's at a lower level of the year where you may not have a choice when you're in holiday and fitness season. So even if there is some more discounting, we can sit there and decide whether we'd rather promote and get more top line, or we want to preserve margin and our units. And especially when you run out of a few of our cardio units, like I mentioned, you may want to not discount those. So Um, anyway, that's, that's how it's going. And, you know, it goes day to day, but generally, and I've been in this industry now for, for three, three years, generally it regulates, um, around this time of year and in February and some, most of our, you know, we'll run maybe a president say day sale or something like that. And you'll see others doing that, but it won't be to the level that anybody was doing. Um, in our, in our opinion, most likely it will be to that level as, as we saw in holiday and fitness season.
spk02: Okay. And then you guys talked about regulating G&A expense. It looks like you did a good job there. Would you call it fully regulated today in G&A, or is there more places that maybe you can trim a little bit?
spk08: I'll take that. It's Ina. I think the way that our approach has remained consistent since Jim and I joined the company is have a really good visibility to what's fixed and what's variable and make sure the variable piece stays in line with revenue and expected revenue. So we've maintained that. And then as part of our North Star, making sure that we don't waver from making the long-term investments we need so that we can achieve those higher operating margins. So it's always a balancing act. So I think the answer is it'll always be reacting to, adjusting to top-line environments.
spk00: Yeah, and maybe I'll just give an example too. So over the period of the pandemic, our sales roughly doubled, right? So that's a lot more work. We moved more units this past quarter than we've ever done before. While doubling the revenue of the company, we increased our head count 10%. So that just gives you kind of an idea there. Now, we still have a lot of contractors and things like that, especially in Journey. So we have more FTA working. And of course, in our asset-light model, we don't have employees. We have people working on our behalf. So that's not a full thing. But I think it is kind of a nice testament of how we try to keep this variable, as Ina said, until we see where that settle point is. And we try not to get too far out over our skis and things like that. At the same time, we've added all those great capabilities I listed, too. So it's not like we're standing still. We're just investing in the areas that we really, really need to invest in. And, of course, staying true to both the journey and the Bowflex brand investments.
spk02: Perfect. And the last one for me, you know, as you talk about investments, you know, as we look at R&D, you know, how much of this is maybe on the product side versus on the technology side in any insight into, you know, your pipeline for new products?
spk08: So that's a really great question. So one of the things that we did as we were going through North Star, you know, we did a lot of focusing work. When you do that and you narrow your skews and you move the commercial business, you decide to sunset one of the brands, that kind of frees up some resources from maybe the more equipment side of the business and then allows you to invest them into Journey. So what we've invested in Journey, you don't necessarily see reflected as the true year-over-year increase because we were able to kind of be more optimized, cut some costs, and then reinvest them into North Star.
spk00: And then in terms of the pipeline, I think what we said was, well, look, we just did all the cardio. So we're going to do some more stuff in cardio for sure. We haven't announced it, but you can expect that. But mostly we're looking at strength now. We mentioned dumbbells with whey and some other strength products that will be coming out over the next year. And so that's a lot of our pipeline. I don't know if I could give you a we used to be a completely mechanical engineering company, and now you heard all the software engineers that we've hired, so it's definitely tilting more towards software engineering, thinking that over time, that's one of the main ways that we'll differentiate. We'll still be trying for strong mechanical differentiation like we have in Velocor and the new Max Trainer and things like that, and when we get it, it's fantastic, but we've tilted a bit more to the software, and The way we think about it, it's not either or. The software actually makes the hardware better. So the software is a feature of the hardware, and that's the way we've really driven the transformation. It's not like, oh, we don't value mechanical engineers anymore. We value them as much as we ever did, if not more, and then we add this other capability on top of it. And so maybe you're tilting a little bit more that way, and some of it is we were a little late to the game and we got some catch-up to do.
spk02: Thanks, guys.
spk01: Sure. Thank you. Our next question comes from George Kelly with Roth Capital Partners.
spk03: Please proceed with your question. Hi, everybody. Thanks for taking my questions. Hi, George. So just to start on inventory. So it came down sequentially, but it's still quite a bit above pre-COVID levels. So just curious if you could talk about what is normalized inventory or where do you expect it to move to and how long do you think it'll take to get you there?
spk08: Yeah, so thanks for the question. It's a great one. So we think about that a lot because what's the right level knowing that overall our company is a lot bigger than it was two years ago. So it's a little heavier now than I'd like it to be and we have a plan I feel really confident in to glide it down to a lower number in the first half of 23, but obviously picking it back up again in preparation for fitness season, fiscal year 23. So slightly higher than I'd like it to be, but moving in the right direction. And as a reminder, the reason it's high is because when you have this uncertainty in the supply chain environment, we really wanted to make sure that the inventory was on hand, in our hands, in the DCs prior to the big fitness season, which is Q3 and Q4 of this fiscal year.
spk00: Yeah, and I do like the way we've worked it down. I know the CFO wants it lower, and that's what she said, but we think we've got the right stuff to sell. We think it's in the right areas. Like I said, we had a couple of stock outs. I'm not happy about that, but you can't be perfect in predicting this, and it tells us people really enjoy our products and demand them, so we've got that for sure, but I think generally we're in a good spot.
spk03: Okay. Okay. And then next question on, uh, just trying to map out next year, fiscal year 23. And you mentioned in your prepared remarks, just a return to kind of normal seasonality. So if I play that through, does, does that, should we see a sort of summer dip versus the December and March quarters? Like, like we saw normally before COVID, uh, and then you would expect it to, to again, climb again in the, in the holiday season of fiscal year 23.
spk08: That's what we are planning for and executing against for our direct segment. The retailer segment is still kind of more volatile, again, only related to the ability to ship things FFO or to ship things from where our DCs are in the EU into UK. So there's a little bit of noise when it comes to the retail side, but for the direct side, that's what we're executing to. And we saw it kind of play out in the last few quarters. It was matching historical seasonality for direct, so we are expecting that to continue in fiscal year 23.
spk00: Yeah, and I'll just jump on. I'll add yes and to Ina, especially what is now our first quarter, the quarter ending June. Do you remember last year, it's just all the retailers loaded in way earlier than they would normally do it. So it's going to be interesting to see. They really did in turn to normal seasonality while direct did. it'll be interesting to see if because of supply chain shortages that they order that early. I would guess they won't. I would guess that, hey, if they see it the way that we're seeing it, that it's going to be kind of a normalization year, that they may go back to their normal ordering. Because you remember that the first quarter, the June quarter in retail was super, super high. And the second quarter was a little weaker because they had pre-ordered in the first quarter. So I'd say maybe you're going to have some shift there, but like I agree with everything Ina said about direct and normal seasonality through the summer.
spk03: Okay. And then last question for me, what was, so I guess two advertising questions. What was the media spend in the quarter? And then you've talked about, you know, reasons mostly supply chain related for kind of peeling back on some of your ad spending. But when you look at what peers are doing, I mean, does it seem like folks are getting more rational as far as, you know, what the current environment is and not spending as much on direct advertising or just what does that look like so far?
spk00: It's going to, yeah, I'll start. I think it's going to be interesting just picking up your last part. I mean, we've obviously been outspent by several of our competitors for a sustained period of time and we've just had to be smart about it and when we did it and how much we spent and things like that. I think you're probably right. I mean, we can't speak for competitors, but I, from a lot of the things you hear about in the marketplace, it seems like it may go a little bit more rational where you can justify your cost of customer acquisition and things like that. So I would speculate, but it would only be speculation that it would turn out that way. But I will say that, again, in my remarks, we measure this thing where it's share a voice, which is how often you hear our name versus any of our competitors. And a good quarter for us is when our share of voice is above our market share. And it was almost twice that this time. So I'll call the third quarter a good quarter. But it doesn't happen every quarter. That says we're doing a good job. We'll hope that we continue to do that. Well, at the same time, and we are staying true to the brand spend. Now, some of the brand spend does drive revenue. So that helps us too. And we're spending more there. But the brand, over time, you know, you get a more modern view of Bowflex. And luckily, the way to do that is to use Journey to make Bowflex more modern. And that's the way the advertising is generally going. So I think it's going in the right direction, but it'll be interesting to see. And I think it does call a little bit for speculation on what competitors will do, but maybe that will exactly happen, that it'll be a little more rational, I think, There weren't very many people even trying to make money in this space a while ago, and I think it's now turning into a market where that's becoming more rational and more important. And therefore, when you make all your decisions, whether it's inventory or advertising or whatnot, you're going to be considering that.
spk08: And then advertising for Q3 was $21 million versus $10 million last year.
spk01: Okay. Thank you.
spk08: You're welcome.
spk01: Thanks, George. Thank you. There are no further questions at this time. I would like to turn the floor back over to Jim Barr for any closing comments.
spk00: Thank you to everyone on the call today for your continued support of Nautilus. We look forward to talking to you again on our fourth quarter fiscal year 22 call in May. Have a great rest of your day. Onwards and upwards.
spk01: This concludes today's conference. You may now disconnect. Thank you for your participation.
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