Q3 2019 Earnings Call
Good afternoon.
Welcome to the Middle first quarter fiscal 2019 earnings conference call.
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Let's turn the conference over to Katie Turner. Please go ahead.
Good afternoon, welcome to Medifast third quarter 2019 earnings conference call on the call with me today, or Dan Chard, Chief Executive Officer, and Tim Robbins, Chief Financial Officer by now everyone should have access to the earnings release for the period ended Septemberthirty 2019.
Afternoon, approximately four or five PM eastern time, he's not either really it's available on the Investor relations portion of Medifast website at Www Dot net inc. dot com.
<unk> being webcast and a result will be available on the company's website.
For the and we'd like to remind everyone.
Paired remarks contain forward looking statements and management may make additional forward looking statements in response to your question. The words believe expect anticipate and other similar expressions generally identify forward looking statements.
Statements do not guarantee future performance and therefore undue reliance should not be placed on that actual results could differ materially from those projected in any forward looking statements.
Assumes no obligation to update any forward looking projections.
Today's release on todays call all the forward looking statements contained herein speak only as of the <unk> This call.
With that I'd like to turn the call over to not Chief Executive Officer, Dan Chard.
Thank you Katy and good afternoon, everyone. Joining us. Thank you as always for your interest in Medifast.
I'll start todays call by giving you an overview of our third quarter performance. Then 10 will review the financial results in more detail and provide our fourth quarter and full year guidance.
Well then both be available to take any questions.
But that's continues to be resolutely focused on driving long term sustainable growth for all our stakeholders.
Rededicate ourselves to our central Michigan to offer the world lifelong transformation, one healthy habits at the time.
We firmly believe that Medifast revenues can double every three to four years and the this growth path can be maintained for considerable time to come.
But there is very much on that consistent growth trajectory, we're investing in the development of our organizational capabilities, our skills and our geographic footprint.
We believe this strategic focus will allow us to take advantage of the significant opportunities that lie ahead.
Our coaching model is at the heart of Medifast competitive different.
Its clinical studies, demonstrating the people have a coach alongside them on their weight loss were held transformation journeys achieve and maintain better results than those who go it alone.
With that in mind, we're placing a clear focus on building in developing our coaching community, giving them all the bottle tools necessary to help us increase the number of people, we reach everyday with our products and services.
We accelerated our growth an active running coaches during the quarter and has exceeded even our own challenging goals, having set ourselves a target of securing 30000 coaches by the end of 2019, we significantly outpaced our schedule. It surpassed 30000 coaches in the second quarter of the here.
We're now well of course to reach our stated goal of 50000 active pretty coaches by 2021 milestone, which we believe will play a lead role in our ability to deliver $1 billion in revenue with an operating margin greater than 15% by the same point in time.
We're not just adding new coaches.
We're also maintaining a high level of productivity.
Average revenue per coach was relatively stable in the period. Despite the continued increase in coach numbers demonstrating the success, we're having in helping the coach community optimize their individual businesses.
Which is our central to our success as such as part of the we continue to develop our approach to development networking and filled alignment to be certain were produced providing coach leadership in the water community wasn't easily repeated scalable process and workflow to drive growth.
Providing opportunities bring leaders together to impart best practices sure intelligence from the field and develop new skills is very important to our mission last month, we hosted our latest international leadership alignment summit in Sundance, Utah.
This is that brings together more than 150 of our key off the via coach leaders long with senior executives from Medifast to share information train. The next generation of coach leaders and assure that we listen to and incorporate the feedback of our coach decline community.
Most importantly, we worked collaboratively to align behind us the shared vision for the future.
Focusing on our goals for the next two years, reviewing and enhancing our product and technology roadmap and optimizing coach the client support.
To support our long term growth projections.
Yes that was also notable for the body focus on our international business with many of our leaders now imagine coaches in our first two expansion markets Hong Kong Singapore.
We're making clear progress in our international business as we should support classic coaches in Hong Kong, Singapore building, our scalable infrastructure to facilitate the growth opportunity. We believe exists in the Asia Pacific region.
We are optimizing our product range to create skews developed specifically for these markets, which already show real resonance in our target market.
We're also consistently reviewing and enhancing our technology to ensure that our user experience in international markets remain strong.
That means developing a new mobile app with client management ordering and mill planning capabilities as well is making sure that we can add new language as quickly and effectively as we expand.
Growth is key for Medifast and that requires making changes to legacy systems and processes and ensuring that we are constantly optimizing and reconfiguring in order to have the shape and structure that can enable greater scale.
As with many businesses building an organization for the future can have some adverse impacts in the president.
We've seen some short term growing pains medifast and the last quarter.
We're still driving strong growth, but we've made some adjustments to our financial guidance to reflect the impact was saying.
And we'll provide more detail in a moment, but there are three cure it key areas.
Which has impacted our results in this quarter I want to take a few moments to talk about each of those in the measures were put in place to address them.
First credit cards.
Effectively processing a high volume of online transactions is complex issue for all businesses, particularly those operating at the Nexus a retail and technology.
Medifast weight.
We experienced some issues in the second or third quarter is related to a highly organized automatic scheme using stolen identities in credit cards transact.
Business on our e-commerce sites.
Each of these transactions was pre approved prior to shipment by the payment processor and subsequently reported to medifast as utilizing its stolen card.
We saw significant escalation on this activity in the third quarter and this led to an unanticipated negative effect on profitability revenue and forecasting as well as client retention.
Well this was certainly isn't an issue for medifast it caused greater problems for coaches in their ability to manage and forecast client acquisition activity effectively.
We've worked hard to establish a dependable and repeatable business rhythm over the past two and a half years and this unexpected bump in the road clearly caused some short term difficulties for coaches.
During the third quarter, we implemented a specialized software in ordering logic system, which has enabled us to admit to neutralize the thread moving forward. This action has helped the spring bad debt back down to levels consistent with historical performance and restore to bill its ability to our coach community.
A second area is technology migrations.
Medifast may be viewed as a health and wellness company.
The nature of the consumer.
And the way, we interact with coaches and clients means that we are many ways technology business technology user experience and data or at the very hard of everything we do and that's certainly not send triality increases every day.
After the has emerged from a business that has nearly 40 years old and as such we've had a number of legacy technology systems that we have built on over a period of time.
And wanting those systems and replacing them with new more rigorous approaches that are capable of handling the skill. We're projecting is a priority, particularly as the number of clients inactive earning coaches grows at the same time.
By migrating all our mission critical systems, including those impacting business intelligence commissions ecommerce and CRM were built a platform.
That will enable us to skill significantly and expand well beyond our current markets.
The technology migrations earlier this year were essential to our growth for the transition cause residual issues that impacted the quality of the coach and client experience and that is really the second area. We have seen where we've seen an impact on our numbers in the quarter.
Hi, Gration is absolutely central to our long term growth for the temporary effects on experience and retention resulted in a lower than expected activity in the third quarter and we'll have some residual effects on our financial results in the fourth floor.
By the end of the year, we will have completed a number of technology improvements to address the majority of the problems and user experience and.
And we anticipate a noticeable positive impact on client retention in the coming months.
We are taking enacted active steps to improving client experience with technology working with some of the best in class vendors.
Sure the full focus of this process and to allow the updates to be made in our systems. We've delayed our planned ERP implementation by three months and now expect that to go lives in the second quarter of next year.
Finally supply chain.
We've seen rapidly increasing volume demand, which has a great problem to have.
It's just the to ensure a supply chain could keep pace with the growth in active earning coaches and the increased demands of clients. They support we increased our supply chain capacity by about 40% in the second and third quarters.
These changes give us the additional capacity to support the future growth of our business.
Changes meant that we need to dismantle and restructure our supply chain operations to allow the news for new equipment it systems to come online.
Well I'm pleased that this process has taken place and we're now geared up for future growth.
This created some short term order in accuracies and disruption in standard operations.
This has led to temporary impacts on client satisfaction and purchasing habits and we saw some symptoms of that in the quarter with higher product return requests and higher order concessions to impacted clients.
He's had an adverse impact on our gross margin quarter.
So we'll see some residual effects of these short term headwinds in the fourth quarter I'm confident with mitigated most of the problems and have an actionable plan in operation to address the outstanding issues.
With schedule several compelling promotions in the current quarter to further accelerate client acquisition and reactivation typically the fourth quarter is a slower sales quarter. We believe these promotions will generate additional field energy and drive performance as we move beyond the short term growth related impacts.
What remains clear is that the fundamentals of our business are very strong and were created a foundation allows us to build significant revenue growth for the long term.
Our management of the board have high confidence in the business reflected both in the amount of stock bought back in the quarter and by the additional stock repurchase authorization by our board, which enables management to repurchase approximately 2.37 million additional shares.
We fundamentally believe in the long term success of this business and we're taking all the necessary steps to make sure that we're able to take advantage of that opportunity.
The company is well positioned to deliver on its goals and create significant value for our shareholders.
Were supported by healthy balance sheet, and strong cash flow and enhanced organization that can build on our momentum.
We have a team in place to maximize our competitive advantage and I'm confident in our ability to grow the business in the U.S. and internationally for many years to come with that I'll turn the call over time.
Thank you Dan and good afternoon, everyone.
You are financial results for the third quarter ended September Thirtyth 2019.
Then I'll provide our fourth quarter guidance and discuss our 2019 outlook.
Revenue in the third quarter of 2019 increased 36.5% to a record 190.1 million from 139.2 million in the prior year period.
We ended the quarter with a record 32200 active burning coaches compared to 22600 in the same period last year and 30600 in the second quarter. This year.
Average revenue per active burning code for the quarter decreased slightly by.
$5715 compared to $5781 for the third quarter last year.
We believe this slight decline was the result of operational headwinds that we'll continue to put downward pressure on this metric in the fourth quarter.
We do expect average revenue per active burning coach to return to normal levels in 2020.
Up to be a branded products represented 78% of our total company consumable units in the third quarter compared to 70% in the prior year period.
Gross profit for the third quarter of 2019 increased 33.3% to 142.9 million compared to 107.2 million in the prior year period.
Its profit margin as a percentage than that revenue decreased 180 basis points, 75.2% versus 77% in the third quarter of 2018.
Degree some gross profit margin percentage was driven largely by higher shipping expenses and higher product returns laid to disruptions that Dan mentioned earlier.
Sq day for the third quarter of 2019 increased 33 million to $122.7 million compared to 89.7 million for the third quarter of 2018.
The increase is primarily a result of higher variable cost.
It is up to be a commission expense and credit card processing fees.
Along with higher cost for highly successful annual convention held in July an increase in consulting costs related information technology projects.
Lastly, as Dan mentioned, we had a significant increase in cost in the quarter related to use the stolen identities and credit card from outside our systems.
Transact business on our e-commerce sites.
We estimate the total impact on everyday in the quarter related these transactions was approximately $3.2 million, which is approximately $2.8 million higher than the prior year period.
<unk> expenses were primarily comprised of higher bad debt expense and credit card transaction fees.
We successfully addressed the situation and brought bad debt levels down to levels that are consistent with historic performance.
Not anticipate any material ongoing expenses related to this matter going forward.
S DNA as a percentage of sales increased 10 basis points to 64.5% of total revenue compared to 64.4% in the third quarter.
18.
Our effective tax rate was 22.7% in both the third quarter of 2019 and 2018.
The effective tax rate was negatively impacted by the tax effects of foreign operating results offset by favorable effects of state income taxes.
Net income in the third quarter of 2019 was 15.9 million $1.32 cents per diluted share based on approximately 12.1 million shares outstanding.
Third quarter 2018, net income was $13.8 million or $1.14 per diluted share based on approximately 12.1 million shares outstanding.
Our balance sheet remains very strong stockholders' equity of 111.2 million in working capital 80.89 as of September Thirtyth 2019.
Cash cash equivalent and investment securities as of September Thirtyth, 2019 decreased 4.1 million to $96.9 million compared to 101 million at December 30, Onest 2018.
Lumpy remains free of interest bearing debt.
Inventory increased 13 million 51.9 million as of September Thirtyth 2019, fair to 38.9 million at December 31st 2018, due to advance preparations for new international products.
Initial production of the new habits of health system, and the continued effort to maintain inventory levels to meet current and future demand.
Our board of directors declared a quarterly cash dividend third quarter of 8.8 million or 75 cents per share payable on November seven.
We also repurchased approximately 225000 shares during the third quarter.
Following this repurchase our board of directors authorized an additional 2 million shares repurchase.
There are now approximately 2.369 million shares of common stock remaining under our share repurchase program.
Management team and board of directors remain committed to enhancing value for our stockholders.
Now turning to our guidance, we expect the fourth quarter revenue to be in the range of 157 to 167 million and he has to be in the range of one dollar three cents to $1.13 cents.
For the full year 2019.
We're updating our guidance and now expecting revenue in the range of $700 million to $710 million SP in the range of $5.80 to $5.90 or.
For fiscal year, 2018, 19 guidance assumes a 21% to 22% effective tax rate.
This is any discrete tax benefits from share based compensation awards, especially in the fourth quarter.
A revised guidance reflects the second half impact the short term headwinds that Dan described earlier related to credit card related bad debt.
And migration around both our technology and our supply chain.
The company is in solid financial position in the fundamentals our business remains strong we're confident in the future growth prospects and are focused on delivering our goals in order to create long term shareholder value.
That concludes our operational and financial overview. We appreciate your interest in Medifast, Dan and I are now available to take your questions operator.
Thank you well now begin the question answer session.
To ask a question reversed Star then one under telephone keypad for use in the speakerphone. Please pick up your handset pressing the keys.
I'm sorry. Your question. Please press Star then too.
Today's first question comes from Wonder button Wiser of D.A. Davidson. Please go ahead.
Yes, hi.
So sorry, if I didn't quite catch all the explanation, but I guess, what I'm a little confused about is did that's fraudulent activity occur in the third quarter and if so why is it the fourth quarter results the seem much more impacted than the third quarter.
That would be nice my first question.
Secondly.
I'm not sure I kind of understand I mean, obviously this doesn't sound good that those fraudulent activity here, but but how does that like affect the coach as because.
They just our misled about what their downline earnings, but how does that actually affect the servicing of their existing clients as long as those clients are getting their their orders. So maybe you could just.
Give a little more color about exactly what's going out and then my third question is clearly this these are IP problems and.
We've had a little sense in the last year, so that certain deadlines have slipped on your IP fraud. So are you, making some personnel changes do you need to bring in special consultants to fix all the and then just maybe restate again your estimation of when your business will be operating normally it wont be.
First quarter 22nd quarter 20.
Because you know the diet season is coming up [laughter]. Thanks.
Sure Hi, this is Dan.
Yes, let me, let me a little bit of color to Oh, that's what we just described from a credit card standpoint, well give you a little bit more description.
These were fraudulent credit cards and identities there were.
Cuda through computer boss, basically leveraging stolen identities and stolen credit cards each of the the credit cards paving <unk> charges were authorized by the bank. The order was placed the shipment was set.
And then.
I came back and reported those are stolen so that's the impact to the company profitability in terms of how it impacts of the coach experience for the client experience or what you mean, our coaches are very much tied in our business is very much tied to client acquisition. So each of these clients who comes and who are tied to.
Oh stolen identity.
Don't repeat their purchase so that has an impact on what coaches think they're doing from a business standpoint. So that's the that's kind of the.
Part of the headwind.
In terms of the coach experience.
Related to the a the I.T. problems yeah, we have essentially over the last two years changed out every one of our critical systems and.
Each time, we've done that.
Weve been replacing in some cases systems that are the end of life and then have migrated are migrating data that's been our systems for awhile. So most of the challenges haven't been.
Tied to the technology per se, but much of it has been tied to the specific migration of the data.
We have over the past I'll say, a nine months have.
Typically in the area.
And also brought on.
The top tier partners to kind of help us through this.
In all these and all these areas not just help us through this but really to establish the platform going forward. So I guess the your last question too to restate when we think will return.
To normal these issues with credit cards all happened in the.
Second and third quarters the to the point when we.
Realized through our it.
We're being informed by the banks.
We it was the the the third quarter and at that point, we put in place technology to stop so at the time, we found out put it the technology in place.
Just stop it or we did.
We effectively mitigated those issues by the end of the third quarter, so that specific credit card challenge.
Was ended at the end of the third quarter. So.
We won't have that read that as a recurring challenge the other things that we mentioned textron technology issues.
Related to the changeover in our technology system. These are some very some fairly.
I'll call them minor bugs that related to how our clients.
Use our reordering platform and how they change their orders.
And we became aware of those in the in the third quarter as well.
And at this point with a have had to technology releases. So in this in this quarter.
That have begun to fix those challenges and we anticipate by the end of the core those will be largely.
Complete the the last area, which mentioned was a supply chain Oh I'll give you. The is this example to understand we are we added about 40% capacity to our supply chain in the third quarter immense dismantling or pick lines. The distribution center, it's all new equipment.
And the interim solution involves change our distribution processes for our supply chain employees. So the ER the effect of that was some orders.
In order and accuracies and some impact on the packing quality so.
That was completed so starting in May and was completed by effectively mid September so that the supply chain is now operating as it was before so we anticipate that through the fourth quarter moat met many of these problems are largely addressed by the end of the fourth quarter.
Mostly address and.
Expect client acquisition to to Richard imply that and client retention returned to normal in the first and so.
And second quarter of the of the or the new year.
Thanks can I have one follow up question.
So.
If there was ordering and then shipment of products that was Oh.
Are you, saying that your revenue in the second and third quarters last fall.
[noise] lender discount sorry, my voices.
My voice a shot.
No. So this is legitimate revenue we were.
We shipped the products.
It's been the bad debt expense.
Some of this happened in the second quarter.
That happens third quarter, but the expense all hit for most part in the third quarter.
So the proper accounting for that is revenue and ER and bad debt expense.
So again why is the fourth quarter, the fourth quarter, that's disappointing us on earnings and and not the second and third quarter.
So <unk> third quarter was impacted largely by profitability the fourth quarter.
As you're aware Linda the the most important activity that happens in our coach model is the acquisition of clients because the client acquisition or was impacted through the three or.
Through the three areas that I described.
And retention was affected we're going with into the fourth quarter with a note with a lower number of clients. So that's that's why as Tim mentioned.
We anticipate some.
Downward pressure on client product, it or a coach productivity into the fourth quarter.
Then as a client retention and acquisition returns to normal as these is three areas of.
As credit card.
The credit card challenge is fixed supply chain return as a normal and the technology fixes are in place.
Anticipates.
The client acquisition and client retention will return to normal. So it's the fourth quarter drag is a result of entering the fourth quarter with a lower clients total client couch account than we would normally have.
Okay. Thanks, I'll pass it on.
Our next question today comes from Doug Williams Lam Research. Please go ahead.
Yeah, good afternoon, everybody [noise].
Staying on that thought Dan your your coach number and the quarter.
Was actually a little bit better than what I was looking for so I want to try to parse through all these cross currents and what you're seeing the impact is at the top with your coach is so far nothing but maybe that's the last thing to be residually impacted so we're looking at the fourth quarter, you're halfway through it and probably through the seasonally most.
An important part of it have you seen a slow down at the top levels of your coaches.
Yeah, Doug we met with our top sales leaders coach leaders in Sundance, a just a month ago.
And we described to them.
Yeah.
The challenges we're facing.
Specifically raise the technology and supply chain and describe to them. The a the plan to address those issues. So they've obviously been experiencing the things that we described in terms of lower client retention and lower client satisfaction.
Together, we worked through what it would take two or to have everything returned to normal and then as I mentioned those well we put a too.
Promotions in place client acquisition promotions to to help.
Generate the activity, we need in the fourth quarter to get things, but back to a to where they should be so I would say our coach community is positive they understand.
Why we experience these headwinds for cross currents as you referred to them.
And how we're getting back to a than normal state and how they can then take the activity or the promotions, we haven't place for the fourth quarter and start doing what they do well, which is acquiring clients helping them get on plan on their health journey, and then helping a portion of those costs.
Clients become coaches. So we anticipate all of these things are very short term oriented we've identified them and they're not theres nothing fundamental or in the and the deeper aspects of the business, where the confidence of our coaches that's been affected.
[noise] that's important thanks for that color and then you know you've gone through a rapid growth phase here and.
Always concerned, but with hyper growth with these kind of models and you made it through a year ago and hyper growth and now we're starting to see a little bit of strain.
On your infrastructure, both the financial the ERP implementation that the supply chain.
Have you thought about what is the board's position or have you thought about internally.
Expanding your senior management role throughout this you you've added a managers in the mid level for sure Youve added physical capacity and now I peak capacity.
But Britain's there's no chief operating officer here, how much do you think.
Given what's going on in the last six to nine months that maybe it's time to beef up the senior management roles.
I think because I expressed earlier, we've added a lot of breadth and experience to our senior management level. So I'm confident in our senior management team.
Again, I think if we if we saw some real missteps meeting that things that were a systemic and that would drive deeper into the overall.
Supply chain strategy I T strategy.
I think would be more concerned about that but the you know the issues that I've described in I mean, they'll give me wrong with Ben it's been a very difficult quarter is we'll work through them and and focused on addressing the issues completely.
But the issues I've described are largely started and will end in the course of two quarters and so.
Weve you know what were put in place from everything from our technology platform to our supply chain platform.
It is in place and found in the foundation is solid and ready to deliver on.
Our long term a set of goals, which are to grow our active earning coaches to 50000.
Which will allow us to achieve our 1 billion dollar goal.
And we believe we can do that as we leverage our infrastructure and grow our operating margin to a 15% or better.
Okay. Just last week, we went in the you started talking about ERP system, probably in the first quarter conference call and I think you had a number $5 million to $8 million.
The implement it which is a viewed pretty much as a onetime kind of expense can you update us on that number and then indicate maybe the time period. It sounds like it will just be 2019 that there'll be some residual spending on ERP in the first half a 2020 and he added information there.
Yes.
My best here [laughter] sorry.
Yeah Alright.
So we didn't have a pull back on some of our spend this year bioprocess approximately about half a million dollars.
Because we delayed the implementation.
It'll be a little bit tricky next year.
Well incur some additional expenses, but the accounting rules around.
Software are changing we believe that starting next year, we'll be able to capitalize some of the cost we've been experiencing historically.
We haven't completed our outlook for next year, but I don't think there'll be a material impact on 2020 related to the delay.
The total cost impact is about $800000 by shifting.
Good worst 800000 will get capitalized.
Got it okay. Thank you.
Hi.
Ladies and gentlemen, once more if you have a question. Please press Star then one today's next question comes from Stephanie Wissink of Jefferies. Please go ahead.
Thanks, Good afternoon, everyone.
I'm wondering if we can just stay on its credit card situation that more can you talk a little bit about the customer fall off or maybe all three of the issues wrapped together youve mentioned customer retention a number of time.
You look at the number of customers are clients I mean, I didn't give us a sense of what that fall up might be and then as you describe this you really talked about it as a bit of an air pocket. So that the trend line kind of continue into 2020 based on the fundamental growth you've seen it is that the best way to think about it that this is really a Q3 Q4.
Pocket of onetime event, and we should start to see the business slowing consistently into 2020.
Yes, it's definitely you the.
I mentioned the credit card transactions.
Of both the company and the coaches Fars throughout their outlook on the future. So typically we have a customer comes in they repeat multiple times for many months.
So even when we were doing our outlook for example for the third and fourth quarters.
We didnt know what at the time.
The word thousands of transactions that.
Our system that we're never going to repeat and we did our forecast our guidance for the full year.
We actually raised our guidance.
What we're seeing.
Same thing happens to coaches they expect a certain amount of repeatability new client.
I was trying to reach out to a.
One of these credit card clients and frustration of never hearing back from them is also did if it's the time.
Oh, it kind of just affects the ocean accompanied to some degree in the same way.
You have this kind of false business in your outlook.
That never never comes to fruition, you can imagine for coach probably affects their motivation as well.
They think they reached a threshold only to find out that the business never comes through in the following month.
So it's it's very frustrating for a coach as well so that's how the credit card transactions kind of affected our two for its we're in that the activities not there that we thought was gonna be there and so customer retention is affected by two separate things.
One is this credit card information.
That you know you also have a dramatic falloff of customers in its Matt.
Then the other is just from client experience, we're seeing and see the customers that required in the past quarter or so not stay as long because believed they haven't had a positive experience.
Your turn that experience back to normal there's no reason, we that we believe that client act behaviors I'll say return to normal.
Okay, and then if we think about the total cost I think you mentioned a little over three and a half million, but that's just for the credit card.
Event right not the total drag from the three technology related event.
Yeah, its credit card and I'll say credit card related so it includes the bad debt.
It includes other costs related to the bad that so for example, we brought professional Herman to help a stop it.
We had additional credit card transaction fees every time, we had an attempt.
If the to check the delivery to that card. So the 3.2 million as a total costs related to.
The bid that transaction.
Nothing to do with the other two other two items.
Okay, and and finally can just talk about the remediation effort. It sounds like you put in a technology layer that.
Helpful to validate yes intensity of the cards. It can you just talk a little bit more about that just so we understand that what you're seeing in your business today isn't still being impacted by some of this fraudulent activity.
Yeah. The technologies layer is a a security software that essentially a use of the an outside database to first look at credit cards that it also looks at certain transaction types, we're able to program in the logic. So we.
At a very quickly climbed the learning curve and understanding exactly what was happening and programmable logic in to address those specific types of transactions and a very very quickly.
We're able to the to get the bad debt expense back down to a in a normal level.
But it happened very very quickly as I mentioned before it was a news computer bots stolen identities and so during the initial phase it wasn't a parent what was happening because the credit cards were being authorized by the banks. So they they came across our systems as looking.
Like they were.
Legitimate individuals with legitimate credit cards.
And by the time the bank told us that they were reported the stolen the.
The shipping it already gone out so the the software addresses that that activity at all on an automated way.
And we continue to to monitor obviously this on it on a daily basis, but.
We have effectively returned at all the way back down to where it's at the level of bad debt has been historically and so it's the issue is.
You know that specific issue is behind that and we're confident and the the vendors were using to us to help us a ensure the security of our systems going forward.
Your final one for US is just on your fourth quarter guidance does it contemplate any improvement from the current trend of business, so with the supply chain and the technology migration.
Our to be less of a factor would that provide upside opportunity or have you built in some improvement into the fourth quarter I said the quarter progressive.
I think I think staff, we tried to be conservative.
[noise] yeah.
We tried to be conservative in the guidance.
Like I said, we what we believe that we Oh, we have a good handle on the issues and the resolution.
And you know, we've we've basically reprioritize all other projects to allow us to quickly and effectively.
Mitigate any of the the headwinds that are we're being created by these last two issues on from the supply chain side, which to me that one is complete.
Then the last one is the technology side so.
We believe that that that there's no reason.
That our client retention and client acquisition won't return to the normal level, particularly as I mentioned because was put in place.
Some incentives to to help our coaches direct through the.
Through the challenging size this challenge the challenge challenging side of.
The business that's a that's been created by the headwinds.
Thank you.
And ladies and gentlemen. This concludes your question answer session, Let's turn the conference back over to the management team for any final remarks.
Well. Thank you everybody for joining US Tonight. We appreciate all your interest in the in your for decision participation in today's call, Tim and I look forward to speaking with you again, when we report our fourth quarter in fiscal 2019 financial results have a nice either.
Today's conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a wonderful.