Q1 2022 Nautilus Inc Earnings Call

August 9, 2021

[music].

Greetings and welcome to the Nautilus incorporated first quarter 2022 earnings results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now.

Like to turn the conference over to your host Mr. John Mills with ICR. Thank you you may begin.

Thank you good afternoon, everyone welcome to Nautilus first quarter fiscal 2022 conference calls.

As previously announced Nautilus changed its fiscal year from the 12 months beginning January 1 ending December 31 for the 12 months beginning April 1.

At March 31.

They include the primary fitness season for exercise equipment, and the same fiscal year and to better align with the fiscal year end of retail partners.

Good day analysis reporting financial results for its first quarter of fiscal 2022, ending June 32021.

Participants on the call from Nautilus are Jim Barr, Chief Executive Officer from Atlantica, <unk> Chief Financial Officer.

Please note this call is being webcast and will be available for replay for the next 14 days.

Be happy to take your questions at the conclusion of our prepared remarks.

Our earnings press release was issued today at 105 PM Pacific time may be downloaded from our website at Nautilus, Inc. Dot com from 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.

On today's call we have a presentation accompanying the call that management will refer to during their prepared remarks.

And on slide 2 is our full safe Harbor statement, which we ask everyone to read.

You can access the presentation now by going to Nautilus, Inc. Dot Com, Inc.

Click on the Investor Tab, and then click on the events webcast and the presentation, we'll be right there for you.

I'd like to remind everyone that during the conference call Nautilus management may 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 of future performance and therefore, 1 should not place undue reliance on debt.

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 web.

And with that my pleasure to turn the call of technology CEO, Mr. Jim Barr.

Thank you John and thank you all for joining us today I'm.

Im excited to speak to you today about our strong growth in earnings driven by long term secular <unk>.

Trends towards home fitness and most importantly, our teams strong execution.

I will then shift to an update on the notable progress, we're making implementing our long term strategy.

I'll share some perspectives I might now 2 years at Nautilus and I'll finish by reiterating our commitment to invest for the long run.

I'm incredibly proud of our team for achieving in both short term results and progressing in our transformation, which will take nautilus to a place it's never been before.

In the first fiscal quarter, we produced strong growth and profitability exceeding our top line and operating margin guidance.

This was driven by continued robust demand for at home fitness across our portfolio of leading strength and cardio products as.

As well as across our customer touch points with our domestic and international retail partners and online direct segment.

We leveraged our backlog strategically built up our inventory for the upcoming fitness season, and continue to manage a slew of unprecedented and temporary challenges and global supply chain and logistics to drive these results.

This quarter as a reminder, we are comping the first full quarter that benefited from Covid related tailwind.

Against that backdrop I'm delighted to report that net revenue was up 62% to $185 million, representing the highest June quarter, and the fourth highest of any quarter in the company's 35 year history.

Even more impressive excluding octane revenue for the quarter was up 74% year over year.

The direct segment grew 26% in what is traditionally our seasonally lightest quarter when consumers tend to be outside and not as focused on indoor exercise equipment.

The retail segment continues to set records generating its highest ever quarterly sales achieving a record $120 million as we began to load into retail partners earlier for the high season.

This is an early indicator that our expanded stable of retail partners is betting on a robust fitness and holiday season.

In addition, our international channel recorded its second highest quarterly sales up 70% or 102% excluding octane.

Strong sales of our new connected fitness cardio machines, including our value core bikes combined with solid performance from many of our strength products, including the continued momentum of our select Tech line drove these better than expected results.

The market reception to our new connected fitness offerings is an important driving force behind our continued growth.

This past quarter, we introduced our brands to over 40000, new customers via our website.

Our new customer count to over 380000.

For the last 15 months for context, our new customer count averaged about 100000, a year pre pandemic.

The growth in direct customers and our expanding retail universe are fueling membership growth.

For connected product sales journey membership growth accelerated after we introduced our first embedded screen product in September of 2020 and by the end of June we had more than doubled the number of members versus the beginning of January.

I'll provide additional detail on journey in a few months.

Our entire industry, along with countless others continue to face unprecedented and temporary inflationary pressures in raw materials and logistics gross.

Gross margins were affected by higher component costs, including chip shortages that are affected many industries as well as higher commodity prices such as steel and continued continually elevated transportation costs.

In addition, natural season channel mix shift to retail played a role direct was 34% of the business in this quarter versus 44% last year.

I want to emphasize that we view these margin pressures to be temporary challenges as the world recovers from the disruptions caused by COVID-19.

While this impact is significant in the short term. We believe these external margin pressures will normalize over time.

Short term margins do not change our view of the long term value we are creating.

Despite gross margin pressures operating margins came in above the high end of our guidance at nearly 10%.

Driven by our strong top line results as well as our strategic decision to shift some northstar investment dollars from Q1 into Q2, including brand marketing for total Frost and Olympic advertising.

EBITDA was $20 million and we ended the quarter with $83 million of cash and short term investments.

As discussed at our Investor day, and on our last earnings call. We operate in an attractive expanding and very dynamic at home fitness industry or.

Our addressable market has expanded rapidly based on permanent changes in workout habits, which favor home fitness.

In the past 15 months consumer saw that connected fitness could deliver on many of the elements that they used to get only at the gym personal training trainer led classes community and variety.

As you know we have continued to follow the sentiment of former gym goers for over a year now.

25% of former gym goers have consistently expressed that they have no plans to ever returned to the gym and many others are changing how they balance the gym and at home based on an emerging hybrid work model.

Operational new vision and long term connected fitness digitally driven growth strategy.

We are transforming non list from a product led hardware company to a consumer led digital company.

Our strategy is rooted in 5 pillars designed to position Nautilus to deliver long term value.

Our entire organization is focused on delivering these long term goals by March of 2026.

$1 billion of revenue.

$2 million journey members.

And sustainable operating margins of 15% with the opportunity to further expand our subscriptions become a larger portion of revenue.

Achieving these goals requires investments and we intend to self fund these investments via our pay as you go philosophy.

Using a long term ROI lens will invest a portion of our earnings in the following key areas.

Already.

Marketing innovation and technology.

Cost to accelerate membership growth.

People and capabilities and partnerships and tuck in acquisitions.

I know, we will provide more detail on our planned north star investments for the rest of the year.

I'll now update you on some notable progress we've made on our North Star strategy first on our efforts to adopt a consumer set first mindset.

In order to attract and retain lifelong customers, we are making increasingly we're increasingly making decisions based on consumer insights and data.

We have moved from early conceptual stages and have now implemented this approach in all areas of the company. Some examples include we've instituted new category management capabilities and they are injecting consumer insights into our product roadmap.

We're measuring baseline net promoter scores and consumer effort scores at all key points of our customer journey.

We are also closely monitoring journey usage in social media sentiment to make sure we prioritize the enhancements that matter most to our members.

Our consumer led approach has really transformed our marketing as planned we increased marketing spend during the quarter and will continue to do so throughout the year to support our expanding digital connected fitness and overall product offerings.

We are targeting to specific consumer segments and continue to shift more of our spend to digital in order to efficiently reach our target customers with newly refreshed marketing messaging.

And our investment in brand marketing is paying off our share of voice is 2 times, our market share and our new brand spots that we aired in the quarter are delivering traffic lifts 5 to 7 times higher than our typical direct media.

We have more work to do in repositioning our brands and we plan on continuing these investments for the rest of the year.

As mentioned previously we are rapidly growing our new customer base.

Adding nearly 400000 new customers in the last 15 months.

The numbers tell only part of the story, we are reaching consumer segments that enjoy exercise more and for whom exercise is more of a priority.

These new customers skew younger and more female.

Our target consumer enjoys the flexibility of buying online or shopping at stores I'm proud to say, we've continued to increase our points of retail distribution. We have added more than 3000, new retail doors.

Great and greater online capabilities in retail over the last 15 months, including at best buy Costco, Costco, Canada, Sams club and target.

Internationally, we had an over 500% increase in our sales through Amazon.

We now have broader and more diversified retail distribution and are functioning as a true omni channel company with many more options for consumers to buy in store and online.

Secondly, transforming our supply chain in the face of all of the challenges in global logistics, if successfully added significant capabilities to our global supply chain.

We have reduced our backlog to the lowest it's been in over a year and expect to achieve our goal of no longer being factory capacity constrained by the end of the fiscal year.

A great example of solving our supply chain problem is are wildly popular select tech dumbbells.

This quarter, we shipped more than 3 times as many dumbbells as the year ago, Covid driven quarter and I'm happy to say they are now available for immediate delivery on bowflex dot com and at leading retailers.

This would not be possible without our suppliers and their ongoing support to help us meet the unprecedented demand for at home fitness.

We share our success with them and we thank them.

Another new capability is our new distribution center in Southern California, which opened in July and is ramping up in time to receive the heightened inventory levels. We have planned for the upcoming peak season.

We've formed task force is focused on spot buying microchips, finding new ways to ship products across the oceans and implementing technology to allow us to expand our outbound freight partners.

Because of improvements in supply chain, we have been able to build our inventory position to be well prepared for the upcoming fitness season across all channels.

Third focusing our investments in growing our organizational capabilities.

We have reduced lower margin skus in all areas.

This improves efficiency throughout our organization and enables all teams to be more laser focused on our targeted offerings.

Since fiscal year 2020, we have discontinued 22% of our product Skus and have tripled the revenue per product that we do carry.

We continue to build out our organization, adding executive talent like our new Chief Legal officer, Alan Chan a seasoned veteran with 16 years of experience leading global teams in M&A commercial agreements intellectual property and corporate governance.

We're also building out our software development and user experience teams category management supply chain, social media engagement learning and development and change management.

Lastly, and perhaps most importantly, we continued to improve and grow journey, our digital platform.

Our members have told us that they want variety highly personalized 1 to 1 adaptive workouts.

Immersive experiences and fresh on demand trainer led content on and off equipment.

We're meeting these needs through our innovative lineup of connected fitness products powered by our continually evolving digital platform journey.

Journey is now fully compatible with the wildly popular bowflex Csis and Schwinn IC bikes via both iOS and Android devices.

Our journey platform is constantly improving our artificial intelligence engine to create an infinite number of personalized workouts.

The platform assesses the members fitness level and recommends workouts based on their abilities.

Available time mood and workout experiences they prefer.

And continues to learn and adapt removing the guesswork from achieving a productive and satisfying work out.

Our members receive voice coached individualized workout similar to 1 on 1 personal training trainer led workouts and integration with other fitness apps.

We continue to provide our members with the ability to stream entertainment, while working out and even while being coached.

We have integrated Netflix Hulu, Amazon Prime and Disney plus for use within our fitness experiences shortly we'll be adding HBO Max.

We are constantly serving up something fresh to our members be it new content or releases. This past quarter alone we added new adaptive AI driven workouts.

To explore the world locations. These immersive experiences now numbering over 100 locations are hugely popular with our members, especially on our trends and we hear from our community that they are choosing explore the world as a form of escapism. During this time.

New trainer led videos, we continue to add more on machine workouts and today, we announced a strategic partner chip with fits on 1 of the fastest growing premium fitness applications to bring hundreds of off product workouts accessible for our journey members for no additional charge. This collaboration and integration is just 1 example of our.

Commitment to creating unparalleled digital workout experiences for our growing journey membership base.

Beginning this fall journey members can seamlessly access.

And track fit on workouts through their bowflex connected equipment for the App.

Users can search from a wide variety of fit on popular off product workout, including cardio high intensity interval training yoga stretch and pilates and choose various lengths ranging from 3 minutes to an hour and levels.

As well as overlay journey radio to find a workout that matches their mood and location at any given moment.

The first day, our member gets their machine is not the best day, and we will continue enhancing the platform in response to our members' feedback.

It is important to acknowledge that while we're still in year 1 of our long term transformation, we've come a long way in a short period of time.

Enjoyed nautilus almost exactly 2 years ago, and I and as I reflect on those 2 years I'm incredibly grateful and impressed by the work of our team the turnaround we've achieved and the profound growth we've driven.

The old Nautilus wasn't equipment only ship it and forget it company supported by Great brands, but it missed important trends such as connected fitness had an aging and <unk>.

<unk> portfolio of products and marketing that badly needed refreshment.

It also lack clear strategy and proper investment back into the business and it started to become eclipsed by new entrants.

It had suffered a multiyear revenue decline, culminating in 2019, 22% drop in significant operating losses.

Pre pandemic, we instituted a number of operational improvements launched new connected fitness bikes with a strong value proposition and began to see significant change in our business trajectory.

During COVID-19, we not only leverage our at home tailwind to deliver 5 consecutive quarters of strong profitable growth, we expanded our supply chain to meet demand launched new connected cardio products targeted new new consumer segments, with our products and marketing and relaunched journey.

We also launched Northstar, our long term vision and strategic plan to give us the direction we need it.

We've become more a more on trend and more digitally focused connected fitness company that partners with our customers on an ongoing basis to achieve their goals.

The new Nautilus is still that veteran fitness company backed by strong brands, but we have now we now have a clear strategy in place and are taking the right steps to reinvest in our business to fund the long term success.

And ensure that we are a digitally focused consumer focused leader.

As I close my remarks, I am delighted that we are further ahead on our long term transformation than I could have dreamed when I joined Nautilus, we've made a lot of progress and find ourselves in a much stronger foundation from which to fulfill our vision.

We are making deliberate and choice full decisions to invest in the long term vision.

We will remain steadfast steadfast in our commitment to continue to build the new Nautilus for the long term, 1 with more predictable growth and higher profitability that will generate attractive long term returns.

I'll now turn it over to Idaho give us more detail on our first quarter financials, and our guidance for the rest of the year.

Thanks, Jim Good afternoon, everyone.

Year ago, we were reporting the results of the first full quarter that benefited from the Covid tailwind and I remember thinking next year will be a tough comp.

I'm really pleased with how we delivered against this quarter.

I'll begin with total company P&L results for fiscal Q1, 'twenty, 2 which is the 3 months ending June with comparison to the same period last year.

Net sales were $185 million up 62% or up 74% excluding octane.

Gross profit was $56 million up 17%.

Gross margins were 31 down from 41, 5% last year.

As Jim noted earlier nearly all of the margin pressure is coming from temporary macro events, which are affecting not just our industry, but many others as well.

Let me now walk you through the drivers of the change in gross margin.

Approximately 6 points of the decline are due to increased landed product costs.

Stop buying as components due to the global shortage inflationary increases in commodities elevated logistics costs and lastly, FX.

Partially offset by price increases that we implemented in the quarter.

Another 3 points due to channel mix day breakfast 34 percentage of total sales this year versus 44% last year.

Another point is due to outbound freight for our direct segment.

Because of limitations imposed by fed ex we had to shift from shipments to more expensive carriers.

Another point of the decline is due to a write off related to the strategic decision to discontinue certain skus.

Given the global component shortage, we decided to accelerate the Northstar plans from discontinued Nautilus branded products and non core schwinn products.

We are focusing the limit chips, we have and our larger screen embedded products given strong consumer preference for these larger screens.

The rest of the decline is driven by higher Cogs in Germany.

Turning now to operating expenses.

As a reminder, last year, we booked $29 million loss on disposal group related to octane.

The next few lines in the P&L had been adjusted to remove the impact of this charge.

Please see our press release for a reconciliation of these non-GAAP numbers to our reported results.

Adjusted operating expenses were $38 million or 20% of net sales versus last year's $25 million or 22% of sales.

Selling and marketing was $21 million or 12% of sales compared to $12 million or 11% of sales last year driven by increased media spend.

Direct media spend was $8 million this year versus $2 million last year and invested an incremental $3 million in brand media as part of our North Star strategy.

G&A was $12 million and leveraged by 2 points to 6% of sales this year compared to $9 million or 8% of sales last year.

The increase was driven by greater investment in IP to support journey.

R&D was $5 million, a 3 percentage of sales compared to $4 million or 3% of sales last year.

Driven by increased development costs related to Germany.

Adjusted operating income was $18 million or 10% versus last year's $22 million or 19%.

As planned operating margins declined versus last year due to lower gross margins returned to normalized levels of brand marketing and North star investments.

We came in better than the high end of our guidance due to stronger sales and the shift of some brand marketing from the first quarter ending June into the second quarter ending September.

We want to give more visibility to the impact of North star investments in our P&L and the continued strength of our underlying business.

On slide 14 in the deck that accompanies our presentation of approving additional detail on how our investments in Germany and in brand marketing affected this quarter's operating margin.

While we are investing in the other 3 pillars brand marketing and journey concert discrete and the most significant.

Journey investments were about $5 million this quarter versus $1 million last year and brand marketing was about 3 million Christmas day around last year.

Gather these investments reduced our operating margins by about 4 percentage points.

Adjusted income from continuing ops was 14 million or <unk> 43 per diluted share compared to last year's income of 17 million or <unk> 56 per diluted share.

Adjusted EBITDA from continuing ops was $21 million.

Compared to $26 million last year.

I'll now turn to performance by segment.

Direct sales were up 26 million to $63 million.

We're really pleased that we were able to clear a lot of our backlog in the quarter. It's now only 3 million versus $27 million last quarter.

Most of the backlog book and strength, which is why strength grew 559%.

Driven by a popular select Tech Lake and Bowflex home gyms.

Cardio declined 31% driven.

Driven primarily by last year's sales of now discontinued products like the tread climber and non connected twin banks.

We're also selling less IC bikes on our direct channel.

Our retailers to non stop.

Strong growth in our new embedded screen products are partially offsetting these declines.

When we exclude the revenue associated with the backlog. It appears that direct is returning to more seasonal pattern.

As a reminder, the quarter ending June and the quarter ending September are typically at a lower volume quarters for direct.

Gross profit was $25 million versus $28 million last year, and gross margins were 39 per cent compared to 55% last year.

Segment contribution was $7 million versus last year's 17 million driven by lower gross profit and a return to normalized advertising spend.

Turning now to retail segment results at.

Net sales were $120 million up 91% versus last year and up 121% excluding octane.

This was our retail segment's highest ever quarterly sales.

International sales grew 70% or 102% excluding octane.

Strength was up 119% and clarity of what's up 83%.

Retail backlog at the end of the quarter was $142 million compared to $179 million last quarter.

We disclosed retail customers, whose sales are greater than 10% of total company net sales.

This quarter Amazon was 18% of total sales in best buy was 17.

Gross profit grew 59% to $30 million versus $19 million last year, and gross margins were 25% versus 30% last year.

Segment contribution was $22 million, an increase of $10 million versus last year. The improvement was primarily driven by higher gross profit and expense leverage.

Turning now to the balance sheet as of June 30, 'twenty, 1 with a comparison to balances as of March 31.

Cash and investments were $83 million debt levels range, mostly flat at $13 million and we had $54 million available for borrowing on our credit line.

Trade receivables were $98 million with the increase primarily due to the timing of customer payments on higher sales.

Trade payables were $115 million, a day increased primarily due to the timing of payments and higher inventory.

Inventory was $111 million.

More than 60% of our inventory as of 630 was in transit.

Given the continued disruption in global logistics, we made a strategic decision to bring inventory in earlier to be in a better position to meet upcoming peak fitness season on demand.

At the end of the quarter, we had $175 million of open pls compared to 216 at $3.30 line.

Turning now to our expectation of the second quarter of fiscal 2015.

Our industry has experienced massive changes in the last 15 months.

Our revenue for the next few quarters will be compared to record results due to bad debt mix effect in our net sales last year.

To gauge continued progress against our expanded addressable market will be measuring our business versus Earl y and versus L. L Y for the next few quarters.

Demand gross we're direct in Q1 and in the first month of Q2 have been trending to more typical seasonality patterns.

Now that we successfully cleared the backlog, we expect direct sales in Q2 to be lower than Q1.

Thus, we expect total company net sales for the second quarter of fiscal 'twenty, 2 to be between $145 million and $155 million, which equates to a 2 year CAGR of 53% to 59%.

As mentioned earlier similar to many companies great experiencing unprecedented price increases and components commodities and transportation with some costs up 6% to 7 times higher than last year.

<unk> continues to be a headwind and regrettably, we expect these macro pressures to worsen in Q2.

Despite rising spot prices, we've been aggressive in securing the chips, we need for embedded screen products and are pulling all levers to overcome transportation challenges and ensure that we have access to the inventory we need to be competitive during the upcoming peak selling season.

As we did in Q1 <unk> book to deliver operational improvements to allow us to continue investing in Northstar. Despite the hurdle of these temporary macro factors.

We are in a period of investment and the preliminary preliminary results. We've seen from our Q1 spend gives us confidence to move forward with our Q2 planned investments.

We expect brand marketing to be between $5.6 million versus $3 million last quarter and zero last year.

We expect journey investment to be between $5.5 million to $6.5 million versus $5 million last quarter and $1 million last year.

As our member count grows and more people interact with our platform, we're learning, which features matter most and might be have room for improvement.

Our investments in Q2 will further improve platform functionality.

Increasing the variety of adaptive workouts, improving the way members can manage their accounts and continuing to provide fresh content like the lunch from a new partner fit us.

This north star investments, which are squarely aligned with achieving our yearend goal of 250000 journey members.

Our expected to dilute operating margins by between 7% to 8 percentage points.

When coupled with the external macro pressures on gross margin, we expect Q2 operating margins to be in the low single digits.

Turning now to our expectations for the back half of the year.

We will continue to optimize our base business to allow us to keep investing in Northstar in the past we go basis.

While we would welcome from relief and supply chain cost per year, assuming Q3, and Q4 margins will continue to be pressured by external factors.

No 1 knows from the pressure will ease it's reasonable to expect that overtime. These price increases will stabilize and eventually return to pre pandemic levels.

Until we see a reverse of the historical high input cost for our products and in the global transportation environment, We expect operating margins to be in the low to mid single digits for the back half of the year.

We are reiterating our full year capex guidance of between 12 and $14 million with the majority of the spending focus on journey.

We're also reiterating our expectation of reaching 250000 journey members by the end of this fiscal year.

Our conviction in pursuing our north star strategy has never been stronger.

The growth, we're seeing in journey membership and they're increasing engagement with the platform confirm our expectations of generating outsized returns on our investments.

We believe we must continue to state of course in our transformation as it will ultimately yield higher quality recurring revenue and long term profitable growth.

These near term external pressures on gross margin are temporary and we believe that they are not impacting our delaying our expectations of achieving sustainable operating margins of 15% plus by year end 'twenty 6.

We recognize the long term benefits of our transformational investments.

Now I'd like to turn the call back over to Jim for his final comments.

Thank you Anna.

I am pleased with our fiscal year results with our first fiscal quarter results and the progress we're making towards our North star strategy. Our investments are on track and even with our ramp up of investments and inflationary costs, we delivered nearly 10% operating margins and our company is better positioned than it has ever been in its 35 year history of.

Being a public company.

Our entire team understands North star is the driving force of building long term shareholder value and his focus each day on executing against the 5 pillars of Northstar.

Our trends are transition is underway and our strategy is working evidenced by continued revenue growth customer growth and our journey membership growth over the past few quarters, even as gyms have reopened.

We are providing differentiated winning fitness experiences that are driven by consumer insights and combining equipment and digital experiences that make us partner with our members on their journey to achieving long term success.

In closing, let me again, thank all of our incredible employees as well as our partners for delivering yet another record breaking quarter and making such notable progress towards the new Nautilus.

I'd now like to open it up for questions operator.

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Once again Thats star 1 to ask a question at this time.

1 moment, while we poll for our first question.

Our first question comes from Mike Swartz with true with Securities. Please proceed.

Yes.

Hey, guys good afternoon.

Hey, Mike Hey, Mike maybe.

Maybe to start off can you just talk maybe a little more detail on this fit on partnership and maybe.

Why why this makes sense.

The strategic partnership and it maybe.

Little more color on what do they bring to the journey platform longer term that maybe you couldn't have done internally.

Sure.

Probably nothing in the long run that we couldnt do ourselves, but we really want to make our journey experience.

As good as it can be as fast as it can be and especially as we looked at where our gaps where 1 of our GAAP was off equipment. So we've done our own content for.

Things like value core and Max trainer that are proprietary to us.

And we've done classes on Viking classes and things like that in our treads have some great content, but when.

When we look Optimus sheet, which is important to our members.

They don't they're not on a machine every day.

We wanted to make sure that they had variety as quickly as possible. So through this partnership they'll get hundreds of videos in the categories that I mentioned off equipment that they can use immediately.

The other part of it is.

Net of.

Going to individual fitness.

Platforms for individual things, we want them to come to journey more often so even their fit on work outs will be logged in our journey application and so they'll get a more complete integration of their full workout picture there their history and the progress that the work that they're making and we just thought.

It was a good idea to accelerate what we're doing in journey and we'll continue to look for partnership opportunities that do just the same that get us further along faster.

Super.

Super enthusiastic about our own organic long term future, but we don't want to be limited by how fast. We can go we want to add the power of partnerships on top of it.

Okay, great. Thank you. Thank you for the color there and then maybe 1 for Ian I know, there's going to be the present. The question on the call just on the investment program that you laid out.

Understanding some of the some of the spending shifted out in the first quarter, but I guess when you laid out the various buckets and the numbers, we should expect for the second quarter I.

I guess is that the run rate, we should be assuming going forward in terms of the level of investment that is needed for journey and from brand marketing are these more kind of 1 time upfront expenses.

I think when you look at that.

High level guidance I provided low mid single digits for the rest of the year.

It's similar run rate.

The reason that we're not providing really specific numbers, it's all tied up in that pay us be go philosophy and and.

Guiding principles, because we like others in our industry and in other businesses. We are not 100% sure. How long these temporary headwinds will last and will they get a lot worse than what we're seeing so we need to make sure that we still we stay really agile and like.

Stay focused on mitigating as much of it as we can while without sacrificing our ability to progress on the long term.

Okay, great. Thank you.

Thanks, Mike.

Our next question comes from Steve Dyer with Craig Hallum. Please proceed.

Thanks. Good afternoon. Thank you for taking my questions.

A question.

Good afternoon.

A question just on the divergence between.

The retail and the direct revenue increase year over year is your sense that there's any differentiation.

And sell through their visa b, it's retail selling through a little bit quicker than directors are simple. This is largely sort of inventories up for book for the holiday season, and restocking with channel.

Yes, I think it's I think it's the latter.

Really what we've seen as we've mentioned on prior calls last year retailers were caught without enough inventory.

We couldnt get them anymore faster, we felt bad about it but they didn't have what they want it so retailers are super smart so they're going into this year, they ordered early and and they wanted to get the inventory in early so they would be prepared and I think there's some perception of somewhat getting in line for scarce inventory as they as they place. These.

Orders so for sure we saw and we mentioned in previous calls and acceleration of their ordering and so that really pushed it into this quarter that we're talking about our first fiscal quarter.

And we.

We will still have a strong second quarter in retail, but I think you can you can see there's an acceleration there.

The good thing is they obviously as we do believe in a robust holiday and fitness season, and there they are gearing up for that.

So I think everybody is optimistic about the future, but I think what's good what's happened over the last 6.810 months.

Being caught without inventory, that's going to make sure they had it and they loaded it in early.

Makes sense and then just with respect to Germany.

It's sort of a couple of qualitative.

Comments is there anything you felt you could sort of just.

Early returns there or what youre seeing whether its churn rate or engagement number of engagements per month or anything like that but that's sort of true.

Gesture on the right track that you could share.

Yes, I mean, we have it but for competitive reasons as we've said before.

Where we're deferring once we start reporting on all of that we're going to continue to report on that we said we'd do it when it was material, which we believe will be when we hit our 250000.

I mean, we are reiterating that number I think that should be a pretty good sign for where we think we're going on on that and.

And we're doing that despite a chip shortage, which which means we may get up to $2.50, a different way, but we are definitely going towards that we're seeing increased engagement, we're really really listening well to what our what our members are telling us and that's why we did the strategic partnership with fit on as well.

We could wait until we were ready to do that but we wanted to wanted to do that so again all the things we've added in terms of explore the world and more adaptive workouts and things like that so the engagements I could probably dig up the number of.

Of workouts, it's just a big number that that.

That is rapidly expanding but probably not super meaningful without greater context. So we're going to continue to hold their with our with our steadfast belief that we can make it to the 250000, which is a we believe a very very ambitious goal.

<unk> taken some of our competitors' multiple years to get to that point and.

And where we're committed to doing that so hopefully that gives you some color.

Over time, just like we did with the journey investment we started talking about it for the first time in this call. We will continue to be more transparent as we can.

To give you more and more of that but the latest being once we hit the $2.50.

Yeah makes sense, okay. Thanks, Jim.

Sure.

Our next question comes from Sharon Zackfia with William Blair. Please proceed.

Hi, Good afternoon, Hey, Sharon Hudson Hi, a follow up question on the marketing side I mean, it's a it's been a strange environment to say the least so how are you kind of measure in.

The effectiveness of your market and I know you said you said a few dynamics there, but I was thinking more on a maybe more quantitative basis, and then I'm curious on what you're seeing on price elasticity of demand I mean have you had to do any discounting or do you think theres any kind of pricing power to potentially offset some of these costs in the interim.

Sure.

On marketing.

Sort of.

Let's take our brand marketing, which is the new part because their traditional marketing. It's just it's an ROI what do we spend on direct what do we get back and sales we have a required ROI. We have as we've said a whole bunch of <unk>.

Tools, we didn't have last last couple of years media media mix models attribution models. So we know what's working and what isn't and we are very scientific about the ROI on.

On our direct spend that primarily is going against.

Driving product sales.

On the Mark on the brand marketing, which is relatively new concept for us the answer is in the in the short run.

We look at traffic to our website immediately following wind rerun our spot, especially when we were doing the Olympics and tour de France, we could we could really see the spike there and we measure what that spike is.

There is the normalized and then when we run the AD Thats, where it is and so that's how we're looking at it short term long term as we talked about in Investor day, and I think maybe more importantly is that our brands are well recognized their top of the market with.

With.

Brands like peloton and in order to track.

But there also but we had a little bit of a drop that we wanted to fix in purchase consideration. So in other words, our brands were well known but where they are known for the things we wanted to be known for.

Being being digital forward being there.

On People's fitness journeys and things like that so that's what we'll measure in the long run for our brand marketing is is the purchase consideration element, we'll continue to see that.

A top recognized brand, but we're also going to make sure that we are when people think of our brands. They don't think about infomercials from 20 years ago that they're thinking about the new the new log list, the fresh nautilus and that drives the purchase consideration.

In terms of your second question on price elasticity I think it really as we're seeing this we've taken a lot of price increases every place we could given what's going on in the commodity.

Market.

It's it's gone fairly well.

It's been absorbed and vary in most places we've had pricing power to do that relative to our competition, who has had to do the same things I mean, everybody is experiencing this.

There are a couple of products in the portfolio that we maybe went a little too far on price than we might have to pull back on but thats pretty thats pretty typical there in terms of.

But overall in general we've been able to pass on those those.

Those price increases.

Our partners and to consumers.

And.

Let's see I think that I think anything I missed INO no no you've got it.

Okay. Thank you very much.

Sure.

Once again to ask a question Thats Star 1 at this time. Our next question comes from Mark Smith with Lake Street Capital. Please proceed.

Hi, guys first.

If I could please.

The direct backlog.

<unk> significantly at a good level, how do you guys see retail backlog trend in through this quarter.

Well, we said that it was also down versus last quarter down.

And we think thats, good because especially for direct that huge backlog was a big source of consumer dissatisfaction people were waiting months for their products and we were dealing with a lot of phone calls and angry people. So we want to be able to be in stock and ship them to consumers as fast as possible. So this was a very big.

Push for the company and the supply chain to get it.

To be more normal level, you always have a little bit of feast across quarters, but it shouldnt be at the levels that we had when they respond to the pandemic.

And as we look at now more available product.

Indirect as well as in.

At retail how are you see consumer behavior shift our consumers paying more attention now to price than they were previously or are they paying more attention to.

Content, but also muscles of these machines and equipment.

Yes, yes, I was going to say, what we're seeing is they pay attention to the whole experience and what I mean by that is when we do a lot of social social media listening and you can see in some of the.

Groups that we've established in various social media platforms, you literally see people go.

I am looking for a bank.

And should I get this hardware plus this ex disconnected fitness experience or this other hardware plus they're connected fitness experience are may be 1 that's like agnostic and connect to many like our <unk> and IC for so they really are looking at how they go together and where more and more seeing that consumers.

Of that purchase as 1 rather than I buy a hardware piece of equipment and I figure out the digital experience that goes with it and then we've definitely seen as people have been going outside more further cardio as we discussed we sort of saw a drop in cardio and some of that is pulling from retail because the same tube.

When you're on the channel at the same 2 bikes are in direct and retail.

We don't care, which 1 you bye bye from but.

They've been they've been doing a bit of that and then we've really seen kind of recently.

And that strength has been kind of the other way strength is just hugely picked up.

That's still important.

<unk> of the season, and especially because we have so much backlog in people just had that.

Demand that was not actually realized and so thereafter after that stuff and they are building their home gyms I mean, we're seeing a lot of anecdotal evidence that people are building <unk>.

Serious home gyms in a way they werent before we sometimes our industry back in the day was a 1 and done you'd buy a tread and 5 years later, maybe you buy an elliptical.

But people are really.

Especially the 25% Theyre, saying theyre never going back to the gym or repeat buying more often and and they're really bringing up their their home gym its as much as they possibly can so those are kind of some of the trends. We're seeing I'll also say that direct has begun becomes a pick up in the last few weeks I mean, that's pretty new data.

So you don't you.

You don't want to necessarily extrapolate it but that's the big thing that we talked about on previous calls we knew that there would be kind of a down seasonality for per direct and what we call now our first quarter, but we realized that some time in our second quarter, usually later in the second quarter, we'd see that seasonality pick back up as people.

I'm more interested they fall was coming the weather changed a bit we've already seen a bit of that and it could be because of our of our good advertising that I mentioned before but it also could be assigned debt that maybe this is picking up a little bit more earlier than we thought but we are continuing to monitor monitor that and we're hopeful.

Okay and net.

It goes right into my next question just.

The timing of strength following cardio.

Is that the pattern that you've historically seen as people maybe get cardio equipment and then they want to add a new element to their fitness regimen then.

In line with that you guys talked about more than 380000, new customers added in the last 15 months.

If you looked at or do you have any idea of how many of those are kind of new to fitness. If you will versus people, who just shifted from the gym to purely at home to cash.

I don't have that but now you have me intrigued so I'm going to go on a data on this after this meeting because.

I'm not sure I do know that so.

Finally people are changing their their workout habits and many of them not not going back to the gym that I think that's driving a lot of it I do know that where we are now because we are intentional about it we're indexing higher with people, who really enjoy exercise and for whom exercise is very important.

Whereas I think the more typical historical.

Let's say bowflex customer where people that we were really we really had to kind of get off the couch and in the game and motivate them to even exercise and now this new segment a couple of new segments. We're going after really wants their best work out every single day, and it's super important to them in and I think those are those are much better customers I don't think we lose our tradition.

Customers at all.

Still provide them with with that motivation.

But I'm very excited to be able to get skew younger skew more female that's great for our brands.

And for the for the long term part so I think that was the second part of your question what was that about all about the timing of strength I don't.

Nothing comes to mind, there I just think so many.

So many trends this year have been kind of what's available.

That's what's out there what do I have what do I need.

And I think really what we saw this quarter again as people could be outside finally released.

Many of them without masks and getting their cardio.

And but they still needed their strength and their strength equipment and they had been trying and trying and trying as you remember we probably had.

Consistent 6 month waiting list for our dumbbells. So now that those finally come back and people people are ordering them and then our retailers are really.

Really bullish on those for the for the holiday season, as well Theres a lot of straight up deals that they plan to offer and even some bundled deals at many of the at the retailers. So they are a great strength is especially the dumb bells in the select Tech line very nice kind of center.

A very nice component for any sort of retail merchandising scheme that you might want to do and then of course, there's the backlog and the demand for direct which is now cleared.

Perfect and you hit a little bit on my last question here, which is as we look at the retail backlog.

Can you speak to the split of strength versus cardio and the inventory build that we've seen you guys with a lot of this in transit if if that matches that backlog pretty well and then the last piece of that is impact on margins of.

Select tech dumbbells that don't involve some of the chips and expensive components versus new.

New piece of cardio equipment.

Let me try to help you I'll answer the easier ones first from a margin side.

Yes true.

You would think with all the componentry like we would have better margins on say a strength product that doesn't have the chips, but steel has also been a bit of an issue for us So I think.

On the margin I would say, they're all there are similar there's not a big story right now on like in the past quarter on strength versus cargo from a margin perspective for the backlog.

I don't think we're going to be able to kind of really draw a conclusion on that because depending on how the retailers are position of what they're ordering to fill in there their inventory gaps.

<unk> been very much like Jim was saying whatever we had available people are just grabbing them. So that they could really come into the holiday season with a fuller complement of inventories.

I wouldn't even really even in my own analysis draw any conclusions from the backlog.

Okay.

Great. Thank you guys.

Our next question comes from George Kelly with Roth Capital. Please proceed.

Hey, everybody. Thanks for taking thanks for taking hey, Jim Thanks for taking my questions.

So just 2 questions for you the first 1.

On.

The advertising environment.

Mentioned that you started to spend a bit more in the quarter.

And just curious I guess sort of 2 components of this how competitive.

Is it now are you seeing kind of month to month or others and fitness equipment and I guess more broadly is it just becoming more competitive more people starting to buy advertising.

And really what I'm trying to get to is do you think we're going to a place.

Similar to where we were pre COVID-19.

Do you think that.

Industry in general will kind of go back towards spending levels, we used to be or do you think theres been a permanent shift.

Well as we've said and I'll continue to reiterate I mean, we have taken this poll and we.

We talk to former gym goers every week or 2 and for now a year.

I swear this it's just crazy this number never changes is within a point or 2 that 25% of former gym goers are not going back to the gym. So that means they have permanently changed there their habits that COVID-19 went along went around.

Happened long enough so that they changed that and they are not going to the gym anymore and they need their their equipment. So what we believe is yes.

The market expanded maybe even doubled during COVID-19 the size of the market and it is possible probable Navy that we reached some peak and it comes down a bit from the peak, but nowhere near what it was before because this equipment and the experiences around it are.

<unk> Super meaningful in more People's lives and not just like 5% of people, but a big percentage of people that way and then when you think about the new hybrid work model, which.

We're all dealing with when is everybody going back how many days a week are they going back.

I've heard very few companies, where it's 5 days a week going back and that drove a lot of that lot of the habit, so anything around advertising side.

Our convicted.

We have we're convicted that there is a.

A profound permanent impact to to that industry and that we are well positioned with our brands and with our omni channel.

Distribution and are now wider portfolio of products connected fitness products to really drill.

Go after that particular market. So we're quite bullish on that we don't think it's going back to where it was I would say none an indication at all of that we're still producing these these fantastic results.

Really no super inflection going on there in terms of the advertising in the first quarter is a bit more than last year, because anything would have been a bit more than last year.

We spent nothing in that first COVID-19 quarter.

That's why I have said, we shifted actually some of what we were going to spend we did spend in that quarter.

And in a meaningful way and then we also shifted some of what we're going to spend in that quarter to the second quarter because of the Olympics were here and sort of France was here those are really.

The people watching those programs really care about athletics and fitness and.

We had an opportunity to participate in that and we've done that and we.

We've gotten good results from that.

But I guess the final thing I'll say is yeah, I think it's more.

Especially in our industry I mean, if you just look at just sit down for.

In our watch in our program and how often do you see the various competitive some of the competitors that are just in a single modality.

But theres a lot of venture capital out there theres a lot of investment capital out there.

Chasing these companies and 1 of the first things. They do is just spend a lot on advertising they have to build a brand because they didn't have a brand Luckily we had a brand and we're enhancing the brand image.

But some of them are trying to get it off the ground to start with and so it.

It is crowded.

It is difficult to.

To stand out we have shifted away from TV and more to digital which we should've done a while ago, but our modeling tells us thats the right way to reach people and it also is.

It's a little bit easier to standout on somewhat social feed then.

Sometimes you just posted someone seizure 32nd spot.

Thank you at this time I would like to turn the call back over to Mr. Jim Moore for closing comments.

Well. Thank you everyone I appreciate all your time today and look forward to.

Thanks for your support of Nautilus, we look forward to talking to you again in the second quarter and fiscal year earnings call in November I Hope you have a.

Great rest of the day onwards and upwards.

Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.

[music].

Greetings and welcome to Nautilus incorporated first quarter 2022 earnings results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder.

This conference is being recorded I would now like to turn the conference over to your host Mr. John Mills ICR. Thank you you may begin.

Thank you good afternoon, everyone welcome to Nautilus first quarter fiscal 2022 conference calls as previously announced model has changed its fiscal year from the 12 months beginning January 1 and ending December 31 from the 12 months beginning April 1 and ending March 31 to include the primary sickness.

Reason for exercise equipment, and the same fiscal year and to better align with the fiscal year end of retail partners.

Good day analysis reporting financial results for its first quarter of fiscal 2022, ending June 32021.

Participants on the call from Nautilus are Jim Barr, Chief Executive Officer, and Atlantica node 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 are.

Our earnings press release was issued today.

105 PM Pacific time may be downloaded from our website at Nautilus, Inc. Dot com from the Investor Relations Page earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures.

On today's call we have a presentation accompanying the call that management will refer to during their prepared remarks.

And on slide 2 is our full safe Harbor statement, which we asked everyone to read it.

You may access the presentation now by going to Nautilus, Inc. Dot com.

Then click on the Investor tab.

And then click on the events webcast and the presentation, we'll be right there for you.

I'd like to remind everyone that during the conference call Nautilus management may 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 of future performance and therefore, 1 should not place undue reliance on them.

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 web.

And with that my pleasure to turn the call of technology CEO, Mr. Jim Barr.

Thank you John and thank you all for joining us today.

Im excited to speak to you today about our strong growth in earnings driven by long term secular.

Trends towards home fitness and most importantly, our teams strong execution.

I will then shift to an update on the notable progress were making and implementing our long term strategy.

I'll share some perspectives on might now 2 years at Nautilus and I'll finish by reiterating our commitment to invest for the long run.

I'm incredibly proud of our team for achieving in both short term results and progressing in our transformation, which will take nautilus to a place that's never been before.

In the first fiscal quarter, we produced strong growth and profitability exceeding our top line and operating margin guidance.

This was driven by continued robust demand for at home fitness across our portfolio of leading strength and cardio products as.

As well as across our customer touch points with our domestic and international retail partners and online direct segment.

This quarter as a reminder, we are comping the first full quarter that benefited from Covid related tailwind.

<unk> that backdrop I'm delighted to report that net revenue was up 62% to $185 million, representing the highest June quarter, and the fourth highest of any quarter in the company's 35 year history.

Even more impressive excluding octane revenue for the quarter was up 74% year over year.

The direct segment grew 26% in what is traditionally our seasonally lightest quarter when consumers tend to be outside and not as focused on indoor exercise equipment.

The retail segment continues to set records generating its highest ever quarterly sales achieving a record $120 million as we began to load into retail partners earlier for the high season.

This is an early indicator that our expanded stable of retail partners is betting on a robust fitness and holiday season.

In addition, our international channel recorded its second highest quarterly sales up 70% or 102% excluding octane.

The market reception to our new connected fitness offerings is an important driving force behind our continued growth.

This past quarter, we introduced our brands to over 40000, new customers via our website.

Our new customer count to over 380.

For the last 15 months for context, our new customer count averaged about 100000, a year pre pandemic.

The growth in direct customers and our expanding retail universe are fueling membership growth for <unk>.

I'll provide additional detail and journey in a few moments.

Our entire industry, along with countless others continue to face unprecedented and temporary inflationary pressures in raw materials and logistics.