Q2 2022 Nautilus Inc Earnings Call

Greetings, ladies and gentlemen, and welcome to the Nautilus incorporated second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

One require operator assistance. Please press star zero on your telephone keypad is now my pleasure.

It's now my pleasure to introduce your host Mr. John No. Thank you you may begin.

Great. Thank you Jen good afternoon, everyone welcome to Nautilus second quarter of fiscal two conference call.

Participants on the call today from Nautilus are Jim Barr Chief Executive Officer.

<unk> Chief Financial Officer.

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

He will 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, and May be downloaded from our website at <unk> dot.

<unk> com on the Investor Relations page.

The earnings release, including a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures.

Please note unless otherwise stated all comparisons in this call will be again, our results for the comparable period of 2020.

For today's call we have a presentation that management will refer to during their prepared remarks on slide two is our safe Harbor statement, which we asked everyone to read.

You can access the presentation by going to Nautilus, Inc, Dot com and <unk>.

Click on the investor's tab.

And then click on the events and the webcast and the presentation will be there.

I would like to remind everyone that during the conference call <unk> management will make certain forward looking statements.

These forward looking statements are based upon beliefs of management and information currently available to us as of today.

Forward looking statements are not guarantees of future performance and therefore, one should not place undue reliance on them.

Our actual results will be affected by known and unknown risks.

Uncertainties and factors that are beyond our control and ability to predict.

For additional information concerning these factors.

Please refer to the safe Harbor statement and to our SEC filings, which can be found in the Investor Relations section of our website.

And with that it's my pleasure to turn the call over to al.

Jim Barr.

Thank you John and thank you all for joining us.

Today I'll begin with some thoughts on the home fitness market dynamics over the past 18 months.

And the outlook going forward as context, then cover our financial performance in the quarter and the first half next I'll discuss our strong progress on our North star strategy, including journey.

I'll end with our plans to further accelerate our investments in journey and in marketing.

You've heard us talk in detail over the past 18 months about the dramatic expansion in the size of our Sam.

Two to three X by our most recent estimates this kind of industry growth is very rare and underscores our strong opportunity as the number three in market share.

There is strong evidence that much of this market expansion may be permanent.

Because of the principal driver is profound and fundamental secular changes in workout attitudes and habits that favor home fitness.

Our frequent surveys continue to indicate that 25% of former gym goers do not intend to ever go back to the gym.

Others, who say they will return to the gym plan to work out more often at home than they did pre pandemic due to remote or hybrid work models.

Workout place is highly correlated with workplace.

We are seeing these changes in attitudes play out in consumer behavior. For example in a recent study we commissioned 66% of respondents report that they work out at home versus 43% pre pandemic.

Connected fitness and our transformation are still in early innings I am proud to have position Im proud that we have positioned ourselves well during the pandemic for post pandemic success.

We now have a portfolio of new connected products, a strengthened journey digital offering with a growing member base stronger consumer targeting expanded omnichannel distribution and a stronger team. It is remarkable what we have accomplished in the last two years I'll talk more about that a bit later.

Now I will briefly speak to our second quarter and first half financial results and.

In the second fiscal quarter of 2022, net sales were $138 million, which represents nearly 125% growth versus two years ago.

Our net sales were $155 million in the same period last year.

The primary driver of our Miss to guidance was due to global shipping challenges beyond our control that affected the end of quarter cutoff Spa.

Specifically, we would have met our guidance of 145 million to $155 million.

If just a portion of the $22 million of <unk> finished goods inventory.

We had ready and waiting on the dock for retail customers had been picked up.

There are a variety of reasons for the delay in pickup including retailers inability to secure containers in time.

In fact $12 million of the $22 million had shipped by the end of October.

For additional perspective. This was the second strongest September quarter in the past decade for Nautilus.

Alluding octane, our retail segment in the second quarter was up 19% compared to the prior year period and up 175% compared to the same period of two years ago.

The direct channel exceeded our internal goals and was down in the second quarter due to seasonality, which didn't occur last year, but it was up 134% compared to the second quarter two years ago.

International which was which is reported as part of the retail segment continued to achieve very strong year over year and two year growth in the second quarter up 57% and 655% respectively.

As expected gross margin for the second quarter of fiscal year 'twenty two.

Was lower due to abnormal shipping and logistics cost eight points commodities and components and foreign exchange for points and continued investment in journey one point.

The cost pressures related to the global supply chain disruptions are obviously affecting many industries, including ours, while the impact is significant we believe these external margin pressures will normalize over time and when coupled with the expansion of our addressable market will result in improved operating margins for Novelis.

Despite our sales Miss we achieved our adjusted operating margin guidance for the second quarter of low single digits, while increasing our investment in advertising and journey by nearly $8 million versus alloy.

Especially given the atypical.

Retail seasonality patterns, we have seen it is important to also discuss the first half of the year in aggregate.

For the first half net sales were $323 million.

A 28% comp to LOI and a 215% comp two L. L y excluding octane.

Keep in mind 2022 is comping against the pandemic sales in 2021. So we are quite pleased with our first six months performance.

And in fact, this first half ranks as the best comparable period and Novelis history.

For the first half adjusted operating income was $22 million or 7%.

Moving on to our progress on our North Star strategy.

During our Investor day in March when we laid out our long term vision and strategic plan Northstar.

One of the areas, we highlighted was our supply chain.

We have made great pride strides by working down backlog, improving our inventory position relative to last year and opening a new DC to alleviate the widely known supply issues affecting global shipping.

We are proud to have built and shipped the inventory to meet consumer demand without the disappointment of last year's long waves.

We have overcome shipping issues and will not be among those sellers with empty shelves. This holiday season.

Even with the successful investments, we expect gross margins to continue to be under pressure as global supply chain disruptions continue to persist.

We continue to address unprecedented challenges such as container availability cost of shipping and storing inventory.

<unk> commodity costs availability and spot prices of electronic components.

And delayed retailer <unk> pickups.

While we have developed a much stronger and more agile supply chain. Thanks to disciplined execution on our North Star strategic plan.

Next I would like to turn to innovation.

This quarter, we announced and completed the acquisition of way a leader in motion and vision technology.

This acquisition directly supports our aim to accelerate our software development capabilities and add new and innovative features Thats journey platform moving us closer to our vision for journey as Youre highly personalized one on one fitness coach.

Waste proprietary technology enables computers to understand human motion using cameras on its computer vision software analyzes movements and provides real time individualized feedback and coaching on exercise.

<unk> has a particular unique strength and using cameras found on todays mobile devices, such as smartphones and tablets wave.

<unk> existing partners include Microsoft in Eth Zurich, one of the top science and technology universities in the world.

We plan to integrate ways motion tracking capabilities into journey to further advance and accelerate our highly personalized workout experiences, including automatic rep counting and form coaching.

Our initial focus will be on strength training and off product workouts, such as body weight yoga and floor exercises.

We are excited to have increased our software capabilities through this tuck in acquisition and plan to incorporate the first set of features from way into the journey experience during our fiscal 'twenty to fourth quarter.

Over the past year, we've made tremendous advancements with journey and are seeing very strong adoption and tremendous growth in journey members. We are excited about the value and the experience that journey provides.

It is focused on the individual.

It provides a greater variety of choices of equipment and ways to work out than competitors.

We have added classes of course, but journey brings what we call entertainment beyond the class.

And we provide all of this at a great value typically one half to one third the price of our competition.

Just last week, we announced that journey now includes strength video workouts for Bowflex <unk> 505 to $2 90 dumbbells.

Select Tech is one of our strongest selling offerings and this is our first entry into strength training with journey.

The new updated digital platform now includes a video library of instructor led strength workouts for these bowflex <unk> dumbbells in the near future. We will also be adding strength workout specific for the Bowflex <unk> hundred 40, kettlebell and the Bowflex <unk> 2080 barbell.

We also announced that for a limited time.

New journey members are eligible to receive a 12 months complementary trial membership. This marks the latest step to make the journey experience available to more consumers, whether they are using cardio or strength equipment or both.

Really consumers could not easily experienced journey without owning one of our connected cardio products. We are excited to expose the journey experience to a much broader audience.

We were also excited to announce last week, our latest connected cardio product.

The new connected Bowflex Max totals 16.

The new Max offers a 16 inch HD touch screen and integration with the journey digital fitness platform. So users users stay engaged and motivated during high calorie burn interval workouts.

<unk> totaled 16 machine blends the low impact of an elliptical and the high intensity of a stepper to offer a short high intensity interval workouts and a compact design.

The initial reception of our journey powered Max machines has been phenomenal and we're excited about how we have improved upon this industry leading product unique to bowflex.

We have increased.

<unk> content.

Adding over 100 explore the world immersive experiences and have released.

Hundreds of new trainer led videos during the first half of the fiscal year 2002.

We have done so with our own first party content and through partners such as fit on.

We also launched journey Dot com, a new web based consumer portal to better highlight journey platforms features and benefits as well as helping members more easily manage their journey accounts without calling customer service.

The team and I are delighted with our execution and progress in connected fitness via our new equipment and the journey platform and we're only just beginning.

All of this progress in the last few months has led to very strong membership growth and lower <unk> lowered our churn significantly.

While it is early our growth is extremely promising I am pleased to report that our current member count is approximately 200000 more than three times.

The year ago period, when we had about 65000 members.

And this incredible growth as before the holiday season, before our new product introductions journey enhancements and special limited time trial offers that I just discussed.

As planned and our Northstar plant, we have stood up and are building a highly profitable digital business on top of a successful equipment business.

The consumer experience on our equipment is enhanced by our digital offerings and our digital business is fueled by the economics of the equipment business.

We have been working tirelessly to make journey, a leading fitness service that matches, our incredible lineup of equipment.

Our digital connected subscription services driving the future of Nautilus and the execution and results of our North star strategy have exceeded our expectations to date.

I am delighted that we are even further along in our long term transformation than we expected on Investor day in March.

This progress ultimately will enable us to have more predictable growth and higher profitability that will generate attractive long term returns.

There remain challenges to overcome such as post COVID-19 recovery driven margin pressure from inflation in transportation costs, which had been more severe than anyone expected in fact 12 points in Q2.

In the first half of our fiscal year, we were proud to have overcome these challenges stayed committed to north star investments and still remain profitable. It was an incredible accomplishment to do at all.

As we look at the second half we assumed that these margin challenges, while temporary will likely persist for the remainder of our fiscal year.

This led us to an important decision point do.

Do we choose to remain profitable by pausing or reducing our north star strategy investments.

Or do we capitalize on our progress and continued to invest with confidence using our balance sheet.

With this choice our board and management team have made the strategic decision to not only stay committed to northstar, but to accelerate our investment in the second half of the year.

We are choosing progress towards our long term goals over short term profit maximization spa.

Specifically, we are increasing our second half forecasted opex spend by 12% to $14 million in journey versus L y.

And marketing as a percentage of sales will increase by 9% to 11 points versus last year.

This will permit us to grow to more quickly grow our membership base and transition to a higher gross margin business earlier than originally laid out in our Investor day.

Additionally, we have improved our liquidity by increasing our line of credit to $100 million.

This allowed us to deploy cash for tuck in acquisitions like way gave us working capital to invest in inventory and importantly gives us room to accelerate our long term investments.

We also expect that this near term investment will enable our journey digital platform business to be accretive sooner than previously expected.

I know, we'll be providing specific 2022 guidance during her remarks.

And will include a waterfall of margins to show, where we are investing.

We also expect margins decline each year from 2023 to 2026 and beyond.

Simply put we are leveraging our profitable equipment business to build digital faster due to strong results. We are unified in our confidence that this is the best approach for our company and for our shareholders.

I'll now turn it over to INR, who will give us more detail on our second quarter financials and guidance for the rest of the year, China, Thanks, Jim and good afternoon, everyone.

Today I'll talk to results for Q2 in the first half of fiscal year 'twenty, two and we will provide guidance for the second half.

I'll start with slide 11 of the presentation total company P&L results for Q2, 'twenty two with comparisons to the same quarter last year.

Net sales were $138 million down 11% to <unk> on a GAAP basis.

Excluding octane were down 5% and up 150% to our outline.

Sales declined year over year, primarily direct return to normal seasonality and global logistics challenges in retail.

As Jim mentioned earlier, we had over $22 million of <unk> orders ready for pickup that didn't make the cut off.

Unfortunately, our sales guidance range was wide enough to accommodate this level of disruption.

Gross profit was 42 million and gross margins were 35 down 13 points from L y eight.

<unk> eight points of the decline is due to logistics four points due to raw materials components, and FX and one point related to increased journey investment.

Turning to operating expenses.

This year, we booked a $5 million settlement related to a class action lawsuit and incurred $1 million in acquisition cost per way.

Last year, we took $8 million of gain on disposal group related to octane.

Given these unusual costs, we believe it's better to look at our operating results on an adjusted basis.

Please see our press release for a reconciliation to GAAP.

Adjusted operating expenses were $39 million or 20% of sales versus last year's $32 million or 12% of sales.

Selling and marketing expenses were $22 million or 16% of sales up $3 million to last year driven by higher advertising.

Our adjusted G&A expenses were $11 million or 8% of sales up $2 million to ally, primarily driven by increased investments in journey.

R&D was $6 million or 4% of sales up 1 million compared to ally again, driven by increased costs related to Germany.

In fiscal Q2 advertising was $12 million in journey Opex was $5 million.

Adjusted operating income was $4 million and adjusted operating margins for 3% in line with guidance of low single digit.

Our presentation includes a waterfall chart on page 13 that describes the year over year change in operating margins.

The biggest driver is lower gross margins, followed by increased advertising and investments in Germany.

Adjusted income from continuing ops was $1 million with <unk> per diluted share versus last year's 28 million or <unk> 87 per diluted share.

Adjusted EBITDA from continuing ops was $7 million or 5% compared to last year's $38 million or 25%.

Please refer to our press release and the presentation accompanying this call for more information on segment performance for the periods three months and six months ending September.

Let me now turn to slide 15 for results for the first half which is the six months ended September 32021, compared to the same period last year.

Net sales were $323 million up 20% on a GAAP basis.

Excluding octane sales were up 28% versus ally and up 215% versus our outline.

Driven by strong growth in retail.

Gross profit was 98 million and gross margins were 30% down 13 points versus last year.

The decrease was primarily due to increased logistics seven points raw materials components, and FX five points and one point related to increased investments in journey.

The following statements for the first half exclude the impact of this year's legal settlement and acquisition costs and last year's Boston disposal group.

Adjusted Opex was $76 million or 24% of sales versus last year's $58 million or 21% of sales.

The $18 million increase was essentially driven by $12 million more in advertising and 6 million learning journey.

When we saw direct begin to return to seasonality in Q1, the equipment side of our business worked hard to keep costs flat to LOI. Despite higher unit sales this year, while continuing to advance store star.

First half advertising spend was $23 million and first half journey Opex was $8 million.

Yes.

Adjusted operating income was $22 million or 7% compared to last year's $58 million or 21% drill.

Driven by lower gross margins and higher Opex.

Please see slide 17 in the presentation for a waterfall chart for the year.

Year over year changes.

Similar to Q2 of the largest driver of the decline of supply chain related followed by increased investments in advertising and journey, partially offset by operational improvements as the organization work to keep costs in line with lower sales.

Adjusted income from continuing ops was 15 million or <unk> 46 per diluted share compared to $45 million or $1 40 per diluted share.

Adjusted EBITDA from continuing ops was $28 million or 9% compared to $64 million or 24% of net sales.

Turning now to the balance sheet as of September 30.

Cash was $22 million and inventory was $163 million with about 40% in transit as of 930 compared to $68 million at year end.

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 peak seasonal demand.

Our inventory is concentrated in our best selling products.

We are incurring incremental storage and transportation fees to position us well for holiday.

<unk> was mostly flat at $89 million and trade payables were $115 million versus 99 million or $3 31.

Merely due to the timing of payments for inventory.

That was $17 million versus $13 million at year end, and we had $49 million available for borrowing in our facility.

On October 29, we amended our facility, increasing our revolver size from $55 million to $100 million and extending the maturity date to October 29 2026.

On a pro forma basis, using our new expanded facility.

He would've had $94 million available for borrowing at 930.

Turning now to our expectations for the rest of the year.

As Jim highlighted we're pleased with the progress, we're making on our star and the solid momentum in our Germany business.

We now have 200000 members engagement is growing China's declining in our path to bringing joining to scale has become clear as we gain new capabilities for our recent acquisition and content partnerships.

Certain aspects of our environment are challenging.

Nearly every other business, we're experiencing near term external pressures on gross margins, which worsened in Q2 versus Q1.

While we're really proud that we were able to overcome the majority of the pressure in the first half we don't believe that putting our future on hold for near term results is the best way to deliver long term shareholder value.

Our board the management team and our employees have strong conviction that the path to sustainable profitable growth is through having a high margin subscription business to complement our enduring equipment business.

They will do that.

We will do that by capturing greater share of the connected fitness market by improving enhancing the journey platform and we will be investing in that.

Now share expectations for the second half of fiscal year 'twenty, two six months ending March 2022.

Please follow along starting on slide 20 of the presentation at the slides.

The waterfall that we think will be helpful. In understanding the changes in operating margins.

We expect sales to be between 290, and $320 million, which represents growth versus L. L y of between 47% and 62%.

Or a two year CAGR of 21% to 27%.

Versus the six months ending March 2020.

This sales guidance reflects our plan to continue bundling 12 months or any trials with cardio equipment sales.

We will be deferring the journey portion of the bundled sale revenue amortizing and lumpy for the subsequent 12 months.

Our expected deferred revenue of $6 7 million, we've reduced sales and negatively impact gross margins in the second half by 2% to three points.

We expect the same macro supply chain headwinds to continue in the second half negatively impacting gross margins by 12 points.

We continue to increase our investment in journey in second half <unk>.

It could have chosen to pull back on spend in the second half.

But our future on hold and deliver operating income into low single digits, but actually told us during investor day, we will always lean more towards protecting the long term prosperity of the company versus achieving near term profits.

Therefore for the second half of the year, we expect operating loss margins in the mid teens and adjusted EBITDA margins in the low teens.

We continue to expect capex to be between 12 and $14 million for the full year with the majority earmark for journey and lastly, we now expect journey members to be between 250000 350000 by the end of fiscal 2002.

Looking beyond fiscal 2002 and into physical 23.

See a path to adjusted EBITDA profitability.

Pacifically.

We anticipate year over year gross margin expansion, driven by a stabilization and the logistics environment.

We will also begin to recognize that accretive impact of our higher margin digital subscription business as we add members and leverage are growing scale.

This will enable us to achieve gross margins in the low 30% on the blended basis for the full year.

As a result, we expect to be adjusted EBITDA profitable for the full fiscal 23.

One final comment on our long term expectations by.

By accelerating our investments into journey, we now expect to achieve mid teen operating margins by fiscal year and 25, one year earlier than we initially modeled with fiscal year and 26, delivering operating margins in the high teens.

In closing.

Liquidity position as strong we've invested our cash in our best performing inventory and we have an expanded 100 million credit line.

We are well prepared for the upcoming fitness season, with a robust inventory position strong digital offering well funded marketing leading equipment connectivity and a team passionate about our vision of creating a healthier world one person at a time now.

Now I'd like to turn it over back to Jim for his final comment.

Thank you Rhonda before we go to questions I would like to briefly take stock in our progress over the past two years.

Faced with a favorable market dynamic reacted decisively to set a new strategy and execute against it.

Our progress to date is undeniable.

I would like to give just a few examples.

In 2019, we had only one connected product in our portfolio until December and no meaningful installed base for a subscription business now.

Now we have a complete portfolio of connected fitness cardio machines unified by the journey membership platform an ecosystem.

Our installed base kicked up in late 2019 with the launch of two new bikes, but we did not have much scale and connected cardio units sold by contrast in just the last year, we have sold more than four times. The number of connected cardio units 2019 rapidly growing our installed base of journey powered units.

The Max trainer are most important than proprietary product was in a multiyear decline in 2019.

This quarter I am delighted to report that the new connected Max connected fitness and nine Max trainer now revitalized with journey was number one in dollar sales and direct.

Two years ago, we were mostly a mechanical engineering company with about a dozen developers and software UX ftes.

Today, we continue our legacy with strong equipment, but we have 160 people engaged in software development.

This fundamental change in our business towards connected fitness has already yielded Chen tangible results journey had 14000 members at the end of 2019 today as we've said we have approximately 200000 and are on our way to achieving our first year goal and accelerating towards our 2 million member goal.

Journey has been built on consumer insight and we are improving in every quarter with accelerated investment.

We are inspired by our mission to be a leader and individualized connected fitness.

Two years ago, we had no meaningful consumer segmentation, our products and marketing appeal more to consumers, who didn't like working out and.

And we were not driving a significant number of new customers to our brands.

Today, we are relentlessly focused on high value targets, who prioritize fitness day in and day out and are highly correlated with gym goers displaced during the pandemic.

As a result, we added over 400000, new customers to our brands.

Versus a typical year of adding 100000.

We also are recalibrating, the bowflex brand to ensure we resonate equally with men and women and to bring our younger cohorts, who thrive on connected fitness and we will and will appreciate the variety of the challenge that our journey platform offers.

In 2019, we were still not fully committed to omnichannel today, we are passionate about letting our consumer shop, when where and how they won I'm really proud of the way, we are invigorated and strengthened or retail segment more than doubling our number of retail doors and radically diversifying our retailer base.

We were shrinking in survival mode in 2019 in need of a turnaround greater liquidity and a clear strategic direction.

Since then we have more than doubled our revenue and strengthened our capital structure, which gives us the confidence to continue to invest in the future and an inspiring on point and very focused strategy norstar that we will that we believe will deliver more consistent more predictable growth based on a balanced equipment portfolio and a growing recurring revenue base.

And levels of profitability not achieved in our history.

We have also built a world class team and strengthened our digital talent.

Our market opportunity has grown tremendously the U S home fitness market size appears to have doubled or tripled after 2019 base due to important changes in habits and trends favoring home fitness.

The progress our company have made over the last two years is incredible and gives us strong confidence that our outlook for the future has never been stronger is with this confidence that we stay committed to our norstar strategy and are investing for the future.

I want to thank all our leaders employees suppliers distributors and retail partners. You are incredible efforts are not only transforming our company, but changing consumers lives by empowering healthier living through an device individualized connected fitness experiences.

I would now like to turn it over to questions operator.

Thank you, ladies and gentlemen, I will now be conducting a question and answer session.

If you would like to ask a question. Please press star 190 telephone keypad.

A confirmation Homo indicate your lines in your question Q you May press star two if you'd like to remove your questions from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star keys, one moment, please the lethal for questions.

Our first question comes from the line has been dire with Craig Hallum.

Please proceed with your question.

Thanks for taking my question good afternoon everybody.

On a couple of questions on journey. Some some encouraging early signs there I guess a two part question. There one if we go through you're willing to share able to share everything with your sort of seeing that's better than expectations are you seeing sort of more subscribers are you seeing more associated sort of members or accounts are most subscriptions.

Everything there I guess would be torture seeing will be the first one the second one.

Would be the increased journey spend.

Is the sort of <unk> to the extent you can sort of talk about that is accelerating sperm that otherwise would have been mixed.

Next year or are you just are you ramping up sort of marketing going on what's going on in the marketplace of foods to stay relevant in front of mine.

And then I have one more fix sure no. Thank you for your question Steve.

Good good questions, yes. So.

The short answer is everything on journey seems to be going better than we expected specifically, we did call out the the member number.

That's going faster and as I mentioned, it's it's kind of pre fitness season and free.

Pre some special offers to get this out there we've disconnected journey from the.

From the cardio equipment, so more people can experience. It I guess, that's one is just a membership the churn is down we're not providing it yet as you know we're committed to providing a set of metrics on an ongoing basis, beginning beginning with our fourth quarter call. When we said it would be it would be material. So we will continue to do that.

Engagement is quite high.

And by that I mean, the number of hours.

Workouts per user are going up.

Attachment is is up so that's the.

The people who are eligible to use journey, how many of them are actually using it so all of those things.

Give us really.

A lot of a lot of confidence that.

That we are we are ahead of schedule on many of these things and hence we've sort of changed our goals as well.

And are more aggressively moving towards towards our long term goals and.

Handed to I know him to spend questions. So you had two questions on the stand first about journey and yet it's an acceleration of spend we thought we'd be doing a little bit later, but we thought given that momentum and the proof points that we could accelerated you asked about marketing. So yes, we're increasing marketing percentage of sale.

And that's in a combination of we now have a great set of connected products and experiences. We went to tell consumers about and we we do want to be a little bit more competitive and just share a voice in the back half of the year and as we said about the brand advertising as well we think a portion of this investment is durable right and we talked about the <unk>.

Fact that we have the Bowflex brand that is kind of top of the market in terms of recognition relative to our closest competitors. So people know the brand, but the brand when we talk about the brand it sometimes.

<unk>.

The idea of the Rod gym, and we want people to be thinking about more modern views of our of our brand.

Related to journey and digital experiences and things like that so we will be spending on that so that we move the brand to where we want to move it.

So it's very helpful.

Just a couple of quick ones.

I think you would torchbearer kaczur assure analysts day about staying profitable through through all of this and paying as you go out here and so that was the term used a couple of times the decision to swing.

Megabits or unprofitable in the next two quarters is.

Primarily a function of accelerating journey or is that also sort of some of these other cost headwinds are just bigger than you anticipated at the time.

Yeah, it's a combination of really both those things.

Are strong progress is a big part of it. So when you are doing well you go hey can we get there faster and you challenge yourself to do that but to be totally honest. It's these 12 points of of margin compression. When we started out of that pay as you go and we thought we could do it all.

We thought we had such a.

A strong.

Tailwind there that we'd be able to overcome all of those.

Especially the landed product costs.

About seven points. So we thought we could overcome all of that.

And still invest in journey, but then by the time, we got to the to the second half and we looked at it and we were really looking at the logistics problems getting worse throughout the first half and sort of peaking in the second quarter and then we have the anniversary that for the entire back half and that's just too much to overcome when you look at it that.

Way. So then we were really faced with that choice and we just really wanted to put investors in our in our framework there.

We literally said hey look we can.

Breakeven, but is that the right thing for the business, we would have to actually slow things down which slowdown some hiring we'd slowdown journey development, we wouldn't market as much and we could deliver a profitable second half, but that did not seem right.

What you're seeing in the market is.

Nobody's really going for a profit motive.

Growth is more important membership growth is more important.

And we saw way to really accelerate towards that much faster. So that's why we made the decision. We did want to kind of put put you all in our mindset. We are 100% confident that is the right decision alright, I mean, we do not we didn't come here.

He came here to change the company in this direction, we have a tremendous opportunity to do that we have a balance sheet that supports it and we're in we're going for it and you think that's the right way to go some investors might want the short term profit but.

We want the investors that are here for the long term because of the long term is just a beautiful thing.

Got it thank you for the color I appreciate it.

Sure.

Thank you.

Ladies and gentlemen, our next question comes from the line of Mike Swartz with Trust Securities. Please proceed with your question.

Good evening guys.

First question I guess, how do you think about customer acquisition costs in the current environment.

And I guess, where do we expect that to level out and really start to see some some benefits.

Over the next couple of years.

Yeah, I mean, obviously direct businesses that are challenged with.

Cost of customer acquisition.

I was trying to get at that a little bit in my in my script and my talk because we're actually if we were if we were trying to acquire journey members.

Without an equipment business that would be that would be brutal right that the cost of cost customer acquisition in a purely digital business.

It would be very very tough the way we look at it and we described a little bit of this at at Investor day, but still the way. We think about it is we are leveraging our equipment business by selling the equipment at the margins that we're selling selling them, we acquire customers and then those customers attached journey and you will see in our advertising over time.

That journey will go from being.

Having a cameo appearance in our advertising to costar to being the star over time, that's what that's how will it will it will roll and and we're really leveraging that that customer cost of customer acquisition for it.

Highly profitable.

Piece of equipment to acquire customers. This way and then of course, we're doing we're doing these free trials as well and we were.

We're doing free trials on the select tech stuff. So you can go back to previous customers and acquiring previous customers for journey much easier thing you have their email addresses you just send them a note, saying hey, we've got a great way for you to use your select text that you've been waiting for we probably should have had it earlier, but we have it now.

Why don't you come try it and then that product gets better over time.

We talked about the way acquisition rep counting for coaching and things like that on that so that's the way we think about it and it's still a challenge for all these businesses that have that have a direct component, but as I said, we we are really running.

Rent a nice place, where we have this digital business and this physical equipment business.

Oh.

Great. Thanks for the color and the second question just on I think you've you've provided some longer term margin targets and it sounds like you're moving them. One one year ahead of maybe when you previously thought you would.

Generate.

Target margins, so I guess or is this purely just a function of journey preceding faster than expected or are you changing any of the margin targets that you gave before and specifically I think you said subscription margins run closer to 2025% is that still the right way to think of.

About that.

Yeah I mean, we're thank you two ways, we are thinking about it earlier and accelerating it and we also.

Gotten to see how the early economics of worked out on our subscription business. We think will have elevated margins and anything to add to that now when we were working it through at the beginning of the year.

Hadn't inked a lot of these contracts that we now have so we have a lot more clarity and we've acquired you know our first tuck in and and see that underlying cost structure and it's.

Favorable to what we were thinking and then the economics are are improving faster than we had initially modeled.

Okay. That's helpful.

One.

Final question for me I think you said the 200000 subscribers at the end of the quarter.

Can you provide any context of color on how many of those are paying.

Subscribers.

Just a corrective reset members, which has a different definition than subscribers and right alright, Yeah. No problem, we'll we'll demystify this over time, but as we said where we are actually providing a lot more about our subscription business that we plan to do our commitment is.

By the fourth quarter of this year when we report fourth quarter that will have a set of metrics that you can look at for our subscription business that'll be robust enough for you to really look at the health of that business until then where we are providing selective information.

We focused on this this member amount, we're not saying what this churn is but I am happy that it's really it's coming down as we work on quality as we get our analytics better as we get our journey Dot com stood up as we build more content as we add new features that's coming down so.

That's that's it and so will stay committed to giving you a robust set of metrics.

In the time frame that we promise, but we're we're kind of leaking it a little bit early in the part of the reason for that is we want people to understand why we're making this decision to invest further into journey.

Okay Gotcha. Thanks for.

Sure. Thanks, Mike.

Thank you. Our next question comes from the line.

Sharon Nexia with William Blair. Please proceed with your question.

Hi, it's Mark Curtis on for sure actually thanks for taking my question.

First question is on the product pipeline.

You recently out of the Max total 16 I was just wondering.

How many more product introductions you have scheduled.

For this fiscal year and roughly one those are expensive expected to launch.

Yeah, I mean, we don't provide our complete roadmap for competitive reasons.

They seem to just pop up you've seen our competitors doing the same thing. So we don't we don't warn people off our total roadmap, but we did the end nine recently the nine inch screen on the Max Max trainer and then 16 are new.

Max Max total as you as you alluded to last.

Last week I talked about the B Y O D strength product and journey. So basically it's not a new physical product, but it's a new way to use our physical products. So you can buy the dumbbell and the training together or if you have the dumbbell you can just get the training attitude added to your account going forward and you'll be able to try it. So that's a big that's a big thing and then like I said.

The way acquisition, we're going to continue building more features into that will help you with those workouts. So that's kind of arc. The early part of strength and we said and the call that that part is is coming in in the fourth quarter of this year beyond that we're we're not commenting but I will say we have a robust.

Pipeline of strength products now we've kind of worked our way all the way through the cardio line and modernize that and now we're focused on strength, which for Bowflex is really what the brand stands for so we're very excited about several products. We are in the pipeline, but I am not at Liberty to talk about them in detail right now.

Okay understood and then on the margin pressure you're expected to see you're expecting to see the second half of the year could you just hopeless flow.

What quarter.

Pressure would be more weird too.

Would be more pre holidays, but.

I'm just wondering if that's the case or if it's going to be more.

Spread out.

That's a great question, so let's start with the supply chain that'll be more evenly spread out.

Same thing with the fixed investments and journeyed like our path.

We're building like an infrastructure for that it's the advertising that I think will be movable and.

I am how can I can't give any more harder than what I have now for the back half because we really minor preserve our agility and we will deploy that.

That marketing firepower and the appropriate moment to like really drive membership growth and people to our website into our retail partners stores. So they can buy the equipment.

Okay understood. Thanks, very much and good luck during the holidays.

Thank you ma'am.

Thank you.

Our next question comes from the line of George Kelly with Roth Capital Partners. Please proceed with your question.

Everybody. Thanks for taking my questions.

So maybe to start with here.

Your comments on 2023, so I was curious if you could.

Bridge.

It's the second half of this year is I think it's 10% to 12% Meg.

Negative EBITDA margin can you help <unk> securities to get most of the day.

Margin to get to profitable EBITDA.

Stern Grove. It. So what else is is is implied in that and then also.

Kind of similar question, but what.

What about sales growth do you expect to hit positive sales growth at any point next year.

Great question, So I'll start with the margins the big driver of our path back to profitability really is.

Expansion or the evening of the head and gross margin specific to logistics.

We're all very clear path on how some of these things will moderate most importantly, b as we are work down our inventory and sell the inventory that we brought in early we won't need as much of the storage and extra transportation constantly are incurring. This this back half <unk>.

Secondarily.

We began already the negotiations for a larger portion of our containers being under a fixed contract rather than being on the spot market.

And then lastly, it's a small piece, but we're really pleased that journey will actually begin to help us on the gross margin line next year. So excited for that to be helping us. So those are really the big drivers of us getting back to adjusted EBITDA profitability and physical 23.

And then I.

Don't know if you want to comment but can you talk about your.

Your expectation on revenue growth for next year.

I think it's similar to everybody right.

We always planned and we talked about this during investor date that if there is a pandemic high it would likely moderate and there'd be some sort of settling down again, not settling back down to where it less than 2019 that settling down and not continuing to grow at this frenetic pace.

Sure.

Like similar to other people trying to figure out is that now is that going to go on for a few more quarters. So our assumptions.

Are putting by to get to that adjusted EBITDA profitability, roughly either model a slight decline, maybe a slight increase but I'm not I'm not counting on massive sales growth to deliver the profitability.

And then I'll just I'll just reiterate what I said about the market. That's why I really wanted to start this whole talk today with what we're seeing in the market and we just really believe in the strong secular changes in towards home home fitness It doesn't tell us where it's going to peek in and what it comes down to but it's it's.

Not coming down to anywhere near where it was a sign of said, we see we see that and we see it not only in attitudes, but we see it an actual actual workout habits that we're monitoring and then connected fitness. That's the other reason to believe as well as.

That is just in its early innings I am we are just.

So many people found connected fitness during the pandemic, but not everybody is delivering great against that and it's all very early relative to what we all think we can deliver.

For consumers. So I think no matter, what you think the industry dynamics are and even if it does.

Crest and work its way down a little bit the whole idea of connected fitness I think of another add on top of that so.

We're feeling very strong about that obviously takes a crystal ball to know for sure.

The other thing that is really tough is cut offs right. We just talked about we just got we just got killed with this.

With this September 30th cut off where we had enough to easily meet our our guidance there. So on the sales side, but it didn't happen so.

That hold us back a little bit, especially when we're talking about next year already so.

So we are providing the first half here and then as we get closer we'll let you know what we think about 2023 is things at work themselves out.

I guess another thing I'll, just say is it like the reason we changed our fiscal year honestly was so that we could take stock in the fitness season, and how the results when before per trying to predict the next year and at the core of your question is exactly that so we're just about just before black.

Black Friday is when we start seeing seasonal pickup in both retail and the direct business. So we're kind of weeks away from knowing how that's going to begin and then where a fitness season away from knowing how it's going to actually play out so hopefully that makes sense.