Nautilus [NLS] Conference call transcript for 2021 q4
2022-02-09 21:56:03
Fiscal: 2022 q3
Operator: Greetings, ladies and gentlemen, and welcome to the Nautilus Incorporated Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. It is now my pleasure to introduce your host, Mr. John Mills. Thank you. You may begin.
John Mills: Thank you. Good afternoon, everyone. Welcome to Nautilus's Third Quarter Earnings 2022 conference call. Participants on the call today from Nautilus are Jim Barr, Chief Executive Officer, and Aina Konold, Chief Financial Officer. Please note this call is being webcast and will be available for replay for the next 14 days. We will be happy to take your questions at the conclusion of our prepared remarks. Our earnings press release was issued today at 1:05 PM Pacific Time, and may be downloaded from our website at nautilusinc.com on the Investor Relations page. The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2020. For today's call, we have a presentation that management will refer to during their prepared remarks. On Slide 2 is our full safe harbor statement, which we ask everyone to read. You can access the presentation by going to nautilusinc.com, then click on the Investor tab, and then click on the Events and Webcasts and the presentation will be there. I would like to remind everyone that during this conference call, Nautilus management will make certain forward-looking statements. These forward-looking statements are based on the beliefs of management and information currently available to us as of today. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control and ability to predict. For additional information concerning these factors, please refer to the safe harbor statement and to our SEC filings, which can be found in the Investor Relations section of our website. And with that, it is my pleasure to turn the call over to CEO Jim Barr.
Jim Barr: Thank you, John. And thank you all for joining us. Before I discuss our quarterly results, I'll begin with a look at the home fitness industry, the market dynamics at play, and our positioning within the industry. The at-home fitness industry has been in the news quite a bit recently, largely due to two issues, speculation about long-term demand and challenges some of our competitors are currently facing. Here's our take on the market and Nautilus's positioning. First, we are confident that the at-home fitness industry has grown rapidly over the last two years. And that the overall opportunity will remain significantly elevated for the long run. Second, we were not surprised that the industry seems to have regulated from its peak and is trending to a new normal level. It's been impossible to be 100% correct in our planning and decisioning at each stage of the pandemic, but we believe we have generally read the market well and have managed our business with disciplined execution through all phases of the pandemic. Third, we have a long-term strategy and a positioning that's quite different from others. And over the past two years, we built a stronger team with new capabilities to tackle emerging opportunities and challenges. And then finally, as a result, we are emerging as a much stronger company than pre -pandemic. I'll now give you some flavor on each of these statements. Since the outset of the pandemic, there has been a renewed focus on health and overall well-being, and on a larger level, people have gravitated towards well-known brands with strong value propositions. Nautilus fits squarely at the intersection of both these tailwinds. At the center of health and well-being is home fitness, and the market has so far behaved largely as we expected. The market size more than doubled over the past two years is regulating from its peak with more normal seasonality and will settle at a new normal significantly above pre -pandemic levels, based on profound evolution in consumer's habits. We've been telling you for several quarters that our surveying shows that about 25% of former gym goers say they do not ever intend to return to the gym. That fixture -- that figure actually ticked up to 29% during our third quarter and has held remarkably steady now for 18 months. Those attitudes manifested themselves in the formation of new long-term habits that favor at-home fitness. Pre -pandemic, about 40% of people for whom fitness was important worked out at home. Nearly two years later, that number is close to 70% and is holding steady. The evolution of the work model to working from home or a hybrid model is also a long-term driver of home fitness. Another important catalyst for the change in workout habits is the digital transformation that has been occurring over the past few years in home fitness and was accelerated by the pandemic. More people discovered that connected fitness not only can bring home many of the benefits of the gym, but the variety of programming such as in JRNY, fights boredom and keeps them at their fitness routine for longer. As a result of these changed habits and sediments, we continue to believe much of the industry growth opportunity will remain at elevated levels relative to pre -pandemic. This results in stronger opportunity for our industry and for Nautilus. In the face of unprecedented challenges and uncertainty over the past two years, I'm proud of how we've managed our business through disciplined execution. Some examples include inventory management, SKU rationalization, and regulating expense growth. We have stayed true to our asset-light manufacturing model. We built inventories then regulated our orders once we were ready for fitness season, but have not needed to close facilities or cease production. We are in fact now reordering for the first half of fiscal 2023. We focused on fewer skews that are largely our best sellers and worked down that inventory during the third quarter as planned. Utilizing our strong culture, noble mission, and a focus on improving the employee experience, we continue to attract and retain strong talent even though the so -- even through the so-called great resignation. We have stayed true to our most important areas of strategic investment, such as JRNY and the Bowflex brand, but have regulated our other expenses such as G&A until we see where demand normalizes. Just under a year ago, we shared our new long-term strategic plan, our North Star plan. Our strategy differs from other competitors and is built on our key strengths: well-respected brand, a portfolio of products that include multiple modalities and price points, making them more attainable, and broad multi-channel distribution. Our strategy adds greater consumer centricity, a new target consumer, consumer, modernization of our Bowflex brand, and an enhanced team with expanded long-term capabilities. It also improves and scales our differentiated JRNY platform offering. JRNY focuses on being your overall personal trainer, offering a variety of ways to work out on and off our products versus tilting towards any single use case, such as predominantly one modality or trainer-led classes. JRNY is also more affordable. We're focused on investing in our company for the long-term and have continued to keep our foot on the accelerator through our investments in JRNY, our brands, and our digital transformation. Our commitment to our strategy continues to strengthen as we began to see our strategic investments succeed. Our board and our management team are united in maintaining our key investments as we continue to balance the long-term and the short-term. We have also progressed during the pandemic by building enduring assets for the long term, including launching a complete suite of new multi-modality connected-fitness cardio products, including innovative bikes, treads, and revitalized Max trainers. And we have a pipeline of strength products leveraging our Way acquisition. A new target customer base with nearly 500,000 new customers since the pandemic began introduced to our brands. Encouraging early progress on improving and scaling our journey digital platform that makes our equipment even better. I'll share some exciting news about member growth shortly. Significant expansion of our already strong multi-channel distribution, including a vastly expanded and a more diversified set of retailers. New talent and capabilities throughout our business, including software, digital product, supply chain, financial analysis, and customer care. And of course, we have a new transformational North Star strategy. Pulling this altogether by leveraging the enhanced long-term industry opportunity and through disciplined execution, by staying true to our Northstar and by building enduring assets, I'm confident in saying that we are emerging from the pandemic as a much stronger company. Next, I'll speak to our third quarter results. In the third fiscal quarter of 2022, net sales were $147 million, which represents 63% growth versus two years ago, excluding Octane. While down from the pandemic-driven all-time high of $189 million in the same period last year, this quarter sales performance remained historically strong. In fact, this was the second highest December quarter in the past 15 years for Nautilus. Our two largest sales channels, direct and North American retail, while down versus last year, were both up over 60% compared to the same period two years ago. Notably, given our strong holiday performance, direct having $9 million backlog coming out of the quarter, stocking out on some of our more popular connected cardio products. One area that was softer than expected was international, which is about 10% of our overall business. We have a different operating model there, we worked primarily through distributors. This model has an extra level of inventory and fewer levers for us to clear inventory. The UK and EU are our largest international markets, and the shutdowns impacted sell-through. We expect softness in international to continue through the end of this fiscal year. I would characterize our Q3 results to be relatively strong in dollar demand and fantastic from a unit sales perspective. As one response to the chip shortage, we pivoted to aggressively marketing and promoting strength products, specifically, the incredibly popular SelectTech line, which also helped drive JRNY member growth. Impressively, I'm proud to say that we shipped more units in the quarter than any other in Nautilus history, showing not only continued strong demand for our products, but demonstrating new capabilities in our supply chain. We're pleased to report that for the first nine months of 2022, net sales were $470 million, a 7% increase over the same period last year, and 144% increase compared to the same period two years ago, excluding Octane. The team is proud to have positively comped the year-to-date through three quarters. Gross margin continued to be affected by the widely discussed elevated global supply chain cost. In addition, this quarter's margins were impacted by lower net selling prices resulting from industry-wide discounting during a highly promotional holiday season. The bulk of the discounting that we observed during the fitness season, which typically runs through the end of January, have now concluded. We believe this gross margin pressure is largely temporary in nature. I know we'll provide more detail on margins in her section. Importantly, despite the lower gross margins in the third quarter, our Q3 operating margin results were in line with our guidance for the first -- for the second half. Moving on to progress on our North Star strategy. We've been working tirelessly to make JRNY a leading fitness digital service that enhances our incredible lineup of equipment, creates an ongoing relationship with our members, and provides a recurring revenue stream. As we communicated last quarter, we made the strategic decision to accelerate our investment in JRNY. The manifestation of our year-to-date investment in JRNY include a new JRNY update, which allows customers to track workouts across cardio, strength, and whole body exercises. That means JRNY members can now track their workouts across all the products they own, cardio and strength, and track whole body off-machine workouts on one fitness platform. We expanded the assortment of JRNY enabled products, building our connected fitness installed base. We introduced the Max Total 16 in the U.S. and VeloCore 16 in Canada at the beginning of November and have attached JRNY to our Bowflex SelectTech 552 and 1,090 dumbbell purchases beginning in mid-October. In the third quarter, we shipped 3.5 times the number of JRNY enabled products versus the same period two years ago when we launched our first connected bikes. And 70% of our cardio units shipped this quarter were JRNY enabled. SelectTech is one of the strongest selling offerings and attaching JRNY to the strength modality has boosted our member base and it's the first time we have combined a digital offering with our strength products. The results and feedback from our members have been very encouraging. We've expanded content. We continue to add more explore the world experiences with over 150 locations around the world now available. Members love the immersive experience and the escapism. We continue to build our trainer-led video library, which now includes over 1,250 trainer-led videos, including new whole body workouts. We've added foundational advances such as JRNY.com, powered by a new subscription management billing platform. We began providing a 12-month complementary trial for a limited time to ensure the maximum number of consumers can use the platform. Here's the punch line. We grew our JRNY member base by nearly -- to nearly 250,000 by the end of this quarter and are tracking across 300,000 total members by year-end fiscal '22, above the midpoint of our previous guidance. We've grown members by nearly 3x year-over-year and by 700% versus two years ago. As you know, Nautilus got a late start in connected fitness. And while it is still early in our digital transformation with JRNY, the strong growth we have experienced to-date is exciting. As such, we continue to invest in the platform. Digital is a key component of the future of Nautilus, and we're investing here will allow us to best leverage our assets and will position us for long-term profitable growth. A second pillar of North Star is putting the consumer at the center of our decision-making. We are working to transform Nautilus from a product-led hardware company to a consumer-led digital company. This consumer-led approach has permeated our business, including Bowflex advertising. Our focused approach to advertising has punched above its weight with measured share of voice nearly double our market share in the quarter. A few key highlights. We ran the first ever Bowflex SelectTech dumbbell campaign for -- that included JRNY. This also helped drive more JRNY memberships. We continued investments in the Bowflex brand with incremental advertising to drive purchase consideration and position the brand in a more modern and inclusive way. In addition to taking a more customer-led approach to advertising, we bolstered our team by hiring a new Director of Customer Success, our first ever customer experience manager, and are adding critical staff in email and social marketing. Strength is another pivotal part of our consumer - centric approach. Bowflex has long been a leader in strength, and we are working to elevate the consumer experience through our connected strength products. In the second quarter, we completed the acquisition of VAY, a leader in motion and vision technology. In the third quarter, we focused on integrating VAY's motion tracking capabilities into JRNY to further advance and accelerate our highly personalized workout experiences, including automatic rep counting and form coaching on and off Bowflex and Schwinn products. We expect to begin testing these features with select customers in the spring. We also focused on hiring more developers. Two years ago, we had about a dozen software developers in UX FTEs and were mostly a mechanical engineering company. But today, we have more than 250 people engaged in software development. We are accelerating our software development capabilities and adding new and innovative features to the JRNY platform, moving us closer to our vision for JRNY as your highly personalized one-to-one personal trainer. And the last pillar of North Star that I would like to touch on today is our supply chain. We continue to battle unprecedented challenges from container and electronic components availability, elevated commodity costs, and cost of shipping and storing inventory. However, our investment and efforts have bolstered overall supply chain capabilities and are enabling us to successfully manage through this period. Earlier this year, we made a strategic decision in light of the global shipping issues to pre -order inventory in preparation for the seasonal -- seasonally strong third and fourth quarters to ensure that we, along with our retail partners would be fully stocked. As mentioned previously, driven by strength products, we moved more units in the quarter than any other quarter in the company's long history. In summary, we are emerging from the pandemic as a stronger company. We have new leaders, new tools, and new processes in place providing us to make a much stronger and more agile company. I'll now turn it over to Aina who will give us more detail on the third quarter financials and our guidance for the rest of the year. Aina.
Aina Konold: Thanks, Jim. And good afternoon, everyone. Today, I will talk to results for Q3 and year-to-date and will provide guidance for the second half of fiscal year '22. I'll start with Slide 14 on the presentation, total Company results for Q3 '22. As discussed previously, we delivered the two highest sales quarters in our company's history in the back half of fiscal year '21, fueled in part by pandemic-driven demand. As expected, demand has moderated in the second half as normal seasonality begins to return. Given the unique nature of last year's results, we'll talk about sales growth versus LY and versus LLY to gauge our growth and overall company improvement when compared to more normalized results. Net sales for the third quarter were $147 million, down 22% versus LY, and up 63% versus LL Y, excluding Octane. Our strong holiday performance resulted in a $9 million backlog for direct. Gross profit was $30 million and gross margins were 20%, down 21% points from LY, 18 points of the decline were related to higher logistics product costs and FX plus increased discounting in the quarter. The remaining three points are related to increased JRNY investments. Turning to operating expenses. We closed on the acquisition of VAY last quarter. The next few lines of the P&L have been adjusted to remove the impact of the deferred compensation related to that acquisition. Please see our press release for reconciliation to GAAP. Adjusted operating expenses were $49 million or 33% up sales versus last year's $36 million or 19% of sales. Marketing expenses were $32 million or 22% of sales. The $10 million increase to LY is primarily due to increased advertising. Adjusted G&A expenses were $11 million or 7% of sales, up 400,000 to LY. R&D costs were $5 million or 4% of sales, up $1 million compared to LY, primarily driven by increased investments in JRNY. In fiscal Q3, advertising was $21 million versus $10 million last year and JRNY OPEX was $6 million versus $3 million last year. Adjusted operating loss was $19 million and adjusted operating margins were negative 13. Adjusted EBITDA loss from continuing ops was negative 15% -- or negative 10% of sales. Our presentation includes a waterfall chart on Slide 16 that describes the year-over-year change in operating margins. The key drivers of the year-over-year change are, lower gross margins as discussed earlier, and planned incremental investments in JRNY, OPEX, and in advertising. Let me now turn to year-to-date results for the nine months ended December 31, 2021, compared to the same period last year. Net sales were $470 million, up 2% on a GAAP basis, excluding Octane -branded sales. Revenue was up 7% versus last year and up 144% versus LLY. Gross profit was $127 million compared to $193 million last year, and gross margin rate was 27% versus 42% last year. 13 points of the gross margin decline was due to higher cost for product cost in FX, and increased discount in fiscal Q3. Two points of the decline was for increased investments in JRNY. Turning to adjusted operating expenses, which excludes the impact of this year's legal settlement, the VAY acquisition and deferred compensation cost, and last year's loss on disposal . Adjusted OPEX was $125 million or 27% of sales versus last year's $94 million or 21% of sales. The $30 million increase was essentially driven by advertising and JRNY investments. Year-to-date advertising was $44 million versus $21 million last year. Year-to-date JRNY OPEX was $15 million versus $5 million last year. Adjusted operating income was $3 million or 1% of sales. Adjusted EBITDA from continuing ops was $14 million or 3% of sales. Please see Slide 19 in the presentation for our waterfall chart, walk you through the year-over-year changes in operating margins. Turning now to the balance sheet as of December 31st. Cash was $20 million. Inventory was a $128 million versus $68 million at year-end. We're pleased that inventory levels at 12-31 were down 21% versus 9-30 and came in better than plan. Inventories concentrated in our best-selling SKU s and about 15% of it was in transit at 1231. AR was $94 million versus $89 million at year-end. AP, $62 million versus $99 million at year-end. And debt was $56 million versus $13 million at year-end. And we had $55 million available for borrowing in our facility. Turning now to our expectations for second half fiscal '22. Please turn to Slide 21 in the presentation to follow along. To gauge growth and progress against more normalized pre -pandemic results, we'll be comparing this year sales versus the same period two years ago for the next few quarters. In addition, because fitness season straddled the last two quarters of the year. We believe it's prudent to consider results in a six-month basis from October 1, 2021 to March 31, 2022. The company now expects total company Net sales in the second half of this fiscal year to be between $260 million and $280 million, an increase of 31% to 41% versus the same period two years ago. The decline versus previous guidance is driven by lower demand in international and increased discounting in the U.S. and Canada this fitness season. This year, the fitness season was much for promotional, driven in part by consumer expectations of good deals during this time period. The deep promotional events has concluded and we are now back to more normal season of promotion. On Slide 22, we provided a waterfall explaining the year-over-year change for operating margins. At the bottom of the slide, we've noted the second half trends we provided three months ago in November 2021. We now expect the impact of logistics, product costs, and higher promotions to be 15 to 16 percentage points higher than previous guidance of 12 points, primarily due to the increased discounting during fitness season. As a rate of sales, we expect total JRNY investments to be six to nine percentage points higher versus last year, advertising to be eight to nine percentage points higher, and OPEX to be three to four percentage points higher driven by North Star investment and de -leveraging of fixed costs and lower sales. Despite lower gross margins, we still expect operating margin loss in the mid-teens. And we're now guiding adjusted EBITDA loss in the low-teens. We are reiterating full-year CAPEX to be between $12 million and $14 million with the majority earmarked for JRNY. And we expect the number of JRNY members at year-end to cross 300,000, above the midpoint of our previous guidance. We continue to expect to return to positive adjusted EBITDA in fiscal '23. And because of our investments in the higher-margin subscription business, we believe we're on track to achieving operating margins of 15% by fiscal year-end '25 with margins expanding to high-teens by year-end '26. I'll now turn it back over to Jim for his final comments.
Jim Barr: Thank you, Aina. I'll end our prepared remarks by saying that we are in the process of transforming into a digital leader in connected fitness. And that transformation is already yielding tangible results. We continue to execute in a disciplined way as we capitalize on the long-term opportunity and navigate the challenges. Further, we are executing against our North Star plan and we are succeeding. These investments are paying off and we are on track to surpass our goal of 300,000 members by the end of the fiscal year, moving us closer to our long-term goal of 2 million members in fiscal 2026. I would like to end by thanking all of our incredible employees and partners for their tireless dedication and support of our mission. And now I'd like to go -- open it up for questions. Operator.
Operator: Thank you. We will now be conducting a question-and-answer session. One moment, please, while we poll for questions. Thank you. Our first question comes from Mike Swartz with Truist Securities. Please proceed with your question.
Michael Swartz : Hey, guys, good evening. This is Mike. Maybe just starting off on the cardio side of the business. I mean, it sounds like it was maybe a little bit softer than you had anticipated. So I guess, I'm just wondering how much of that is the discounting environment that we saw through the holiday season versus your commentary around international. And I think you had also mentioned that you pulled back on advertising around cardio, given some of the supply limitations. So second part of that would just be, when do you expect advertising to return to more normal levels for cardio?
Jim Barr: Sure. Great question. For sure -- I think the first thing we have to think about is the fact that on cardio we are comping a pretty good quarter last year. Our all-time high quarter overall. And then we had just launched the VeloCore bike, so we had a lot of great bikes in the market and we were coming back into supply for that. First of all, I think it's a tough comp on the cardio side. Second thing is you're absolutely right. The chip shortage forced us to pivot away from using the maximum number of chips and go into some of the strength products that don't require chips. We wanted -- that was one thing. That was a bit self-inflicted there. I wouldn't say self-inflicted, it's something we really wanted to do. That's a key part of it. And by doing that and attaching JRNY to dumbbells, we got a lot of JRNY memberships that way and we got a lot of people trying the product, which is what we really wanted to do. I think part of it is we were stocked out on a few of our best-selling cardio products, like one of the VeloCores. I think maybe both of the VeloCores at times during the quarter, the M9 and some of our treads. So we were stocked out and so a little bit more limited on those and we've made a ton of dumbbells and 60% of our cardio unit -- of our backlog is actually cardio unit too. You'll see more of that coming through going forward. I think it's really a combination of comping the top quarter, some stock-outs, then promoting strength on purpose and really pivoting towards a new mix of products that helped us deal with the chip shortage better. We hope that chip shortage goes away. We would like to just go straight up on consumer demand. But I was actually quite pleased with how the team didn't take it lying down and just pivoted to the best way we could succeed this way. And in terms of advertising, we're still largely known for cardio. We're still running several VeloCore commercials. We were just highlighting that we had never really done a SelectTech focused commercial before. And we did that this time. So we're just balancing at a little bit better and we'll probably see that going forward that we'll look at both strength and cardio products in our advertising. So really good question, hopefully that provide some color.
Michael Swartz : Yes, that's very helpful. Thanks, Jim. And maybe a follow-up question for Aina. If we look at the guidance for the second half of the fiscal year, it looks like the expectation just of a headwind from advertising is a little lower. The headwind from JRNY investments a little higher. How should we read that?
Aina Konold: I think the way that I'd want you to read it is, as we navigate the changing environment, we're going to pull all the levers available to us to achieve our strategic objectives, but also meet our short-term target for operating margins.
Michael Swartz : Okay. Thank you.
Jim Barr: Thanks, Mike.
Operator: Thank you. Our next question comes from Sharon Zackfia with William Blair. Please proceed with your question.
Sharon Zackfia : Hi. Good afternoon.
Jim Barr: Hi, Sharon.
Sharon Zackfia : Hi. I appreciate the color on the international component. I guess I'm curious. Do you think their inventory is going to be relatively clean at the distributor level by the end of March so you're more set up to win overseas as we enter fiscal '23? And I'd also appreciate if you have any insight into retailer inventory levels. Are those relatively clean or are they still working through any excess inventory?
Jim Barr: Sure. I'll start, and if you want to add anything. Let me just start with the retail inventory. Looks pretty clean to us. The sell-through looks like it’s going. Now, they did have a lot of inventory to start with. That's why we promoted. Then of course, our retailers have to -- when you're on the channel, your retailers have to have the ability to promote at the same price you're promoting. If we do it on one side, it gets done on the other. They started out with a fair amount of inventory, as did we, but the sell-through numbers we've seen are quite healthy in that channel. We did want to call out international. It's not a huge part of our business. We don't talk about it too often, but I don't think people understand structurally how it works in that. Here in North American retail, for example, we can support our retailers with some discounts and other ways to have them lower the price and meet our price. So we have some levers here that they don't have over there. When you sell through a distributor, you've got inventory that's at the distributor level. And then, there's also inventory at the retail level. So there's like an extra level there. I think in terms of calling the question, we continue -- we did say we expect it to be slow through the end of the quarter. I don't know where it will end at the end of the quarter. I think -- I mean we've seen a slowdown over there. People are still buying it, but lot more lockdowns and things like that. We're just not sure how long it's going to take to clear through those two levels of inventory. Now, fortunately, that's only 10% of our business, but it had maybe half of the impact this time as well. Hopefully that gives you a little color.
Sharon Zackfia : Yeah. That's helpful. And then on the discounting side, I appreciate the commentary year-over-year, but can you talk about the December quarter, how it looked relative to maybe December of 2019, if there's any comparisons there, and how that comparable period would look so far during New Year's resolution time frame relative to the pre -COVID early 2020 time frame.
Aina Konold: When you compare to two years ago, so that would be the December '19 quarter, it's an interesting comparison because the company was in a much different place, but I would say that we intentionally chose to be very supportive of our retailers to allow them to clear their inventory in content with how we are clearing and on direct because we wanted to make sure that we entered the first half of fiscal year '23 with cleaner inventory.
Jim Barr: And then I will just say, look, it starts out that of course that's time of the year everybody promotes, right? It didn't happen last year, but typically that's the way it was. And what I'd say we saw that what we -- was a little bit, well, we didn't expect maybe was our competition went deeper and longer than they typically do. And I guess if you read what you -- read what's out there, they have a lot of inventory, so they're trying to clear through a lot of inventory. It's probably the smart thing for them to do in that period. If you don't sell it in fitness season, you might be holding it for a bit longer. They did that. And around holiday season, you really got to -- I don't think you have to match the competition, but you certainly have to play. Once you get out of fitness season, like where we are now, it'll be more normal discounting. We can decide, hey, do we want to match this type of price, or where would we rather go for margin over top-line for this particular period? And when the volume is low, you can make that move. I think more so than we've seen in a while, just because inventory positions at some of the competition were driving them to notably drop their prices and we had to play a little bit. We mostly played with JRNY – with attaching JRNY. But we also did lower our prices and didn't quite a bit of discounting ourselves.
Sharon Zackfia : And then, last question for me. The logistics and product costs when we've talked about that, I feel like every quarter this year for every company I follow. But you didn't really -- it doesn't seem like you really change your expectation for that component for the second half of this year. Does that mean or can I infer that you're starting to see that at least level off? Or are you, I guess, I'm just trying to get a sense of is it more predictable now or is it still volatile , if you can give us any context there available.
Aina Konold: Thanks, Sharon. That's a great question. I'll make sure I answer the three points. Yes, it's about similar to what -- it's fairly similar to what we talked about last quarter and then in the guidance. That does mean that we're starting to see some stabilization. We're no longer getting rocked by surprises. And our intent, and this is the path to getting to fiscal year '23 positive EBITDA, is we're going to use that lever to get us to positive territory next year for EBITDA. And it's really going to be about improving things like storage cost that we'll no longer be needing as we go into fiscal year '23.
Sharon Zackfia : Awesome. Thank you.
Aina Konold: Thanks, Sharon.
Jim Barr: Thanks, Sharon.
Operator: Thank you. Our next question comes from Steve Dyer with Craig-Hallum. Please proceed with your question.
Steve Dyer : Good afternoon. Ryan on for Steve.
Jim Barr: Hi, Steve.
Aina Konold: Hi.
Steve Dyer : Oh, Ryan.
Steve Dyer : I know you guys have been hesitant to give any paid subscriber metrics. But anything you can share, at least, qualitatively, kind of relative to your internal expectations on the paid side within that total subscriber base?
Jim Barr: Yeah. As you've alluded, we've said for quite some time that starting next quarter, and I think we really mean it, next quarter, we'll provide a whole -- a fulsome set of metrics to begin to analyze the health of our subscription business. We don't have that right now. We can say, as we said in the script, that we were at 250,000 members at year-end, at 12/31. I can also add to that, since you asked me, that today or as of Sunday, we were at 280,000, on our way, as we said in the script, to eclipsing our 300,000 goal for the year. We're doing well there. Engagement is strong. I know that's not a metric, but we have metrics on that. We haven't provided, so you we'd have context of told you anyway, but the strong engagement, churn is going down. The things you'd want to see still early, but that's all good. And yes, the sub-component of that is paid subscribers, for sure. But, you know, we're in that stage where we're really just trying to get people to use it, where we relate to the game. We're giving somewhat of reasons especially people who love our equipment, the reason to try JRNY and we're making it really easy for them to do that. So I think that's the right strategy. We look at some of our competitors that have done that early in their growth of their subscription base. And it has worked very, very well. So we'll continue to do that. And sorry, I can't give you more of what you're exactly asking for, but hopefully that gives you a little bit of color.
Steve Dyer : Yes. That's helpful. I look forward to those metrics next quarter. clarification points, just so I'm clear, for the guidance for the second half, the company expects adjusted EBITDA loss from the low teens. That reads like EBITDA dollars. But is that dollars or margin, you're talking there?
Aina Konold: Oh, it's rate. I'm sorry. You're right. Its rates.
Steve Dyer : Okay. Thank you. And then secondly, Amazon had been a 10% customer for umpteen quarters in a row, it did dip a little bit below that in the quarter. Anything to read through there or is it just -- anything there?
Jim Barr: No. I think it's less about Amazon and more about what I mentioned. One of those capabilities we built during the pandemic and strengthened of ours is that retailer base. We've talked before about Best Buy not even selling our stuff before this started and now they're at the top. We continue very strong with Dick's. We continue strong with Amazon. We've got a lot of Costco and Costco Canada and many other valuable retailers there. We've really diversified that base and that's why you see a number like that where suddenly they're not at 10% anymore. But we think it's a healthy way to go. That just means there's more doors. I think -- I haven't looked at our doors lately, but I think in our last call we talked about its growing a fairly large percentage. That just means you can get our products more places, from us or from any of those great retailers that I mentioned and some that I didn't.
Steve Dyer : Great. Thanks and good luck.
Jim Barr: Thanks, Steve. Thanks.
Operator: Thank you. Our next question comes from Mark Smith with Lake Street Capital. Please proceed with your question.
Mark Smith : Hi, guys. Question from me. Just wanted to dig into the pricing trends just a little bit more for you and the industry. Can you talk a little bit about what you're seeing today as far as competitors pricing and maybe how promotional we have to be today to compete post-peak fitness season?
Jim Barr: Yes. Most of it was during fitness season and there's a few famous one where people -- more expensive bike was lowered to $1,500. Pretty famous one. Stayed there for a while. That company has now gone back to more regular pricing and they have also now charging for assembly and some things like that. So aren’t you seeing there that it's going back to a more normalized way of going about. I think some of it, you'll still see some promotions as people try to squeeze the last little bit out of the season. But pretty soon this is not on consumers’ minds the way that it's been in holiday season and New Year's resolutions season. So it's coming down. I think the other thing we wanted, the way we think about it is you don't always have to follow -- in game theory, you don't always have to follow your competitors when the volume is at a lower level of the year where you may not have a choice when you're in holiday in fitness season. Even if there is some more discounting, we can sit there and decide whether we'd rather promote and get more top-line or we want to preserve margin and our units. And especially with -- when you run out of a few of our cardio units, like I mentioned, you may want to not discount those. Anyway, that's how it's going and it goes day-to-day. But generally -- I've been in this industry now for three years, generally, it regulates around this time of year and in February. And some -- most of our -- we'll run maybe a president say -- day sale or something like that and you'll see others doing that, but it won't be to the level that anybody was doing -- in our opinion, most likely, it won't be to that level as we saw in holiday in fitness season.
Mark Smith : Okay. And then you guys talked about regulating G&A expense. It looks like you did a good job there. Would you call it fully regulated today in G&A, or is there more places that maybe you can trim a little bit?
Aina Konold: I will take that it's Aina. I think the way that our approach has remained consistent since Jim and I joined the company is, we have a really good visibility to what's fixed and what's variable and make sure the variable piece stays in line with revenue and expected revenue. So we've maintained that. And then as part of our NorthStar making sure that we don't waver from making the long-term investments we need, so that we can achieve those higher operating margins. So it's always a balancing act. So I think the answer is, it will always be reacting to adjusting to top-line environment.
Jim Barr: And maybe I'll just give an example, too. So, over the period of the pandemic, our sales roughly doubled, right? So that's a lot more work. We moved more units this past quarter than we've ever done before. We've -- while doubling the revenue of the company, we increased our headcount 10%. So that just gives you kind of an idea there. Now, we still have a lot of contractors and things like that, especially in JRNY. So it's we have more FDA working. And of course, in our asset-light model, we don't have employees, we have people working on our behalf. So that's not a full thing, but I think it is kind of a nice testament of how we try to keep this variable as Aina said, until we see where that settle point is. And we try not to get too far out over our SKU s and things like that. At the same time, we've added all those great capabilities I listed too. It's not like we're standing still. We're just investing in the areas that we really need to invest in, and of course, staying true to both the JRNY and the Bowflex brand investments.
Mark Smith : Perfect. And the last one for me. As you talked about investments, as we look at R&D, how much of this is on the product side versus on the technology side, in any insight into your pipeline for new products.
Aina Konold: So that's a really great questions. So one of the things that we did as we were going through NorthStar, we did a lot of focusing work. When you do that and you narrow your skews and you remove the commercial business, we decide to sense at one of the brands, that kind of frees up some resources from maybe the more equipment side of the business and then allows you to invest them into JRNY. So what we've invested in JRNY, you don't necessarily see reflected us a true year-over-year increase because we were able to be more optimized, cut some costs, and then reinvest them into NorthStar.
Jim Barr: And then in terms of the pipeline, I think what we said was, well, look, we just did all the cardio. We're going to do some more stuff in cardio for sure. We haven't announced it, but you can expect that. But mostly, we're looking at strength now. We mentioned dumbbells with VAY and some other strength products that will be coming out over the next year. And so that's a lot of our pipeline. I don't know if I could give you a -- we used to be a completely mechanical engineering company and now you heard all the software engineers that we've hired. So it's definitely tilting more towards software engineering, thinking that over time that's one of the main way that we'll differentiate. We'll still be trying for strong mechanical differentiation like we have in VeloCore and the new Max Trainer and things like that. And when we get it, it's fantastic. But we still a bit more to the software, and the way we think about it, it's not either or. The software actually makes the hardware better. It's the software-as-a-feature of the hardware, and that's the way we've really driven the transformation. It's not like, oh, we don't value mechanical engineers anymore. We value them as much as we ever did, if not more, and then we add this other capability on top of it. So maybe you're tilting a little bit more that way and some of it is where we were a little late to the game and we got some catch-up to do.
Mark Smith : Thanks, guys.
Jim Barr: Sure.
Aina Konold: Thanks.
Operator: Thank you. Our next question comes from George Kelly with Roth Capital Partners. Please proceed with your question.
George Kelly : Hi, everybody. Thanks for taking my questions.
Jim Barr: Hi George.
Aina Konold: Hi.
George Kelly : So just to start on inventory. So came down sequentially, but it's still quite a bit above pre -COVID levels. So just curious if you could talk about what is normalized inventory or where do you expect it to move to, and how long do you think it will take to get you there?
Aina Konold: Thanks for the question. It's a great one. We think about that a lot because what's the right level knowing that overall our company is a lot bigger than it was two years ago? It's a little heavier now than I'd like it to be. And we have a plan. I feel really confident to glide it down to a lower number in the first half of 23 ', but obviously, taking it up -- taking it back up again in preparation for fitness season fiscal year 23 '. Slightly higher than I'd like it to be, but moving in the right direction. And as a reminder, the reason it's high is because when you have this uncertainty in the supply chain environment, we really wanted to make sure that the inventory was on hand, in our hand, in the DCs prior to the big fitness season, which is Q3 and Q4 of this fiscal year.
Jim Barr: And I do like the way we've worked it down. I know the CFO wants it lower, and that's what she should. But we think we've got the right stuff to sell, we think it's in the right areas. Like I said, we had a couple of stock ups and not happy about that. But you can't be perfect in predicting this and it tells us people really enjoy our products and demand them. So we've got, we've got that for sure, but I think generally we're in we're in a good spot.
George Kelly : Okay. And then next question on -- just trying to map out next year, fiscal year '23. And you mentioned in your prepared remarks, just a return to kind of normal seasonality. So if I play that through, does that -- should we see a summer dip versus the December and March quarters like we saw normally before COVID? And then you would expect it to again climb again in the holiday season of FY2023?
Aina Konold: That's what we are planning for and executing against for our direct segment. The retailer segment is still more volatile, again, only related to the ability to ship things, FFO or to ship things from where our DCs are in the EU into U.K. So there's a little bit of noise when it comes to the retail side, but for the direct side, that's where we're executing until we saw it kind of play out in the last few quarters. It was matching historical seasonality for Direct. So we are expecting that to continue in FY2023.
Jim Barr: And I'll just jump on. I'll add to Aina. Especially what is now our first quarter, the quarter ending June, you remember last year just all the retailers loaded in way earlier than they would normally do it. There's going to be -- it's going to be interesting to see -- they really didn't turn to normal seasonality while directed, so it'll be interesting to see if because of supply chain shortages that they order that early. I would guess they won't. I would guess that, hey, if they see it the way that we're seeing it, that it's going to be a normal -- a normalization year that they may go back to their normal ordering. Because remember, the first quarter, the June quarter in retail was super high, and the second quarter was a little weaker because they had ordered -- pre -ordered in the first quarter. I say, maybe you're going to have some shift there, but l agree with everything Aina said about direct and normal seasonality through the summer.
George Kelly : Okay. And then last question for me, what was -- so I guess two advertising questions. What was the media spend in the quarter? And then you've talked about reasons, mostly supply chain-related for peeling back on some of your ad spending. But when you look at what peers are doing, I mean, does it seem like folks are getting more rational as far as what the current environment is and not spending as much on direct advertising or just what does that look like so far this year?
Jim Barr: It's going to -- yes, I'll start. I think it's going to be interesting just picking up your last part. I mean, we've obviously been outspent by several of our competitors for a sustained period of time. And we've just had to be smart about it, and when we did it and how much we spend and things like that. I think you're probably right. I mean, we can't speak for competitors, but I -- from a lot of the things you hear about in the marketplace, it seems like it may go a little bit more rational where you can justify your cost of customer acquisition and things like that. So I would speculate, but it would only be speculation that it would turn out that way. But I will say that again, in my remarks, we measure this thing where its share of voice, which is how often you hear our name versus any of our competitors. And a good quarter for us is when our share of voice is above our market share. And it was almost twice that this time. So I'll call the third quarter a good quarter. But it doesn't happen every quarter, that says we're doing a good job. We'll hope that we continue to do that, while at the same time and we are staying true to the brand spend. Some of the brand spend does drive revenue so that helps us too, and we're spending more there. But the brand over time, you get a more modern view of Bowflex. And luckily, the way to do that is to use JRNY to make Bowflex more modern. And that's the way the advertising is generally going. I think it's going in the right direction, but it'll be interesting to see. And I think it's -- it does call a little bit for speculation on what competitors will do, but maybe that will exactly happen, that it'll be a little more rational. I think there wasn't -- there weren't very many people even trying to make money in this space a while ago. And I think it's now turning into a market where that's becoming more rational and more important. And therefore, when you make all your decisions, whether it's inventory or advertising or whatnot, you're going to be considering that.
Aina Konold: And then advertising for Q3 was $21 million versus $10 million last year.
George Kelly : Okay. Thank you.
Aina Konold: You're welcome.
Jim Barr: Thanks, George.
Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to A - Jim Barr for any closing comments.
Jim Barr: Thank you to everyone on the call today for your continued support of Nautilus. We look forward to talking to you again on our fourth quarter, fiscal year 22 ' call in May. Have a great rest of your day, onwards and upwards.
Operator: This concludes today's conference. You may now disconnect. Thank you for your participation.
