May 4, 2016
Executives
Katie Turner - ICR, Inc., IR Michael MacDonald - Chairman and Chief Executive Officer Timothy Robinson - Chief Financial Officer
Analysts
Frank Camma - Sidoti & Company Mitch Pinheiro - Wunderlich Securities
Operator
Good afternoon and welcome to the Medifast First Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode.
[Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Katie Turner for opening remarks.
Katie Turner
Good afternoon, and welcome to Medifast’s First quarter 2016 earnings conference call. On the call with me today are Michael MacDonald, Chairman and Chief Executive Officer; and Timothy Robinson, Chief Financial Officer.
By now everyone should have access to the earnings release for the period ending March 31, 2016 that went out this afternoon at approximately 4:05 PM Eastern Time. If you’ve not received the release it’s available on the Investor Relations portion of Medifast’s website at www.medifastnow.com.
This call is being webcast and a replay will be available on the Company’s website. Before we begin, we’d like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions.
The words believe, expect, anticipate and other similar expressions, generally identify forward-looking statements. These statements do not guarantee future performance and therefore undue reliance should not be placed on them.
Actual results could differ materially from those projected in any forward-looking statements. Medifast assumes no obligation to update any forward-looking projections that may be made in today’s release or on today’s call.
All of the forward-looking statements contained herein speak only as of the date of today’s call. And with that, I’d like to turn the call over to Medifast’s Chairman and CEO, Michael MacDonald.
Michael MacDonald
Thank you, Katie. Good afternoon, everyone, and thank you for joining us.
Today I will share an overview of our start to 2016 along with an update on the progress we have made on our key initiatives. Tim will then review the first quarter financial results and guidance for the second quarter and the full year for 2016.
Finally, we will open up the call to take your questions. We have kicked off the year on a very positive note.
Momentum continue to build throughout the first quarter in Take Shape for Life, our largest business segment. Take Shape for Life improved 9% compared to the first quarter last year and this represented a fifth consecutive quarter of improvement in revenue for this business unit.
These segment results combined with gross margin expansion of 201 basis points and our team’s consistent efforts to efficiently operate the business fueled our financial performance. On a consolidated basis, net revenue from continuing operations was $72.3 million and adjusted earnings from continuing operations were $0.42.
We are pleased that both revenue and profitability were above our guidance for the first quarter. As a result of this positive momentum we are raising our 2016 annual guidance which Tim will review in detail.
Our team continues to believe that we are poised to return to growth in 2016. Going forward, we remain intensely focused on taking steps to optimize each of our business segments, Take Shape for Life, Medifast Direct, Franchise, Medifast Weight Control centers and Medifast Wholesale by continuing our plans to differentiate products, programs and service offerings.
I would now like to provide you with an update on our key business initiatives for 2016. Across our entire organization, we are on a mission to bring health, happiness well-being and empowerment to our client customer base.
We are very pleased with our start to the year and the momentum across our Take Shape for Life business unit. As we’ve shared in the past, new client and health coach growth and productivity are key metrics for determining performance within this business.
The total number of active earning health coaches in the first quarter increased up to 12,600, up from 11,900 in the fourth quarter of 2015, and 12,100 in the first quarter last year. We continue to experience meaningful increases in health coach sponsorship year-over-year.
New coach sponsorship grew close to 20% in quarter one, as it did in the last two quarters prior. Average revenue per coach for the first quarter of 2016 was $4490 compared to $4316 in quarter one last year.
We continue to generate increased coach productivity as a result of higher new client acquisitions. Higher new client health coach sponsorship and a higher average order value year-over-year.
This increase in the rate of sponsorship combined with productivity growth is a strong indication of the health of our network. We believe these continued positive improvements reflect the success of the initiatives we put in place to simplify and improve health coach journey from the initial signup to new standardized and unified trainings on the business path to sustainable leadership development.
A great example of how we are further developing the tools and resources to support our health coaches in the field is the development of a new service center to provide business building support for our health coaches. Field First is a coach-focused call center operated by highly specialized team of trained corporate resources dedicated to answer questions related to coach career path progression.
It’s incredibly important that health coaches feel that the right level of support every step of the way. Mona and the team continue to work to bring our top few of the corporate leaders together for planning and strategy sessions.
We believe the connection between the field and corporate teams, it’s as stronger that’s been in the history of Take Shape for Life. Key actions we have taken over the last 12 to 18 months include the creation of a team to collaborate on key initiatives and to address any issues across the health coach network to ensure both the field and corporate teams are closely aligned.
We have taken steps from both the product and pricing perspectives to minimize conflict across our novel business units as we work to increase diversification and emphasize the individual strengths and growth opportunities of each business segment. A strategically planned first quarter has delivered strong start to the year with positive field momentum.
In the first quarter, we have virtual live Take Shape for Life events in 43 states with 8000 attendees. This is a dramatic increase and attendance for prior years including last year we hosted approximately 2500 attendees.
The increase in the number of virtual events also allowed our field leadership to remain closer to home and focused on their businesses, coaches and clients. Additionally, we hold our annual Go Global leadership event in Baltimore in February.
The event was completely sold out and provided a great opportunity for coaches and our objective is director and above ranks to come together and further develop their business and leadership skills. It was also a chance for many coaches to visit Take Shape for Life headquarters and get even more acquainted with our people and products.
Most recently in March, we celebrated the success of our top performers who earned and incentive trip to San Diego by achieving key business building goals between July last year and January this year. We are now well underway and are planning for the Take Shape for Life annual convention in July and we look forward to sharing many exciting new announcements with you in the coming months.
We are making meaningful progress on the execution of our key Take Shape for Life initiatives to simplify the business, provide effective training and further differentiate the value proposition. Our health coaches are highly engaged sponsoring new coaches and acquiring new clients.
For these reasons, we are optimistic about the future growth of this important business unit. While we are now seeing the benefits and the changes we have made to our Take Shape for Life business last year, our Medifast Direct business, which is 15% of our sales did not performed to our expectations this quarter.
Our focus over the last several months and year, has been returning our largest and most important business Take Shape for Life to growth. This has included making strategic business decisions that negatively impacted the Medifast Direct Response business near-term.
Stabilizing the Medifast Direct Response business remains a key focus for us as we build upon our efforts from last year. While we have made progress in the key areas of conversion and retention, this business unit continues to experience challenges and cost-effective new customer acquisitions.
We also see opportunities to improve customer reactivation including process automation and driving re-entry into our Medifast Advantage program. This business segment is an important profit contributor and we are taking steps to fix the business performance with a sense of urgency.
Last year, we launched our Medifast Achieve plan, which is aimed at addressing customer acquisition and improving retention and while revenue is down for the quarter, we are seeing some positive results in the areas of average order value and customer acceptance of our Medifast Achieve plan kit offerings. We believe these kit offerings are an effective approach for the self-directed customer.
We also increased promotion of two week and four week kits in an effort to deemphasize a la carte ordering habits. We believe the kits offer the best solutions and value for our customers while they also contribute a higher life time value.
And in vision to the focus around the kits near-term, we are working on number initiatives to help improve the revenue trajectory of Medifast Direct response in 2016. These include an expanded tool set for analytics and attribution to improve acquisition and retention strategies, a new summer promotional campaign that has just kicked off that features our newest summer shape up kit, the implementation of new e-commerce technology capabilities, new promotional offers including email reactivation and direct mail acquisition campaigns.
We are evaluating some creative marketing strategies that help us build better awareness to the Medifast brand and drive consumers to Medifast Direct. While this business is not performing to expectations, we are attacking the issues, driving the underperformance and look forward to stabilizing the business in the quarters ahead.
Additionally, our team continues to work closely with our franchise MEDFAST weight control center partners. We are very fortunate that the strong franchise business operators who know the industry, their markets, and their customers, both current, prospective very well.
Together, we are working with our franchise partners to evolve the offerings in the centers, initiate new pilot programs to test future concepts while continuing to develop a strong value to center members. As we think about the long-term growth opportunities, some of you had a chance to try our recently launched Dual Fuel sports nutrition products.
This product launch reflects our innovation in manufacturing expertise as well as our ability to build unique business partnerships. We expect these initial efforts along with our recent engagement with Play By Play Sports, a Sports marketing company to get us off to a good start in the sports nutrition area.
As we have previously shared, please keep in mind that this is not expected to have a meaningful impact on our financial performance in 2016. From an organizational perspective, as we previously communicated last quarter, quarter one marked a period of transition for Medifast.
Our senior leadership team was streamlined to reflect the changing needs of the business and to provide even greater emphasis on our key initiatives and future growth. We continue to take steps forward to accelerate the activities required to return the company to sustainable revenue and profitability growth.
Our consistent improvement across key areas of our business over the last 18 months and importantly our first quarter financial and operational performance truly demonstrates the momentum we are building and the positive future direction for Medifast. Finally, our team remains committed to returning value to shareholders.
Our strong and consistent cash flow generation enables us to be in a position to continue enhancing shareholder value. As of March 31, 2016, we have approximately 850,000 shares of common stock available to buyback under our existing repurchase program and our second quarterly dividend will be paid on May 10.
It is an exciting time for all of us at Medifast and we believe the company is well positioned for future success with a strong balance sheet, progress on our strategic operational initiatives and a team laser-focused on delivering sustainable top and bottom-line growth. With that, I’d like to turn the call over to our CFO, Tim Robinson who will discuss our financial results in more detail and our outlook for 2016.
Timothy Robinson
Thank you, Mike. I'll now review our performance for the first quarter ended March 31, 2016.
Please note that the financial information I reference today will focus on our results from continuing operations. For the first quarter of 2016, we had no activity from discontinued operations, compared to income from discontinued operations net of tax of approximately $28,000 in the first quarter of 2015.
In the first quarter, net revenue decreased approximately 1.5% to $72.3 million from net revenue of $73.4 million in the first quarter last year. The Take Shape for Life business unit accounted for approximately 78.4% of revenue.
The Medifast Direct business unit accounted for 15.1%, the Franchise, Medifast Weight Control center business accounted for 5.8% and the Medifast Wholesale business unit accounted for 0.7% of net revenue. Focusing on the sales mix in more detail, revenue in our direct sales unit Take Shape for Life was up 9% to $56.7 million from $52.1 million in the first quarter of the prior year.
The Sequential quarterly improvement in our year-over-year trending continued in the first quarter and we were pleased to have our second consecutive quarter of positive year-over-year revenue growth in Take Shape for Life. There were approximately 12,600 active health coaches in the first quarter compared to 12,100 in the same period last year and 11,900 in the fourth quarter of 2015.
Average revenue per active earning health coach for the quarter increased to $4,490 from $4,316 in the fourth quarter of last year. We continue to be encouraged by the improvement in our newly sponsored coach count and increased level of coach productivity.
We believe that our increased emphasis on key Take Shape for Like strategies, the operational improvements in the health coach experience and the incremental resources added to the Take Shape for Life team are having a cumulative impact that will drive sustainable growth. As I mentioned last quarter we feel we now have very good visibility into the key growth drivers in the Take Shape for Life business.
Our activities are focused on fueling the growth trajectory, and as a result we are confident Take Shape For Life is on the right path for continued growth. Our Medifast Direct segment revenue decreased 24% to $10.9 million as compared to $14.4 million in the first quarter of the prior year.
As Mike discussed, this business unit continues to present challenges and our teams are implementing and testing initiatives across acquisition, conversion, retention, onboarding and reactivation in order to drive improved results. Total Medifast Direct advertising in the quarter decreased to $4.1 million from $5.3 million in the first quarter of 2015.
Revenue in the Franchise Medifast Weight Control Centers business unit decreased modestly to $4.2 million from $4.7 million in the same period last year. The decrease in revenue was primarily driven by fewer franchise centers in operation during the period.
We ended the quarter with 58 franchise centers in operation, compared to 70 centers at the end of the same period last year. Medifast wholesale revenue which is comprised of revenue from healthcare providers and other wholesale partners decreased to $1.7 million to $0.5 million.
This decrease was fueled by the loss of certain accounts resulting from Medifast enforcement of business partner compliance requirements as we discussed on the last several earnings calls. This will continue to be a difficult comparison for the balance of the first half.
Gross profit for the first quarter of 2016 was $53.2 million, compared to $53.8 million in the first quarter of 2015. Our gross profit margin increased 20 basis points to 73.5% versus 73.3% in the first quarter of 2015 driven primarily by the price increase implemented in March 2015.
Selling, general and administrative expenses in the first quarter of 2016 were $46.9 million, or 64.9% of sales versus $47.3 million in the first quarter last year, a decrease of $400,000. Excluding $1.2 million of restructuring charge this quarter and $1.8 million in extraordinary legal and advisory expenses resulting from 13D filings in the first quarter of last year, first quarter 2016 adjusted SG&A was $45.7 million or 63.3% of revenues, compared to $45.5 million or 61.9% revenues in the first quarter last year.
Sales and marketing expense decreased $1.1 million in the first quarter of 2016 as compared to the first quarter of 2015. The first quarter operating income from continuing operations before tax was $6.4 million or 8.8% of net revenues, compared to income from continuing operations before taxes of $6.8 million or 9.3% of net revenue in the first quarter of 2015.
On an adjusted basis, operating income from continuing operations before tax was 10.4% of net revenue compared to 11.8% of net revenue in the first quarter last year. Income from continuing operations was $4.3 million or $0.36 per diluted share, based on approximately 11.9 million shares outstanding.
First quarter 2015 income from continuing operations, net of tax, was $4.4 million or $0.36 per diluted share, based on approximately 12.2 million shares outstanding. First quarter adjusted income from continuing operations was $5 million or $0.42 per diluted share, compared to adjusted income from continuing operations of $5.6 million, or $0.46 per diluted share in the first quarter of 2015.
Adjusted income from continuing operations is a non-GAAP financial measure. Please refer to the tables in this press release for a reconciliation of all non-GAAP financial measures.
Our effective tax rate was 33%, compared to 35% in the first quarter of 2015. The decrease in the effective tax rate was due to an increase in the domestic manufacturing deduction and a change in the tax law making certain research and development credits permanent to allow us to recognize the credit throughout the year.
In prior years, recognition of credit was dependent on the timing of the annual accrual by [Indiscernible]. Our balance sheet remains strong with stockholders' equity of $89.9 million and working capital of $67.4 million as of March 31, 2016.
Cash, cash equivalents, and investment securities for the first quarter of 2016 increased $4.5 million to $71.6 million compared to $67.1 million at December 31, 2015. We did not repurchase any shares during the first quarter of 2016 and we currently have approximately 850,000 shares remaining on our repurchase authorization as of March 31, 2016.
If we turn to our guidance, we expect second quarter net revenue from continuing operations to be in the range of $70 million to $73 million and adjusted earnings per diluted share from continuing operations to be in the range of $0.50 to $0.53. As Mike mentioned, we are ranging our 2016 full year revenue guidance from continuing operations to be in the range of $275 million to $282 million and full year adjusted earnings per diluted share from continuing operations to be in the range of $1.75 to $1.80.
We continue to take a cautious view in our guidance as we monitor the positive momentum from our newly implemented strategies and tactics. We will certainly continue to update our expectations as the year progresses.
The fiscal year 2016 guidance excludes $1.2 million of first quarter 2016 restructuring cost associated with separation agreements for several senior executives. The company expects annual savings from the restructuring, excluding the current year restructuring cost above to be approximately $2.2 million.
Well, that concludes our financial review. Now I'd like to turn the call back over to our Chairman and CEO, Mike MacDonald.
Michael MacDonald
Thanks Tim. In summary, we are pleased with our start to the year.
We remain confident we have the right strategic and executional initiatives in place and our achievements across the organization demonstrated our success thus far. I would like to take a moment to thank our incredible team members, health coaches, clients, customers and valued partners for their hard work, dedication and support of Medifast and Take Shape for Life.
We look forward to future growth across our business segments in 2016. We appreciate your interest and support of Medifast.
And with that business review, Tim and I are available to take your questions. Operator?
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Frank Camma with Sidoti.
Please go ahead.
Frank Camma
Good afternoon, guys. Congratulations.
Michael MacDonald
Thank you very much, Frank.
Frank Camma
Hey, obviously, you did much better in Take Shape for Life, but what I am most concerned about is that, the – you did much better on both growing the networks as well as the productivity and I was wondering on – in the past, typically when you grow the network, you kind of see a decline in productivity. I was wondering if you could address that like, how that was achieved for that dual benefit.
Michael MacDonald
Well, typically, when a network grows, the growth comes from more junior coaches who – at the entry point have a lower productivity. So that is true and that will continue to happen.
What you are seeing is, the existing coaches increasing their productivity which offsets that downward pressure. So we’ve got some nice growth in the health of our coach network where we have leadership advancing occurring in a more rapid rate than we’ve had in recent history and more active involvement in the kind of middle ranks of our coach network and that’s kind offset to the natural impact that you have of growing entry-level coaches at lower productivity.
So it’s been a nice mix for us.
Frank Camma
Great. Is there active statement to say that your retention is generally stronger than the industry?
I mean, I know, I don’t know if you actually give a percentage, actually your industry has it, but, it seems like your sales force is relatively sticky. I was wondering if you can just add something to that.
Michael MacDonald
Yes, we have a very good, I mean, the industry I think has about an 80% turnover, our turnover is about 40%.
Frank Camma
Right.
Michael MacDonald
We’ve done a very good job and the other thing is we have great stability and our leadership in the network through the upward ranks. So we’ve had people that have been involved with the company all the way back to 2003, so, and now we are adding younger newer people like, Tim and I were out in San Diego at a recognition meeting and we were really pleased with how many first-time people were in the audience that were much younger and as these people keep going through the ranks, that’s going to help the health of the network as we were bringing up more talented younger people into the system.
Frank Camma
Great. And can you make a general statement just about the direct selling market in the US, because it means, for a couple of years obviously, it wasn’t doing good.
Have you seen any change there?
Michael MacDonald
Well, I think if you looked at some of the other competitors, I think our 9% growth will stack up very well as a real strong performance in the North American market. North America seems to have been the toughest direct selling market over the last couple of years with obviously huge growth in direct sellers in China, Mexico, some of the other markets.
So I feel very, very good that we are focusing on the market that was most important for us and also doing the planning to be able to move to Mexico as we develop an Espanic base within the United States. So we are trying to develop that and then that would be the first place.
So, we would go outside the US.
Frank Camma
Great, and my last question, can you tell us like, what you’ve learned so far, now it’s early, but in sports nutrition business and have you seen any big difference between the – sort of two organizations that you rolled out on so far?
Michael MacDonald
Yes, in the sports nutrition business, we started out by really establishing the product credibility. So we’ve done a deal at Rutgers University where they are using it for their entire athlete department.
We’ve also sponsored the Colonial Athletic Conference Tournament and the Atlantic Hockey Association. So we are getting it into some different sports areas as we start to do that.
At the same time, we are really working on the product development side to ensure we have the product depth that we need as we do that. Our initial launch, we’ve launched a chocolate shake, we’ve launched multiple bars, we are coming out with a vanilla bar and then we’ve also hired Play By Play Sports, which is a Sports marketing company firm to help us with other universities.
And we’ve hired a young executive who is a professional lacrosse player, Kyle Sweeney who has just joined the company who will help start Maverick Sports which is a Lacrosse company that sold the helmets and the things. Just remember Medifast doesn’t have that expertise in the company, Frank, so we are building that.
So, I think we are starting well. We are trying to get credibility established first and we are not trying to be overly aggressive here, but take the right steps in meeting with the right people to start the business.
Frank Camma
Great. Thanks guys.
Congratulations.
Michael MacDonald
Okay, thank you.
Operator
The next question comes from Mitch Pinheiro of Wunderlich Securities. Please go ahead.
Mitch Pinheiro
Yes, hi, good afternoon.
Michael MacDonald
How are you doing, Mitch?
Mitch Pinheiro
Hey, really good. Hey, could you just – could you help me connect the dots as far as, what those – the 20% growth in your healthcare health coach sponsorship and how does that translate, like to what we are seeing?
Like, so you are up about 4% year-over-year. I mean, what’s going on to 20% growth?
And how does that filtered down to the ultimate active health coaches?
Michael MacDonald
Sure. So, a new sponsor coach is a coach who joins to Take Shape for Life, pays the initial fee to join Take Shape for Life.
And there is a typically a lag effect from the time they do that to the time they begin to earn and that varies amongst people. So, we see growth in a number of people joining every month.
Attrition of existing coaches is stable, actually a little bit improved and the difference really is how quickly people actively start earning. We only count – as you may know, we have many more coaches than our 12,600 what we reported that the number of people actively earning a commission in the period.
So, it’s a leading indicator of the number of active coaches you are going to have and that’s something that should happen with attrition which we don’t anticipate at all. These newly sponsored coaches become active often in the subsequent quarter after they join and that’s what we are seeing, it’s mostly the growth that you saw in the fourth quarter, third and fourth quarters of sponsorship are translating into productive active coaches in the first quarter and that’s kind of the way that works.
Mitch Pinheiro
So, if I look at, your quarter end active coaches of 12,600, I mean, with 20% growth in the sponsorship rates, I mean, is that translating? Should we see a modestly accelerating sort of year-over-year growth or does it accelerate sequentially?
Michael MacDonald
Yes, I mean, we don’t have an exact crystal ball, here but I think what we are expecting is, in the coach count, it’s kind of what you are seeing, right you are seeing some modest, mid single-digit percentage growth in the coach count and of course if we continue to increase sponsorship at rates near 20%, that will accelerate fairly rapidly. It’s a hard thing to exactly predict, but we’ve now put three quarters together of – I think roughly 20%, 20%, 19%, which is beyond our expectations and we are seeing that convert into increasing the overall coach count and at a rate of around 5%.
So, I think from a modeling perspective, I think about that continuing at that rate and a little bit better. And if we train two quarters more together of 20% growth that will accelerate beyond that.
Mitch Pinheiro
Okay, and what are the drivers, I mean, you sort of talked about it a little bit, the drivers of your – the revenue per health coach, obviously there is the mix of new and seasoned coaches, so I get that. But what are the things, I mean, is there any pricing in there?
Are there - like what percentage of maybe that growth comes from new products? Can you kind of dive into some of the other drivers of that line?
Michael MacDonald
Yes, so if you look at like this prior quarter, we had a year-over-year benefit from price increase last March 1st. So in 2015, we had one month of price increase and this year we had three months that same price increase.
Just as a note, we had another price increase April 1st of 2016 that will start to apply in the second quarter of this year. So price increase, I think has probably given us about 2% or 3%.
And then, it’s kind of an interesting thing when you think about what we do, we sell, primarily in Take Shape for Life of 5-in-1 program where you have five meals a day, but you are on program you have five meals a day. We don’t necessarily promote you need a sixth meal that that would be counterproductive.
So, can sell more to existing customers, but generally speaking, the way we look at it is, you increase the number of clients or coach and the number of coaches and that primarily gets what gets you your revenue per coach. It’s not necessarily incremental choices of products.
Now we did add products like snacks, which can be incremental. We have done some upsell kits to some premium products.
But the way I look at it is, it’s really – to get clients to be able to handle more, coaches, I am sorry, to be able to handle an average of more clients is a productivity measure that we are working on through some technology. And then, I think just being able to get the number of active coaches out is the key measure of productivity.
Tim Robinson
We are also refocusing in Take Shape for Life on our maintenance plan going out with a three and three program, Frank that Mona is focused on. So we are putting, I think, stronger marketing around some of the – we’ve already been really strong selling the replacement strategies, but we are putting stronger marketing around the other approaches.
So, we can sell some of the other products as people continue on their journey of healthy living.
Mitch Pinheiro
Okay, thank you and then, just the final question is, when I am looking at, sort of your guidance and how like the final three quarters compare to last year’s not last nine months, as you are looking basically for low to mid-teen type of revenue or earnings growth and it will be just a low to mid single-digit kind of revenue growth. How does – how is that going to part and the part of a Take Shape like sequentially?
Are we going to see, is it a real back-end loaded year, I mean, fourth quarter or actually …
Michael MacDonald
Not at all, Mitch, our third quarter is generally better in revenue than our fourth quarter.
Tim Robinson
We get some – a little bit of some easier comparison away once we get to the third quarter of the event we had last year in the second quarter in the Wholesale business unit where we had to really shutdown about $4 million of our business which was quite profitable. That makes the comparison first two quarters of this year a little bit difficult, but when we get to the third quarter it makes a little bit easier.
But when we think about the Take Shape for Life business, we look at it grows by quarter to be slightly improve this quarter, but – I’ll call relatively consistent. We see some improvements in the Med Direct business as we proceed during the year a little bit.
Clearly, the Med Direct business was greatly affected by some of the strategies we’ve taken to improve the Take Shape for Life business. So, it’s a balancing act, how strong we regulate the marketing activities in Med Direct and we are constantly monitoring that and trying to find things we can do there that improve the Med Direct business without creating conflicts.
Michael MacDonald
And we did spend, Mitch in the first quarter 37% on advertising against the revenue we got which is a similar percentage as competitors in that space. But as you know, with 78% of our business right now being Take Shape for Life, we clearly see that as the area of opportunity for us to really drive and to make sure we are not disrupting that improvement.
Tim Robinson
And Mitch, I think we said in there, we are – we’ve taken – we take a cautious approach to our guidance and I think the opportunities at certainly at the back half could be very, very strong, as you build, we talk about it as non-annuity business but as you build a bigger customer base, a stronger customer base, a stronger coach base, you build momentum and the – the power of that customer base starts to have a long-term impact on your guidance. So, we’ve taken a conservative approach.
The opportunity certainly exists for to get larger in the back-end of the year, but our guidance is – assumes kind of a relatively consistent rate of growth.
Mitch Pinheiro
Okay, and then just the last question is just, related to Med Direct, as you are spending, I mean, is it all digital?
Michael MacDonald
We are spending less on television, Mitch, we did go out. We’ve started with national television, then we did heavy up spending in two cities to pilot more aggressive spending and we saw that the returns weren’t as effective.
So we are moving more to digital and we see that as a good strategy. We’ve brought in a consultant to help us by the way to give us some advice.
He has got a lot of expertise in this area and I think that will be a benefit to helping us with ideas that maybe – we don’t have internally. So, we are putting a lot of focus on improving the Med Direct business.
That’s a key priority for us, but at the same time, we want to make sure we are doing it not at the expense of the improvements in Take Shape for Life.
Tim Robinson
And we try to keep the perspective that Med Direct is an important business for us, it’s a very profitable business for us, but it is 15% of our business. And so, from a priority perspective, it was really, really important for us to get Take Shape for Life which is now 78% of our business in the quarter, making sure that’s really on the right track as Take Shape for Life grows, the company will grow.
Mitch Pinheiro
All right, well, thank you very much. I appreciate the time.
Michael MacDonald
Thanks.
Tim Robinson
Thanks, Mitch. This concludes our question-and-answer session.
I would like to turn the conference back over to Medifast’s Chairman and CEO, Michael MacDonald for any closing remarks.
Michael MacDonald
Okay, thank you for your interest in Medifast and participation in today's call. We look forward to providing you with an update on our business when we report our second quarter 2016 results.
Thank you and have a nice evening.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.