Aug 4, 2016
Executives
Katie Turner - Managing Director, ICR, Inc. Michael MacDonald - Chairman and Chief Executive Officer Timothy Robinson - Chief Financial Officer Mona Ameli - President, Take Shape For Life
Analysts
Frank Camma - Sidoti & Company Mitch Pinheiro - Wunderlich
Operator
Good afternoon, everyone. And welcome to the Medifast, Inc.
second quarter 2016 earnings conference call. All participants will be in a listen-only mode.
[Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Katie Turner.
Ms. Turner, you may begin.
Katie Turner
Good afternoon. Welcome to Medifast second 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 June 30, 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 Web site at www.medifastnow.com. This call is being webcast and a replay will be available on the company's Web site.
Before we begin, we’d like to remind everyone that prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. The words believes, expects, anticipates, 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 posted on the company’s Web site. 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'll share an overview of our performance in the second quarter, including an update on key initiatives.
Tim will then review the second quarter financial results and guidance for the third quarter and full year 2016. Finally, we’ll open up the call to take your questions.
Our success from early in the year continued through the second quarter of 2016. Our entire team has worked tirelessly over the last few years to better differentiate our business units and highlight their respective value propositions to clients and customers.
We know this approach will yield the best results for each business unit. These efforts have resulted in a strong foundation for continued success.
And while we still have significant plans to continue to develop the strategic objectives, it is proving successful as we saw Take Shape For Life post double-digit revenue growth in the second quarter, the highest level of year-over-year revenue growth for Take Shape For Life in three years. Take Shape For Life grew 10% compared to the second quarter last year, representing the sixth consecutive quarter of improvement in revenue growth.
Take Shape For Life results fueled our consolidated financial performance in the quarter and helped us achieve greater leverage across our cost structure. Across the entire business, gross margin expanded 110 basis points in the quarter to 74.8% and our team remains focused on efficiently managing our expenses to support our revenue plans.
On a consolidated basis, net revenue from continuing operations was $71.1 million, earnings per diluted share from continuing operations was $0.29 and adjusted earnings per share from continuing operations was $0.63. Revenue was in line with our expectations which when combined with the strength of our cost and expense leverage drove strong profitability performance.
As a result of this positive momentum, we are raising our 2016 annual adjusted earnings from continuing operations guidance, which Tim will review in detail. Our team continues to believe that we are poised to return to growth at the total company level in 2016.
We remain intently focused on continuing to take steps to optimize each of our business segments – Take Shape For Life, Medifast Direct, Franchise Medifast Weight Control Centers, and Medifast Wholesale – by advancing our plans to differentiate brands, products, programs and service offerings. I would now like to provide you with an update on our key business initiatives for 2016.
Across our Health Coach network, we're helping clients redefine the path to optimal wellbeing. As we have shared in the past, new client and Health Coach growth and productivity are key metrics for determining performance within Take Shape For Life.
And Tim will share more of the positive metrics in these areas in the financial review section. We continue to generate increased productivity as a result of higher new client acquisitions, higher new health coach sponsorship, and a higher average order value year-over-year.
Our coach network is stronger than ever as demonstrated by the rate of sponsorship combined with the productivity growth in quarter two. We believe Take Shape For Life’s continued positive momentum reflects the meaningful progress we have made executing our key initiatives to simplify the business, including providing effective training and further differentiating the value proposition.
Much of the second quarter was spent planning for our Take Shape For Life national convention in Austin, Texas, held July 21 to 24. We’re pleased to report that it was the largest convention in the company's history, with more than 3,400 registered attendees, over 20% growth from last year's convention.
Overall, the energy level, excitement and engagement from the field was outstanding and united all attendants around this year’s powerful Lead from the Future, Act Now event theme. We believe the collaboration between the field and corporate teams, it's the strongest it's ever been in the history of Take Shape For Life.
Mona Ameli, President of Take Shape For Life, and our team continue to bring our top field and corporate leaders together for planning and strategy sessions to ensure full collaborative alignment on these important plans. Together, and with a tremendous partnership with a leading provider of full potential branding for global brands, we created a fully exclusive brand and product offering that is only available to our family of health coaches and clients.
We expect this new exclusive brand to go a long way towards solving for any strategic conflict that existed between Take Shape For Life and our Medifast Direct business. This project started approximately two years ago.
It has been a wonderful journey to get us to the official launch of our lifestyle brand, OPTAVIA, which we unveiled at the annual national Take Shape For Life convention. This marks a significant evolution for us.
It is the first time in our company's history that we have an exclusive offering for Take Shape For Life, putting us in a prime position for future growth across the diverse audience not only in the United States, but over time throughout the world. Over the past two years, we worked closely with our field leadership, surveyed all Take Shape For Life health coaches and conducted numerous rounds of extensive research, both in the United States and internationally.
We have established a lifestyle brand in OPTAVIA that has a meaning and breadth to help our health coach community, better fulfill the tremendous opportunity we have to share our optimal well-being offering. Specifically, at our convention, we launched 13 new innovative OPTAVIA fuelings that feature bold flavors and exciting ingredients sourced from around the world, including Morocco, Bolivia, Indonesia and the Philippines that are packed with 25 vitamin and minerals, as well as probiotics which helps support digestive and immune health as part of a balanced diet and healthy lifestyle.
Additionally, these products are free from artificial colors, flavors, sweeteners or preservatives and are all non-GMO. Importantly, OPTAVIA fuelings provide the same scientifically proven nutritional profile as our existing portfolio of over 70 products, so our health coaches and clients can very easily interchange the new OPTAVIA products with their existing favorites and our existing plans.
The response from our health coaches at our annual convention was overwhelmingly positive on this exciting brand evolution. It’s a big step forward to have a brand and a product portfolio that is exclusive to health coaches and their clients.
All health coaches now have the opportunity to offer OPTAVIA fuelings to clients nationwide in combination with our existing product offerings. This will help attract new audiences to Take Shape For Life, while reenergizing current, even prior, clients within Take Shape For Life.
Over the course of the next year, we’ll undergo a gradual and comprehensive brand and product evolution. And by our annual national convention in 2017 in Dallas, Texas, the full brand and product transition to OPTAVIA will be complete.
Not only will this provide a tremendous opportunity for growth for Take Shape For Life, but as I’d discuss in just a bit, it presents significant upsides for our other business units who will continue to offer the Medifast branded product line. We’re extremely pleased with how far Take Shape For Life has come and are very optimistic about the continued growth and success of our largest business unit.
Shifting to our Medifast Direct business, it represents 13% of our sales in the quarter. First to note about the longer-term potential of this business unit, as we have shared, our focus on returning Take Shape For Life to growth has included making strategic decisions that have impacted the performance of Medifast Direct.
That said, the introduction of the OPTAVIA lifestyle brand, an exclusive product line, and the eventual complete transition by July of 2017 presents significant future potential for Medifast Direct. That notwithstanding, our short-term revenue and customer acquisition performance has been challenging.
We have engaged additional expertise and partners as we work on immediate improvement initiatives. This business segment is an important profit contributor and we're taking steps to address the business performance with a sense of urgency.
The most important area of focus is the ability to invest in additional advertising that would result in new customer revenue without negatively impacting the momentum in Take Shape For Life. We have clear financial targets in place and are very disciplined about our spending, placements and offers within specific parameters.
In the second quarter, our decrease in advertising spending far outpaced our decrease in revenue and this fueled strong profit performance. Or as we implement new initiatives across digital media, direct response television, Web content, customer on-boarding and many other areas, we're confident we will soon be in a position to ramp up spend efficiently and positively impact our near-term results.
Additionally, our team continues to work closely with our Franchise Medifast Weight Control Centers partners. As we have noted on many occasions, we're very fortunate to have strong franchise business operators who know this space very well.
Together, we are working with our franchise partners to evolve the offerings in the centers and initiate new pilot programs to test future concepts, while continuing to deliver strong value offering. This business and other partnerships with franchise owners represents an important part of our business and the compelling support offering for current and prospective center members.
We continue to take steps forward to accelerate the activities required to return the company to sustainable revenue and profitability growth. Our ongoing and consistent improvement across key areas of our business over the last few years and, importantly, the first half of 2016 truly demonstrates the positive momentum we're building and why our team is excited about what the future holds for Medifast.
With Take Shape For Life a very significant part of our business plan, its increasingly important that we expand the talent on our management team with individuals with extensive experience in growing the healthy direct selling business. To that end, I’m pleased to introduce the newest member of our management team.
Effective August 1, Bill Baker joined us as our Executive Vice President of Information Technology. Bill comes with significant leadership experience in a number of industries, most notably in direct selling at Rodan + Fields and Arbonne International.
So Bill brings a plethora of experience across the core IT function that will aid in our strategic plans across all business units and functions. Bill’s background in direct selling industry will reap immediate dividends as we improve the technology roadmap for Take Shape For Life.
We believe this is a critical step towards further accelerating the growth in our Take Shape For Life business first domestically and then internationally. I also want to take the opportunity to thank our entire team at the corporate offices and our partners in the field for hard work and dedication.
As a testament to the values of both our corporate team and health coach community, Medifast was named to the 2016 Forbes 100 Most Trustworthy Companies in America list. Our finance team, under the leadership of CFO Tim Robinson, continually strives to reach the highest standards of financial management and it's an honor to be included in the prestigious list of companies from such a well-respected national business publication.
In addition, Take Shape For Life was the only organization in the direct selling industry to be recognized on the list, a significant achievement for a direct selling company. In addition, Take Shape For Life has been named by the Direct Selling Association to its 2016 DSA Top 20.
It’s truly an honor to have Take Shape For Life recognized as a top 20 company again because of our incredible field of health coaches who work so hard every day to share the Take Shape For Life optimal health community. We continue to reach new levels of success.
In summary, our team remains committed to delivering value to shareholders. Our strong and consistent cash generation enables us to be in a position to continue enhancing shareholder value to both our existing dividend and share repurchase programs.
Our third quarterly dividend will be paid in August. And as of June 30, 2016, we have approximately 850,000 shares of common stock available to buyback under existing repurchase program.
We are very pleased with our operational achievements and financial results in 2016 year-to-date and we are confident we have the right strategic and executional mission is in place for future 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. And good afternoon, everybody.
I’ll now review our performance for the second quarter ended June 30, 2016. Please note that the financial information I reference today will focus on our results from continuing operations.
For the second quarter of 2016, we had no activity from discontinued operations. Compared to income from discontinued operation, net of tax, approximately $400,000 in the second quarter of 2015.
Before I get into the operational results for the quarter, I want to take a moment to explain an important recent decision to record a $6.1 million non-cash expense for a software asset impairment. I will reference this expense several times during the call and will reflect the expense in our reconciliation of non-GAAP measures to help provide better insight into our ongoing operational results.
The impairment expense is the result of a comprehensive evaluation, a recent decision to implement a new state-of-the-art proven direct sales software platform for Take Shape For Life and to cease work on an internally developed software platform. Technology solutions have evolved rapidly in the past several years and our business requirements have changed since the scope and design of our internally developed system was determined several years ago.
The new competence of cloud-based software solution has significant advantage over the internally developed platform, better meets our current and future requirements and will be deployed to our field much more rapidly. In addition, implementation of new platform is more cost-effective over time.
New software platform greatly enhances our coaches’ ability to manage their business activities and client communications. Additionally, the software is designed to process commission payments for health coaches, provide deep insights into our business trends, and provide an enhanced online experience for clients and coaches.
We felt this is a very important step in preparing the infrastructure for accelerated growth domestically and internationally. As Mike mentioned, we recent hired a very talented new IT executive with deep roots in the direct selling industry.
Bill actually assisted us through the final evaluation and decision prior to arriving this week and will now lead the team that will implement the new solution over the next 9 to 12 months. Now, let’s take you through our second quarter results from continuing operations.
In the second quarter, net revenue decreased approximately 1.5% to $71.1 million from net revenue of $72.2 million in the second quarter last year. The Take Shape For Life business unit accounted for approximately 80.7% of revenue.
The Medifast Direct business unit accounted for 13.1%. The Franchise Medifast Weight Control Centers business united accounted for 5.8%.
And the Medifast Wholesale business unit accounted for 0.4% of net revenue. Expanding on our sales mix in more detail, revenue in the direct sales unit, Take Shape For Life, was up 10% to $57.4 million from $52.3 million in the second quarter of the prior-year.
The sequential quarterly improvement and the year-over-year trending continued in the second quarter and we’re pleased to have a third consecutive quarter of positive year-over-year revenue growth in Take Shape For Life. We’re also very pleased to return to double-digit growth in Take Shape For Life for the first time in three years.
There were approximately 12,800 active health coaches in the second quarter compared to 11,800 in the same period last year and 12,600 in the first quarter of 2016. New coach sponsorship continues to grow in double-digits at 15% in the second quarter.
Average revenue per active earning health coach for the quarter increased to $4,479 from $4,423 in the second quarter of last year. We continue to be encouraged by the improvement in our newly sponsored coach count and the increased level of coach productivity.
We believe that our increased emphasis on key Take Shape For Life strategies, the increased engagement level of our field leaders, the operational improvements to health coach experience, and the incremental resources added to the Take Shape For Life team have a cumulative impact that have translated into operating momentum and will in turn drive sustainable growth. We continue to be pleased with the visibility we have into the key growth drivers in Take Shape For Life and our activities are intently focused of fueling the growth trajectory of Take Shape For Life over the next several quarters and years.
Our Medifast Direct segment revenue decreased 32% to $9.3 million as compared to $13.7 million in the second quarter of the prior-year. As Mike discussed, this business unit continues to experience challenges and our team is working to implement and test initiatives across acquisition, conversion, retention, on-boarding and reactivation in order to drive improved results.
Total Medifast Direct advertising in the quarter decreased 61% to $1.6 million from $4.1 million in the second quarter of 2015. This reflects the strategic decision to manage this business appropriately given our focus on returning Take Shape For Life to growth.
It also reinforces our discipline to not only spend behind initiatives that meet our criteria while we work furiously on implementing the improvements Mike set forth earlier. While customer acquisition challenges continue to be addressed, this business unit continues to deliver strong contribution towards our overall profitability.
As we gain increased traction with the plans currently in place, we expect our advertising spending will slowly ramp up again. Revenue in the Franchise Medifast Weight Control Centers business unit decreased to $4.1 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 57 franchise centers in operations compared to 62 at the end of the same period last year.
Medifast Wholesale, which is comprised of revenue from healthcare providers and other wholesale partners, decreased $1.2 million to $300,000. This is expected and communicated on several prior earnings calls.
The decrease to revenue was intentional as was caused by Medifast enforcement of our business partners compliance requirements. It has resulted in us closing a number of customer accounts since mid-2015.
As we move into the third quarter and second half of 2016, we expect this to be a much easier comparison for us. Gross profit for the second quarter of 2016 was consistent with the prior-year period at $53.2 million.
We were pleased to see our gross profit margin as a percentage of net revenue expand by 110 basis points to 74.8% versus 73.7% in the second quarter of 2015. The increase was driven primarily by price increase and improvements in our supply chain operations.
Selling, general and administrative expenses in the second quarter of 2016 were $48.2 million versus $44.5 million in the second quarter last year. Excluding the $6.1 million non-cash asset impairment expense this quarter that I mentioned earlier and $300,000 of extraordinary legal and advisory expenses resulting from [indiscernible] in the second quarter of last year, our second quarter 2016 adjusted SG&A was $42.1 million or 59.2% of revenues compared to $44.2 million or 61.3% of revenues in the second quarter of last year.
Sales and marketing expense decreased $2.9 million in the second quarter of 2016 as compared to our second quarter of 2015. Second quarter operating income from continuing operations before tax was $5.1 million or 7.2% of net revenue compared to income from continuing operations before tax of $8.8 million or 12.2% of net revenue in the second quarter of 2015.
On an adjusted basis, operating income from continuing operations before tax was 15.7% of net revenue compared to 12.6% of net revenue in the second quarter of last year. Income from continuing operations was $3.4 million or $0.29 per diluted share based on approximately 11.9 million shares outstanding.
Second quarter 2015 income from continuing operations net of tax was $5.8 million or $0.48 per diluted share based on approximately 12.2 million shares outstanding. Our second quarter adjusted income from continuing operations was $7.5 million or $0.63 per diluted share compared to adjusted income from continuing operations of $6 million $0.50 per diluted share in the second quarter of 2015.
Adjusted income from continuing operations is a non-GAAP financial measure. Please refer to the table’s in today's press release for a reconciliation of all non-GAAP financial measures.
Our effective tax rate was 33.3% compared to 33.8% in the second 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 credit permanent, allowing us to recognize the credit throughout the year.
In prior years, recognition of this credit was dependent on the timing of the annual approval by Congress. Our balance sheet remains very strong with stockholders’ equity of $91.3 million and working capital of $73.4 million as of June 30, 2016.
Cash, cash equivalents and investment securities for the second quarter of 2016 increased $12.5 million to $79.6 million compared to $67.1 million at December 31, 2015. We did repurchase any shares during the quarter, the second quarter of 2016.
We currently have approximately 850,000 shares remaining on our repurchase authorization as of June 30, 2016. Now, turning to our guidance.
We expect the third quarter net revenue from continuing operations to be in the range $64 million and $67 million and earnings per diluted share from continuing operations to be in the range $0.43 to $0.46. For the full year, we're reiterating our revenue guidance from continuing operations to be in the range of $275 million to $282 million.
We continue to take a cautious view on our topline guidance as we monitor the positive momentum from our newly implemented Take Shape For Life strategies and work diligently to reverse the trends in the Med Direct business. As is all of our recent non-cash asset impairment expense, we now expect earnings per diluted share from continuing operations to be in the range of $1.38 to $1.43.
The company is raising its guidance for adjusted earnings per diluted share from continuing operations to $1.79 to $1.84 per diluted share from our prior guidance of $1.75 to $1.80. Adjusted earnings per share excludes $1.2 million of restructuring costs associated with separation agreements with several senior executives in a $6.1 million non-cash asset impairment expense.
The company expects annual savings associated with restructuring, excluding the current year restructuring cost to be approximately $2.2 million. That concludes our operational and financial overview.
We appreciate your interest in Medifast. And Mike and I are available now to take your questions.
Operator?
Operator
[Operator Instructions] Our first question comes from Frank Camma from Sidoti. Please go ahead with your question.
Frank Camma
Good afternoon, guys. How are you doing?
Michael MacDonald
How are you doing, Frank?
Frank Camma
Yeah, good. Hey, just couple of questions maybe on the guidance.
So on the gross margin for this quarter you had, pretty high, obviously. You must be expecting that to pullback.
I just wonder if you could discuss that little bit. Was that something extraordinary pulling that up?
Timothy Robinson
No, we had done a number of things in the quarter from our perspective. One, we had a price increase that took place April 1.
So we had a full quarter benefit of a price increase. We also had some really good work done on our supply chain operations around the costs of getting the product to the customer, primarily the delivery cost to the customer by redesigning packaging to be more efficient in our – the size and the footprint of the box.
So those things will continue to be ongoing. I think when you look at the forecast for the full year, kind of the implied guidance for the fourth quarter is somewhat similar to what it was last fourth quarter.
And I think, there, we are looking at opportunities to make some investments in the fourth quarter in the area of advertising. And also, we’ve got a lot of packaging design and things we need to do for the new OPTAVIA brand.
So we took a conservative approach I think on the fourth quarter.
Frank Camma
So it’s more of a G&A expense, specifically in that sort of investment for next year most.
Timothy Robinson
We’d like to have the opportunity to make those choices in the fourth quarter if the right opportunities are presented to us.
Michael MacDonald
Our fibrous platform is being implemented at that time, Frank. So once we have a new platform in for Med Direct, that would be the time to potentially increase our advertising.
Frank Camma
I got you. I got you.
Could you talk about any developments with the sports products that you rolled out and what learnings you’ve gotten from that and any maybe partnerships or new partnerships you might be…
Michael MacDonald
We're still working on product development as an example on some of the products. So we don't have the product lines sold out yet, but we have signed up about seven colleges and universities and we also have the ECAC, the Atlantic Hockey League, and the CIA conference where we are sponsoring three conferences.
So one of the things we’re doing, Frank, is really trying to get the right references and start to sign these people up. It does take some time.
So we don’t expect that to be material this year. But it also helped us to prepare and experiment with the product lines.
As Mona looks in the future at our OPTAVIA product line, she can determine what she wants to do with those types of products down the road. But we feel good about the progress we’re making and we’re going to have some good solid references of people working with us to give credibility to our approach.
Frank Camma
Okay, good. As you walked away – you explained a little bit about the software and walking away from it.
What type of investment does that require you to put up or is it more of a subscription model, this new system or – this option that you’re going with.
Timothy Robinson
Yes, it’s a subscription model, Frank. So there’s very little upfront cost associated.
There’s no acquisition. Other than as a public company in order to be SOX compliant, there's some servers we’re going to have to care, but they’re relatively insignificant.
Just to make there’s adequate backup.
Frank Camma
Okay, great. Last question for me is, we talked a little bit about ultimately an international strategy.
Can you give us – it’s probably too early, but is there any way you can give us a sense of timing or what – you probably don’t want to disclose markets, just a little more clarity on that on what your…
Michael MacDonald
We have Mona here for a minute. One of the key issues is the system, it’d allow us to do that.
I’m going to let Mona answer that question.
Frank Camma
Sure. Okay, great.
Thanks.
Mona Ameli
Hi. So one of the most important part of actually going international is to be able to make sure that we have the right infrastructure and the right support and investing in this new IT platform enables us to have a multilingual, multicurrency platform and to be able to then start working on our cross-border sponsorship compensation plan to ensure that health coaches that come onboard in other countries are able to be compensated and vice versa.
So there are some additional parts that goes into it. On top of that, as we introduce the OPTAVIA new product line and the reformulation, we need to go through regulatory approvals through the countries.
So we are doing constant background work right now on making sure that we have the right infrastructure, the right tools put in place on our end, so that we could hopefully go international once we have all those in place.
Frank Camma
Understand. And if I could just ask one follow-up to that, how do you decide what markets would make sense from a marketing standpoint or from a branding standpoint?
Like, where would that OPTAVIA appeal to international customers, if you will, if that’s the right way to look at it?
Mona Ameli
What we do is really a cross reference of market on understanding the potential both from a product positioning standpoint that what Octavia presents as optimal well-being, which is a combination of not only losing weight, but weight maintenance and attractiveness of sustainable lifestyle and we cross-reference that with the opportunities and the market size of direct selling, which is the business model. So when you look at that, we assess the opportunities that are also geographically close to us, so that we’re able to do a cross-reference of actually starting our international expansion in the home country, in the US through the various ethic markets and then expand then with leadership and with people here going to foreign markets with us.
So we have looked at what that looks like from a timeframe perspective, of regulatory approvals, but also time perspective of making sure that we have the right leadership that can go in with us and open those markets.
Frank Camma
Great. Thank you.
Michael MacDonald
Thanks, Frank.
Operator
Our next question comes from Mitch Pinheiro from Wunderlich Securities. Please go ahead with your question.
Mitch Pinheiro
Hey, good afternoon.
Michael MacDonald
How are you doing, Mitch?
Mitch Pinheiro
I’m doing well. So couple of questions.
Getting back to be the guidance issue for a second, so you're raising basically your guidance on an annual basis by $0.04 a share and you beat the second quarter here by, call it, $0.10 just for round numbers. So, in effect, is that $0.06 differential, is that sort of now in your model thinking about the investments for next year, maybe in the fourth quarter?
Is that how it should be understood?
Timothy Robinson
Yeah. I think that’s the right way to think about.
I think we’re coming out of the second quarter favorable to where we expect to be and we have an opportunity now, I think, to make some investments in the latter part of the year to help 2017 get off to a great start. And we’re going to monitor some of the testing that we’re doing to see how that does.
And as we see those things kind of prove success in customer acquisition, we’d love to make those investments into kind of getting a jumpstart. So that's exactly how to look at it.
Michael MacDonald
The other thing we’re doing too, Frank, we’re also investing in the conversion of our product lines to OPTAVIA where we’re creating very exclusive new products for our network and I think that's a key area for us because the first 13 were the convention, but we expect to launch more in the first quarter, more as we go through the year because our goal is to have the product line changeover done by July of next convention. By the way, a very exciting thing out of convention is we had double the signups for our next convention which is the most we’ve ever had.
And we had 3,400 people and our sign-up process was double what it was at the end of last year’s convention.
Mitch Pinheiro
So okay. So let me back up and look at SG&A also then.
You sort of – a big part of this quarter was simply that sales and marketing expense – advertising was down $2.9 million. So is this current level of SG&A spending sort you’re under-spending here.
It's not a sustainable level that we’ll see that pop back up to higher levels that you hope to be supported by more gross profit coming out of some – your revenue growth next year. Is that how the SG&A kind of writes itself?
Or are we at a new cost paradigm here and like a sub-60 SG&A is the right number to use?
Timothy Robinson
I think that the – from an advertising perspective, it was a low quarter. And we constantly test and look at the cost of client acquisition and we kind of pull a lever forward and backwards based on how that works.
But I think that is not where our expected levels are. I think as the brands further separate, the opportunities to have a bigger presence with Medifast Direct, without negatively impacting Take Shape For Life, will start to grow.
And as those opportunities grow, our spending will grow.
Michael MacDonald
And the other thing, I think, Frank, is even the decision we made on the asset impairment is that will lower our cost as we go forward versus increase our costs. So we are managing our cost base very, very efficiently.
I don’t think there’s any question if you looked at the last few years we’ve done that pretty well. But we do need to put more money into advertising in the fourth quarter once we get the systems in place and we improve the processes and we have a very good consulting firm we’ve hired that are working with us on that.
And that should be a big benefit.
Mitch Pinheiro
For the last couple of years, you have been taking a lot of costs out. Are you at the point where you’re down to the bone?
Or maybe where old costs – you were just too fat before.
Timothy Robinson
Certainly, we’re always looking at opportunities to take any kind of cost out. But just I think to reframe that a little bit, when you look at most of the costs that have come out in the past, we took business units that were not profitable like the clinics, and that's where a lot of our cost cutting over the past several years have come from.
Our employee base is about half what it was because we don’t have all the folks out there manning the clinics. So that’s largely where a lot of that’s come from.
I wouldn’t really look at it that way. It's not we're looking for those types of things.
I think that we’re looking to make investments to grow the business. And I think this past quarter is an example from a timing perspective with everything happening with the OPTAVIA launch, it wasn’t the right time for us to make those investments in advertising.
But that time will present itself again and we do expect to ramp that spending back up again with profitable revenue growth.
Michael MacDonald
And by the way, we’ve been investing in products and in Take Shape For Life and adding resources. We’re not cutting back the investment.
I think where we’ve done a good job, Mitch, is we’ve restructured very well out at businesses that weren’t profitable to make each business profitable. And I think that’s where you’ve seen the bigger reductions.
Mitch Pinheiro
Okay. That makes sense.
And then, as I look at OPTAVIA, are gross margins going to be similar to your current Take Shape For Life product line?
Michael MacDonald
Yeah. The 13 products we just launched are very, very similar product margins as our existing line.
Mitch Pinheiro
Even with all the exotic ingredients and hard-to-find chia seeds, et cetera, you can still maintain – is it priced higher?
Michael MacDonald
It is priced higher. Our core product line today, price point is about $18.95 and the new product line with the premium ingredients is about $22.95.
So it’s different price points. Speaking of prices, you said you took a price increase in April.
Can you quantify roughly the percentage?
Timothy Robinson
The price increase affected part of our offering. The price increase really didn’t apply most – much of our acquisition offers that are out there.
So we made sure the client acquisition was really not affected this time. So we have one quarter of history behind us.
But it's very low single digits impact. I think if it applied everybody across the board, it will probably be about a 4% price increase and maybe we’re getting a flow-through of 1.5% or something like that.
Mitch Pinheiro
Okay, that's helpful. And then, obviously, you're excited about OPTAVIA.
What I've seen of it looks certainly on-trend, ingredients and new flavor profiles, and that's all a great innovation. But wouldn't you want that – are you going to do the same for Med Direct?
Do you want the same type of – or are you going to stay with sort of the current format to stay differentiated? Don't you want to change to a more updated sort of product offering?
Michael MacDonald
I think the intention really is to keep Med Direct on trend as well. I think our priority was the OPTAVIA line and I think the strategy will be different, however.
They will not be the same. So, in ten years, not to have the same products sold in each of those channels.
So we will have some planning to do with Med Direct for what that product looks like, what those offerings look like in the future, but they will be different in the offerings in OPTAVIA.
Mitch Pinheiro
Okay. And then – and so, I guess, we should expect Med Direct to stay sort of status quo until you get around to July when you can sort of have a fully differentiated business.
Is that what I heard before?
Timothy Robinson
I think what you’re going to see, we would expect, Mitch, some levels of improvement in Med Direct, but I believe over the next 12 months, until you have a totally differentiated product line, you’ll continue to see – Med Direct will improve, but we won't see step function improvement until you see a differentiated product line. And our goal really is to make sure that we’re focusing on creating a great experience for this whole OPTAVIA experience.
And, clearly, that’s – our business is 80% Take Shape For Life and 13% Med Direct. So I think we need to understand that’s the basis of our business.
We’re really a very strong direct selling company and our goal is not to try to be Nutrisystems.
Mitch Pinheiro
Got you. And then, I guess, the last question is on, like, the July convention and what that means for a sort of health coach growth.
Should we expect growth off of that 12,800 that you ended this quarter with?
Michael MacDonald
Coach growth is somewhat seasonal. So when you think about sequential growth, as you go into the latter part of the year, people – that's around the holidays, we always see a little bit of help.
But I think the momentum on a year-over-year basis is – we feel we’ve been pretty consistent. So we expect to continuing to see health coach growth throughout the year on a year-over-year basis.
But there is some sequential quarter seasonality.
Mitch Pinheiro
And so the third quarter is roughly – the range in earnings per share is roughly flat with last year? Is there a large amount of – you would expect a little bump with health coaches.
I would just – thought with such a – with strong attendance and a lot of enthusiasm there, is the convention expense in this quarter also weighing on the third quarter? Is that what's driving it to be flattish rather than maybe a little pop here?
Timothy Robinson
You always do have your convention expense which always happens in July relative to third quarter. That has some impact certainly.
I didn’t calculate it, but the impact probably more than several cents. So that definitely has some impact.
But on a year-over-year basis, that’s not very different.
Mitch Pinheiro
Okay.
Timothy Robinson
I think the third quarter, as you start to attract new coaches, newer coaches are less productive than your average coach, so you – kind of period of growth, usually is some downward pressure. In all honesty, we haven't seen that in the past couple of quarters, which is a great thing.
To see your average revenue per coach go up at a time when you’re growing is different than the trends we have seen in the past. So what basically means is that your existing coaches are increasing their productivity as well as you’re getting new coaches.
So that's a really good sign. Look, definitely, there’s some opportunities in the third quarter, hopefully, if we hit on all cylinders to do better than our guidance.
But we like to make sure we set a guidance level that we feel very, very comfortable that we’re going to be able to achieve and always like to have upside.
Mitch Pinheiro
That’s a good thing. Okay.
Well, thank you for your time and the questions.
Michael MacDonald
Thanks very much, Mitch.
Operator
And ladies and gentlemen, at this time, we’ve reached the end of the question-and-answer session. I’d like to turn the conference call back over to management for any closing remarks.
Michael MacDonald
I just want to thank everybody for participation on the call today. Thank you very much.
Operator
Ladies and gentlemen, that does conclude today's conference call and we do thank you for attending. You may now disconnect your lines.