May 3, 2018
Executives
Katie Turner - ICR Dan Chard - CEO Tim Robinson - CFO
Analysts
Frank Camma - Sidoti Linda Bolton Weiser - DA Davidson Douglas M. Lane - Lane Research
Presentation
Operator
Good afternoon and welcome to the Medifast First Quarter 2018 Earnings Conference Call. All participants will be in 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. Please go ahead.
Katie Turner
Good afternoon. Welcome to Medifast first quarter 2018 earnings conference call.
On the call with me today are Daniel Chard, 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, 2018 that went out this afternoon at approximately 4:05 PM Eastern Time.
If you've not received the release, it is available on the Investor Relations portion of Medifast Web site at www.medifastinc.com. This call is being webcast and the 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, anticipate and other similar expressions generally identifies 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 projection that maybe made in today's release or on today’s call. All the forward-looking statements contained herein speak only as of the date of this call.
And with that, I would like to turn the call over to Medifast Chief Executive Officer, Dan Chard.
Dan Chard
Thank you, Katie. Good afternoon everyone.
We're pleased to discuss our first quarter 2018 results with you today. I will provide a brief overview of our financial and operational business performance.
Tim will then review our financial results in more detail and share our 2018 second quarter and full-year guidance. We will then be available to answer any questions.
We started off the year with a strong first quarter as the momentum we built throughout 2017 continue to accelerate into the first quarter of 2018. Our corporate team and our field leaders are aligned behind our strategy to extend our unique offer to a growing client population throughout the United States and soon internationally.
It is clear that our mission to offer the world lifelong transformation, One Healthy Habit at a Time is resonating in the U.S market. We ended the first quarter with a record of 16,700 active earning OPTAVIA Coaches to support the clients in achieving their health goals.
The growth of our OPTAVIA Coach base along with improved revenue per active OPTAVIA Coach combined to deliver financial results that exceeded our expectations for the first quarter. Quarterly year-over-year revenue growth accelerated from a 25% growth in the fourth quarter of 2017 to nearly 40% growth in the first quarter of 2018.
This mark the fourth consecutive quarter of year-over-year growth and the fifth consecutive quarter of sequential revenue improvement. The first quarter was also the largest revenue and profit quarter in the history of the company.
Our team continues to focus on generating operating efficiencies to maximize profitability as we continue to grow. Gross margin expanded 100 basis points to 75.9% and SG&A cost as a percentage of revenue decreased 170 basis points.
These improvements contributed to a record operating margin of 14.9%. Combined, the acceleration in our revenue and our operating efficiencies, drove first year -- first quarter diluted earnings per share of $1.01 ahead of our first quarter guidance of $0.84 to $0.87 diluted earnings per share.
With this strong start of the year, we're raising our annual revenue and profit outlook which Tim will discuss in just a minute. To give you a feel of how our business is developing, let me share a few recent highlights to illustrate how corporate and field leaders are partnering to execute on key strategic initiatives.
Just last month, we had the pleasure of hosting our Annual Global Leadership event, in Florida. It was the largest global event in the history of the company with approximately 1,400 OPTAVIA Coaches in attendance.
This represented a 40% year-over-year increase. This event is for qualifying OPTAVIA Coaches who aspire to advance to become stronger leaders and mentors within the OPTAVIA Coach and Client Community.
In addition to a series of presentations and workshops, the event provided our first opportunity to formally outline our international expansion plans to extend our business offer to Hong Kong and Singapore in the first half of 2019. OPTAVIA Coaches heard from both field leaders and corporate executives on how to participate in our expansion and why is it important for them to join us at the upcoming training events planned for our July convention in St.
Louis. We also announced two new exciting OPTAVIA Fuelings: Caramel Macchiato and Silky Peanut Butter Shakes at this event.
These incremental products are designed to make healthy habit creation easier for our OPTAVIA community of coaches and clients. Our product development and marketing teams continue to work on new innovative product offers to support future categories in the delivery of our brand promise of creating healthy lifestyle tied to incorporating new healthy habits in their daily routines.
Our technology investments are focused on improving our enterprise and mobile technologies to support our business operations and enable our OPTAVIA Coaches as they support their client and trainer teams. A good example is the recently announced agreement with Gatheredtable for perpetual license to their software, which will help our coaches and clients make healthy eating second nature.
Operationally, we're preparing for the opening of our distribution center in Nevada, in June. We’ve partnered with a leading global logistics provider to open scalable operations designed to support our growing business here in the United States as well as our upcoming shipments to our new Asian markets.
Along with our company-owned East Coast distribution center in Maryland, we're well-prepared to support the growing needs of the company. In summary, we're successfully executing our strategy of aligning our corporate and field leaders behind a repeatable business rhythm capable of delivering long-term sustainable growth.
Our results have been at accelerating growth rate, improving operating efficiency and increasing fuel productivity. Our focus moving forward will continue to beyond delivering above average returns to our shareholders by continuing to develop our U.S business and expanding our offer into Asia through the opening of two key gateway markets in Hong Kong and Singapore.
We're optimistic and excited about the future opportunities ahead of us. With that, I will turn the time over to our CFO, Tim Robinson.
Tim Robinson
Thank you, Dan, and good afternoon, everyone. Before I begin, I want to remind everyone that starting this quarter we’ve changed how we report sales.
Going forward, simplifying the line of changes in the way we now manage the business, review operating performance and allocate resources. We previously disclosed entity wide disclosures for sales by channel, OPTAVIA, Medifast Direct, Franchise Medifast Weight Control Centers, and Medifast Wholesale.
Through the interchangeability nature of the customers among sales channels, sales migration to OPTAVIA and realignment of the internal operations, we will now be operating and reporting as a single sales channel. This change in our financial reporting structure is a testament to our success in transforming and restructuring the business and a reflection on how the business is managed today.
Secondly, I wanted to inform you about an important accounting change we made beginning January 1, 2018. As most of you are aware, the updated Financial Accounting Standards Board revenue recognition standard requires companies review the way they recognize revenue.
As required, we've completed our view and adopted a new standard in 2018 on a modified retrospective basis. As a result, on a net basis, we recorded an after-tax transition adjustment to reduce retained earnings as of January 1, 2018 by $2 million.
This is comprised of $5.6 million of revenue offset by $3.6 million of inventory costs, commissions expense, shipping cost, credit card fees, and related income taxes. The adoption of this new accounting standard primarily impacts the timing of revenue recognition for product shipments.
As product revenue will be recognized upon customer receipt and delivered at the time of shipment. A reconciliation of this is contained within our press release issued this afternoon and in our Form 10-Q filed with the SEC.
I will now like to review our financial results for the first quarter ended March 31, 2018. First quarter 2018 revenue exceeded our expectations increasing 39.6% to $98.6 million from $70.6 million in the prior year period.
As Dan mentioned, we ended the quarter with a record 16,700 active earning OPTAVIA Coaches compared to just 13,000 in the prior year and 15,000 in the fourth quarter of 2017. Average revenue per active earning coach for the quarter increased 18.3% to $5,278 compared to $4,463 for the first quarter of last year.
The growth in productivity is very encouraging and result in part from improved field training initiatives and the accelerated rate of new productive OPTAVIA Coaches in the quarter. The increase in the mix of higher priced OPTAVIA products also contributed to the increase in productivity of our coaches.
OPTAVIA branded products represented 58% of our total company consumable units sold in the first quarter compared to 17% in the prior year period. Gross profit for the first quarter of 2018 increased 41.4% to $74.8 million compared to $52.9 million in the prior year period.
Gross profit margin as a percentage of net revenue increased 100 basis points to 75.9% versus 74.9% in the first quarter of 2017. The increase in gross profit margin was a result of improved inventory management and shipping expenses.
Selling, general and administrative expenses for the first quarter of 2018 were $60.1 million or 61% of revenues versus $44.3 million or 62.7% of revenues in the first quarter last year. The increase in SG&A was primarily a result of higher OPTAVIA commission expenses resulting from the growth and success of our OPTAVIA Coaches.
Our effective tax rate was 18.1% compared to 29.5% in the first quarter of 2017. This decrease in the rate is result of a decrease in the Federal Statutory rate pursuant to the Tax Cuts and Jobs Act as well as the discrete accounting for taxes associated with share-based compensation.
Excluding the discrete accounting for taxes associated with share-based compensation, our effective tax rate would have been 23.1% for the first quarter of 2018. Net income in the first quarter of 2018 was $12.2 million or $1.01 per diluted share based on approximately 12.1 million shares outstanding.
First quarter 2017 net income was $6.1 million or $0.51 per diluted share based on approximately 12 million shares outstanding. Our balance sheet remains very strong with stockholders equity of $113.6 million and working capital of $92.9 million as of March 31, 2018.
Cash, cash equivalents and investment securities as of March 31, 2018 increased $10.4 million to $109.2 million compared to $98.8 million at December 31, 2017. Our Board of Directors declared a quarterly cash dividend in the first quarter of $5.7 million or $0.48 per share payable on May 8.
Our management team and Board of Directors remain committed to enhancing value for our shareholders. Now turning to our guidance.
We expect second quarter revenue to be in the range of $99 million to $102 million, and earnings per diluted share to be the range of $0.94 to $0.97 per diluted share. We are raising our previous guidance for the full-year of 2018 and now expect revenue in the range of $385 million to $395 million and earnings per diluted share to be in the range of $3.55 to $3.65 per diluted share.
Our fiscal year 2018 guidance assumes a 21% to 22% effective tax rate. Well, that concludes our operational and financial overview.
We appreciate your interest in Medifast and Dan and I are now available to take your questions. Operator?
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Frank Camma of Sidoti.
Please go ahead.
Frank Camma
Dan Chard
Tim Robinson
Frank Camma
Tim Robinson
Frank Camma
Tim Robinson
Frank Camma
Dan Chard
Frank Camma
Dan Chard
Frank Camma
Dan Chard
Frank Camma
Dan Chard
Operator
The next question is from Linda Bolton Weiser of DA Davidson. Please go ahead.
Linda Bolton Weiser
Tim Robinson
Linda Bolton Weiser
Tim Robinson
Linda Bolton Weiser
Tim Robinson
Linda Bolton Weiser
Dan Chard
Linda Bolton Weiser
Dan Chard
Linda Bolton Weiser
Tim Robinson
Linda Bolton Weiser
Tim Robinson
Linda Bolton Weiser
Dan Chard
Linda Bolton Weiser
Dan Chard
Operator
The next question is from Douglas M. Lane of Lane Research.
Please go ahead.
Douglas M. Lane
Tim Robinson
Douglas M. Lane
Tim Robinson
Douglas M. Lane
Dan Chard
Douglas M. Lane
Tim Robinson
Douglas M. Lane
Tim Robinson
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.
Dan Chard
I’d like to thank all you for your interest in Medifast and a particular thanks to our community of OPTAVIA Coaches across the country for everything they did to make this quarter a successful one. We appreciate all of your participation in today's call.
And Tim and I look forward to speaking with you again when we report our second quarter 2018 financial results. Have a nice evening.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.