Nautilus (NLS) Q4 2020 Earnings Call Transcript

Nautilus (NLS)
Q4 2020 Earnings Call
Feb 22, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Nautilus, Inc. fourth-quarter 2020 earnings results conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Mills, ICR.

John Mills -- Investor Relations

Thank you. Good afternoon, everyone. Welcome to Nautilus' fourth-quarter 2020 conference call. Participants on the call from Nautilus are Jim Barr, chief executive officer; and Aina Konold, chief financial officer.

Please note that this call is being webcast and will be available for replay for the next 14 days. We will be happy to take your questions at the conclusion of our prepared remarks. Our earnings release was issued today at 1:05 p.m. Pacific Time and may be downloaded from our website at nautilusinc.com on the Investor Relations page.

The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures. For today's call, we will have a presentation accompanying the call that management will refer to during their prepared remarks. And on Slide 2 is our full safe harbor statement, which we ask everyone to read. You can access the presentation by going to nautilusinc.com, then click on the Investors tab and then click on the Events and Webcast, and the presentation will be there.

I would like to remind everyone that during this conference call, Nautilus management will make certain forward-looking statements. These forward-looking statements are based on the current beliefs of management and information currently available to us. Such forward-looking statements are not guarantees of future performance and, therefore, one should not place undue reliance on them. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control and ability to predict.

For additional information concerning these factors, please refer to the safe harbor statement and to our SEC filings, which can be found in the Investor Relations section of our website. And with that, it is my pleasure to turn the call over to Nautilus' CEO, Mr. Jim Barr. Please go ahead, Jim.

Jim Barr -- Chief Executive Officer

Thank you, John. Good afternoon, everyone, and thank you for joining today's call. I'm delighted to speak with you today about our company's record-breaking performance in the fourth quarter that capped a game-changing year for Nautilus. I'll highlight our financial and operational performance, underscore the profound contribution from our people and partners, discuss our outlook for the future and finish with a few words about North Star and our upcoming Investor Day.

We ended the year with a tremendous fourth quarter, executing on all fronts with growth across all brands, channels and products. To achieve our record results, we met the continued strong demand with significant increases in supply. Our incredible growth was somewhat tempered short term by disruptions in global logistics, similar to what many other companies and industries have experienced. Let me start with our financial highlights, and they are truly remarkable.

Our fourth quarter was not just good, it was the best quarter in the company's 35-year history by both top and bottom line measures. Full company revenue was over $189 million, up 82%. On an apples-to-apples basis, excluding the recently divested Octane business, revenue in the fourth quarter more than doubled versus the year-ago period, up 108%. Both our reporting segments also turned in their best quarter ever.

Direct was up 129%. And Retail, excluding Octane, was up 96%. For the year, the company generated $553 million in revenue. The highest sales year for Nautilus since 2006 and easily the best comp in our history as a public company, plus 79% and plus 97%, excluding Octane.

This came in within our guidance and would have been even higher if it weren't for a severe shortage of shipping containers. At year-end, we had over $16 million of completed and sold inventory sitting near our factories just waiting for retailers to pick them up. These so-called factory fulfilled orders are common in our business, but the magnitude of sold and unshipped inventory is far from typical. Under this FFO arrangement, retailers are responsible for arranging transportation, finding containers and picking them up at our factory, at which point title passes and our revenue is recognized.

When even leading retailers like Amazon are not able to take possession of product they badly want due to an inability to find shipping containers, it serves as a strong illustration of the global disruption that is occurring. All told, we entered 2021 with $91 million in backlog. Operating income for the quarter was $41 million, second only to third-quarter 2020 in our history and 1,100% increase over fourth-quarter 2019. Excluding the gain on Octane we recognized one quarter earlier, fourth-quarter 2020 is the highest ever for Nautilus.

For the full year, operating income was $78 million, compared to a loss of $101 million in 2019. Excluding the Octane net loss on disposal, operating income for the year was $98 million and adjusted EBITDA was $107 million, exceeding the top end of our guidance by $7 million. This is a swing of $125 million versus last year's EBITDA loss of $18 million. That $125 million improvement in EBITDA resulted in a massive change in year-to-year cash and short-term investments.

We ended the year with $94 million of cash and short-term investments, giving us additional resources to invest in our company's long-term growth. While our results were aided by the at-home fitness tailwind for much of the year, I want to emphasize that they were far from easy to achieve. In many ways, 2020 may have instead been our most challenging year in history. We faced many unprecedented and unanticipated obstacles and navigated through them to produce this outcome.

We also had key learnings we can apply to the future to execute even better. These record results were driven by executional improvements we began implementing in late 2019, well before the pandemic hit. Our employees and partners' agility and endurance in confronting adverse conditions in their professional and personal lives and their grit determination and creative problem-solving in the face of the numerable operational challenges. I'm very proud of our whole company for facing challenges for delivering for customers and shareholders in a truly incredible performance.

Underlying these financial results and the extraordinary efforts are some impressive operational achievements worthy of calling out. Working out -- working with our valued partners, we dramatically increase production and supply chain capacity. To accelerate connected fitness, we've launched seven new cardio products, including the debut of the industry's first unstationary dual-mode bike VeloCore, introduced the next generation of Bowflex Max Trainer and expanded the Bowflex treadmill line. In addition, we launched our instantly popular SelectTech 2080 Barbell set, updated Bowflex benches and refreshed our Schwinn 30 Bike series.

All in all, our portfolio features strong consumer choice of strength and cardio of modalities and the price points. Our new products and a more modern go-to-market approach have gotten us into the conversation in connected fitness in a big way. As tangible examples, our earned media impressions through our public relations efforts were up over four times year over year, and our social media influencer program produced eight times the reach compared to a year ago. Our products are not only in the conversation, but winning reviews and awards.

Such as VeloCore winning the prestigious award for innovation at this year's Consumer Electronics Show. We continue to rev JRNY, our individualized connected fitness digital platform, with a new user interface, more features, many more classes and on-demand workouts, including, for the first time, off-machine workout such as yoga. JRNY offers more choices for less. Other popular fitness platforms tend to focus mostly on trainer-led group classes where you follow along.

JRNY includes classes, but its focus is on each member individually, providing a one is to one AI-driven personalized experience based on each individual's own progress and goals, providing a virtually unlimited number of suggested workouts. It also provides entertainment options and immersive experiences, which can be used stand-alone or at the same time as the adaptive workouts in individualized coaching. Our members value variety, and we deliver all of this for a fraction of the price of the nearly $40 per month fee that has been trending among connected fitness competitors. We continue to listen to consumers and observe usage, which guides our ongoing development efforts.

We've also been able to accelerate our growth of JRNY memberships in tandem with the recent increase in connected fitness devices sold. We improved margins through select price increases on key products and decreasing the level of product promotions. We capitalized on the opportunity to introduce new customers to Bowflex and Schwinn high-quality products. We added four times more new customers in 2020 versus 2019.

Website traffic was up approximately three times for bowflex.com and four times for schwinnfitness.com for the full year. We stood by our retailer partners and allocated scarce inventory to them as we continue to build long-term relationships with our top partners, such as Amazon and DICK'S Sporting Goods. We continue our recent expansion with Best Buy, as well as Costco U.S. and Canada and added Shields to our key retailer partner list.

And lastly, we completed the sale of Octane to reduce cost and focus on the at-home fitness market. Many of these operational accomplishments, such as new customers, new retail partners, our new products, manufacturing capacity are durable and have lasting impacts to our business. In addition to financial results and operational improvements, I'm proud of our enduring progress on people, capabilities and culture. During 2020, for example, we pivoted to work from home within 72 hours and took explicit actions to support our people this past year.

A few examples include giving HQ employees a stipend to outfit their home office, providing additional time off for refreshment and to volunteer for causes that are important to them, and importantly, shared company success in the form of financial rewards commensurate with our accomplishments. We won Best Places to Work for the eighth straight time. We significantly improved employee engagement and lower turnover. We have implemented a new mission, vision and values that build on the strong foundation but strive to take us to the next level as we aim for our North Star.

Since December 2019, we've built a stronger, more diverse executive team to take us forward with a new Chief Financial Officer, Chief Marketing Officer and Chief Digital Officer. The executive team has a nice balance between experienced Nautilus veterans and outside perspectives. And we recently hired a new Chief People Officer, whom we will announce shortly to help us continue building our talent, capabilities and culture and develop our people for the road ahead. I'm inspired by the accomplishments of our leadership team in 2020, and in particular, how they succeeded on multiple dimensions simultaneously, including executed on the day-to-day optimization of the business, produced record-breaking financial results, launched impressive new products and improved JRNY, provide strong leadership and support to our teams as they dealt with the pandemic and other stressful events, completed the sale of Octane, and finally, completed and rolled out our long-term strategy North Star to the entire company.

Two or three of these would have made for a good year, but executing well on all of these levels to this degree, made 2020 a year to be truly proud of. With that, let me bridge to our outlook for 2021 and the long term. We continue to see strong demand for all products, especially bikes, new connected fitness cardio products, our SelectTech line and home gyms. Demand and consumer sentiment for home fitness has not slowed with the availability of vaccines.

Polling results remained stable, with more than 20% of former gym goers saying they will never return to the gym. This sentiment is driven partly by feeling unsafe, but more durably that many have discovered or rediscovered the convenience of working out from home, now with the added ability to replicate much of what they got from the gym through connected fitness. Those who have or plan to return to gyms, tell us they will balance their gym and at-home routine much differently than before COVID hit. When the pandemic is behind us, they do not see themselves going to their workplaces every day, which was a key driver of gym habits.

All of this leads us to be optimistic that a large driver of the surge in demand will continue long term to permanently. Hence, we continue to make significant investments in supply chain and inventory. We're coming closer to meeting demand with supply, but still have some more work to do. We still battle major challenges in global logistics, at least short term and we continue to monitor leading indicators such as consumer sentiment, web traffic and retail sell-through.

Aina will cover our guidance for the quarter ended March 31, 2021, in her remarks. Importantly, we were -- while we were striving to meet our customers' needs this year, we didn't lose sight of the long term. We completed North Star, our insights-driven long-term vision and strategic plan. We rolled it out to the full company in the fourth quarter and are now in full implementation mode.

Our plan built on the company's notable strengths, including well-known brands, reputation for quality and innovation, broad product portfolio, omnichannel go-to-market and customer-focused company culture. It also addresses the company's underlying issues and weaknesses, which I diagnosed when I arrived, some of which I had previously shared with you. Under our plan, Nautilus will be a stronger, more resilient and more digitally focused company. Notably, our North Star vision is enduring.

It would have been the same COVID or not, but the resulting home fitness trend has added opportunity, a sense of urgency to meet the evolving needs and habits of gym goers, and provided fuel to accelerate our key initiatives. While 2021 is the first official year of our North Star plan, it's important to take stock of actions we've already taken and early wins: our progress in accelerating connected fitness in the portfolio; our progress in improving JRNY, our digital membership platform; we have a balanced product portfolio of strongly demanded products; our focusing decisions such as selling Octane and SKU rationalization work; and we've added top talent to our team in key areas. The entire team is embracing the direction. We will be holding a virtual Investor Day next month on March 18, and I look forward to sharing more details about North Star and many additional improvements we have made to our company at that time.

Let me close by saying that 2020 has indeed been a game changer for our company. Operational improvements got us started. Strong execution permitted us to benefit profoundly from at-home fitness trends, which we believe are here to stay. Nautilus is already a more on-trend and a more digital version of itself, and our long-term vision and strategy will lead us to a sustainable industry leadership position.

I could not be more excited about our long-term prospects and the steps we are already taking. With that, I'd like to turn it over to our CFO, Aina Konold, who will go over our financial results in more detail. Aina?

Aina Konold -- Chief Financial Officer

Thank you, Jim, and good afternoon, everyone. During my first earnings call with Nautilus a year ago, I said that this company has incredibly strong brands and a loyal customer base, that we have the right assets in place to return to profitable growth, and that we are already addressing the issues that caused our performance to falter in 2019. Importantly, we are investing in the future. One year later, on behalf of our whole team, I proudly share with you our Q4 and full-year 2020 results.

I'll begin by speaking to total company P&L results for Q4 2020, with comparisons to Q4 2019. Net sales were $189 million, up 82% or $108 million, excluding Octane. Gross margin rate increased by 450 basis points to 41%. Gross profit was $78 million, a 104% higher than last year.

Strong execution across both segments was a key driver of the increase. Favorable segment mix was also a factor as Direct was 43% of sales this year versus 34% last year. And in COGS, we saw leverage on fixed costs, offset by continued pressure on product landed costs. Operating expenses were 4% higher, increasing to $36 million or 19% of net sales.

Selling and marketing costs were down 14% to $22 million or 12% of net sales, compared to $25 million or 24% of net sales last year. Given our tight inventory position, we opted to redirect spend to R&D and G&A. R&D was up 34% to $4 million or 2% of net sales, compared to $3 million or 3% of net sales last year, primarily driven by increased investments in JRNY. G&A was up 61% to $10 million or 5% of net sales this year, compared to $6 million or 6% of net sales last year, primarily driven by early investments in our North Star initiatives.

Operating income was nearly 1,200% higher, increasing to $41 million, driven by increased gross profit. Operating margin was 22%. Income from continuing ops increased by 699% to $29 million or $0.90 per diluted share. EBITDA from continuing operations improved by 578% to $40 million.

Turning now to Q4 2020 performance by segment. Again, I'll be comparing it to last year's Q4. Direct net sales were up 129% to an all-time high of $82 million, driven by strength which grew 372%. Demand remains strong for our SelectTech weights and benches.

The Direct segment sold more strength product in this quarter than in all of 2019. Cardio grew 78%, driven by our connected fitness bikes, the Bowflex C6 and VeloCore and the Schwinn IC4. Cardio sales growth was relatively constrained by disruptions in global logistics, which delayed the launch of some of our new connected fitness equipment, like the treadmill and the new Max Trainer. Direct entered Q4 with $46 million in backlog.

Gross margins expanded by 370 basis points to 54%, and gross profit grew by 146%. Segment contribution was $24 million, $29 million higher than last year's $5 million loss. The improvement was driven by increased gross profit and lower marketing spend. Turning now to Retail.

Net sales hit a historic high of $106 million, up 58% versus last year or up 96%, excluding Octane. Cardio was up 59%, driven by the Schwinn IC4 ellipticals. Strength was up 52%, driven by SelectTech weights and benches. Retail's backlog at the end of Q4 was $45 million.

We disclosed retail customers whose sales are greater than 10% of total company net sales. This quarter, DSG and Amazon were both 14% of total company net sales. Gross margins expanded 230 basis points to 31% and gross profit grew by 70%. Segment contribution was $25 million, a 107% higher than last year, primarily driven by higher gross profit.

As is the last quarter of the year, I'll now turn to total company P&L results for the full-year 2020 with comparisons to full-year 2019. The P&L that I'll be speaking to is adjusted to remove the impact of one-time significant charges this year and last year. Please see our press release on our website for a reconciliation of these non-GAAP numbers to our reported results. Net sales were $553 million, up 79% or 97% excluding Octane versus last year.

These full-year sales were at the midpoint of our guidance of $540 million to $565 million. We incorporated logistics disruptions into our guidance, and I'm really proud of how the team overcame poor congestions, reduced sailings, and in December, an unexpected reduction in the number of delivery trucks available to pick up shipments from our DCs. We quickly implemented an IT solution to allow us to ship the additional carriers. What we could not overcome was the severe container shortage that Jim mentioned earlier, we had $16 million of FFOs, factory fulfilled orders sitting in the warehouse waiting for pickup in December.

Gross margins expanded by 560 basis points to 41% and gross profit grew by 107%. I'm really pleased by our progress in gross margin. We're seeing the fruits of our SKU rationalization and price and promo optimization. This will help us weather headwinds we are seeing in 2021 related to shipping costs and increasing steel prices.

Channel mix also helped as Direct was 44% of sales this year versus 39% last year. Adjusted operating expenses were 6% lower, decreasing to $130 million or 24% of net sales. Selling and marketing expenses were down 17% to $78 million or 14% of net sales, compared to $95 million or 31% of net sales last year. Given our limited inventory and strong organic demand, we pulled back on paid media and redirected spend to R&D and G&A in support of JRNY and other North Star initiatives.

We are also much more active on the PR front, and our media impressions increased four times versus 2019. R&D costs were up 11% to $16 million or 3% of net sales, compared to $14 million or 5% of net sales last year. G&A was up 20% to $36 million or 7% of net sales, compared to $30 million or 10% of net sales last year. Adjusted operating income was $98 million, an improvement of $127 million, compared to last year's loss of $29 million.

Adjusted income from continuing ops increased to $79 million or $2.46 per diluted share. Adjusted EBITDA from continuing ops was $107 million versus last year's loss of $18 million. This is 7% higher than the top end of our guidance range of $90 million to $100 million. Turning now to other year-end highlights.

We are ending the year with a much stronger liquidity position. Cash and investments were $94 million, 750% higher than last year's balance of $11 million. Debt level stayed flat at $14 million, and we had $55 million available for borrowing on our Wells Fargo credit facility. AR was $91 million, 67% higher than last year, primarily due to the timing of customer payments.

Trade payables were $96 million, 30% higher than last year, primarily due to timing of inventory payments and higher advertising-related payments. Inventory was $51 million, compared to $55 million last year. The global logistics disruptions is a well-covered topic as it affects not just our industry, but any company that sources products from Asia or has an e-commerce presence. I'm really proud of how our team overcame the challenges that we encountered this year.

It started with factory manufacturing delays as China was the first country to deal with COVID-19. As other countries began implementing stay-at-home orders, demand spiked to five to six times what it was last year. We needed to move beyond just restarting production and had to significantly ramp up capacity. Then as we were getting supply closer to demand, we needed to deal with reduced transformation -- transportation availability, both inbound ships and outbound delivery trucks, which we overcame by choosing to pay upcharges in order to deliver for our customers.

Then as I said earlier in December, there was a severe container shortage, which even our largest retail partners were unable to fully mitigate. At this time, our largest suppliers have stabilized against our elevated demand. Therefore, we no longer need to issue POs two or three quarters into the future. We have gone back to issuing them closer to normal lead times of several weeks.

At the end of Q4, we had about $166 million of open POs, compared to $28 million last year. I have a couple more topics before I turn it back to Jim. In December, we announced that we are changing our fiscal year-end. From the 12-month beginning Jan 1 and ending December 31 to the 12 months beginning April 1 and ending March 31.

We will file a transition report on Form 10-QT for the transition period from January 1, 2021, to March 31, 2021. The company's fiscal-year 2022 will begin April 1, 2021 and end March 31, 2022. We made this change because we wanted to include the entire fitness season for exercise equipment in the same fiscal year. Additionally, this new fiscal year-end is better aligned with the 4-5-4 retail calendar used by our retail partners.

Turning now to our forward-looking guidance for the transition period from January 1, 2021 to March 31, 2021. We expect net sales growth of 55% to 75% versus the same period last year. Due to pressures from increased logistics costs, higher commodity prices and continued FX headwinds, we expect gross margins to be relatively flat to the same period last year. We expect many of these temporary increases in costs to subside as we move through our fiscal 2020 year.

We expect operating expenses to be higher in dollars but achieve leverage as these expenses are expected to be lower as a percent of sales than the same period last year, driven by increased investments in marketing in JRNY and other North Star initiatives. We told you a year ago that we were addressing the issues that caused our performance to falter in 2019. While we are far from done, we have made consistent progress every quarter. Importantly, we took full advantage of the tailwinds we experienced this year to strengthen our balance sheet, giving us the fuel to accelerate progress on our North Star strategy and invest in our company's long-term growth.

Now I'd like to turn the call back over to Jim for his final comments. Jim?

Jim Barr -- Chief Executive Officer

Thank you, Aina. 2020 is a year we will not soon forget for many reasons. It was filled with personal and professional challenges and taught us a lot about resilience. Our company and our employees are resilient, resourceful and extremely hard working.

Nautilus emerged from 2020 with a stronger platform and a stronger balance sheet than at the end of 2019. We are positioning the company for long-term growth and profitability driven not by one product offering, but by a balanced portfolio and strong subscription revenue. We have the team and the tools in place to implement our growth strategy and show the market and consumers that we are not the Nautilus of old, but are an innovative equipment and technology company committed to delivering best-in-class fitness experiences. I want to end by thanking our employees and our partners for their commitment to our mission.

I am proud to be part of this organization, and I believe the future for our company is bright, and there is much we will accomplish together. And now I'd like to open up the call to your questions. Operator?

Questions & Answers:

Operator

[Operator instructions] And our first question is from Steve Dyer with Craig-Hallum. Please state your question.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Good afternoon. Very nice finish to the year. Congratulations to all of you. Couple of questions from me.

First, as it relates to JRNY, I know I've asked this a few quarters, and I'm sure it's not overly material yet, but just anything you can give us in terms of being able to quantify the JRNY participation, attach rate, etc., would be helpful.

Jim Barr -- Chief Executive Officer

Yes. For sure, I mean, I definitely understand where the question comes from. One of the things we're really going to focus on in our Investor Day is where we want to go with this and how we're going to get there. And that's really what we're going to address there.

I will tell you that, like we were hoping, once you get enough equipment that runs JRNY, you accelerate the adoption of it. If you recall, I know you know for sure, Steve, that in 2019, the only product that we sold that had embedded JRNY in a screen was the top end Max Total. So that was our starting point. As you've seen, we've launched seven new products since then, starting in the fall with VeloCore.

And we have one more to go, which is the new Max Total going forward. And as those proliferate the portfolio, that will be a big driver for what we're talking about. But at Investor Day, we'll talk much more about that. And I think that's really what you want to look at is what are the things that we can do, how will we win with this particular platform.

In the meantime, we'll just continue to say that we'll report the hard numbers when it becomes material. And it's not yet there, given the JRNY I just mentioned.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

I guess, in the absence of maybe enough machines running it for long enough, I guess, just generally speaking, are you happy with the uptake and maybe retention rate that you're seeing in the very early days?

Jim Barr -- Chief Executive Officer

Yeah, absolutely. Absolutely, we are. It's been exactly what we've expected. At one point, we were offering six months or so free.

Now the main offer is two months free, it gets people go and it gets people to see what we have. As I mentioned, we believe we have more for less. And when people make even the equipment purchase, what they're telling us now is the equipment purchase is somewhat driven by what you get in the platform and how much you pay for that platform. It's kind of a total cost of ownership situation, and we do very well there.

Even when some of our products are closer to some of the competitors' actual products, our JRNY subscription is significantly less, especially if you pay on an annual basis. So we've got a real advantage in those -- that real total cost of ownership is really weighing into both the decision of what platform and which equipment to buy.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Yup. Got it. And then I guess just as you look into JRNY further, you talked about some of the off product capabilities, videos, etc., that you've put out. Can you talk a little bit more about how you've done that? Are you doing this in-house? Are you licensing it, etc.?

Jim Barr -- Chief Executive Officer

Sure. Well, first of all, as you know, the center of the universe for JRNY has not been on-demand videos. It's been that adaptive coaching, AI-driven individualized workouts. However, when the pandemic hit, we saw tremendous acceleration of using classes at-home.

So we've added more and more of those classes. We've taken kind of a hybrid approach so far. So for things like, let's say, VeloCore there's no other content you could license for VeloCore there that somebody else makes. We've got to make a lot of our own there.

And then we extend it with some licensing. Then for other things like a normal spinning class or whatnot, we're able to license from third parties and include that in our library. Long term, what we'll continue to do is kind of what I think is I think a few of our competitors over indexed on that one thing, that was trainer-led video in those classes, we may have under-indexed initially. But it's not a difficult thing to overcome over time.

And we're continuing to add more and more of that. And as I mentioned, we'll continue to watch what people use. That's the best part of our connected fitness. It's like, especially if you're a data junky, you can just see the stuff and see what people use and what they don't and invest more in what they like.

And then honestly, with social media and some of the groups out there, we hear about things people like and don't like a lot sooner than we used to. It used to be something we'd have to kind of brew for a while till someone felt like picking up the phone and telling us what they thought. It's so easy these days to see that. And so based on the usage and just listening to what people doing, what we're going to continue to invest where we think will make a huge difference.

But again, probably overall, I like to think about it as more for less.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Got it. Strength continues to be strong. I know personally, I'm on my third month of waiting for SelectTech. Are you continuing to see sort of the new order strength there? Or are you still -- has that slowed at all? And you're kind of working more off backlog? I know the strength there kind of maybe caught all of us, including you guys off guard right away.

Jim Barr -- Chief Executive Officer

Yeah. No, we're not seeing any decreased demand in anything in the strength category. And it continues to just do everything we can to meet that. We did work through hundreds of thousands of leads like we talked about on those 552s.

Our approach was we created kind of a queue so that people didn't get frustrated that they didn't get on the website exactly the right day and the right moment. And rather, we had a kind of a line there. And so we've worked through most of those things -- those and you can now order them on our website, but there's still a three- to four-month period waiting. I'm sorry about your own personal situation.

We can talk off-line about what we could do for you there. But we continue to see that demand is the answer.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Yeah, no problem. One more for me, and then I'll turn it over. You were kind enough to give guidance for the first quarter, so I don't want to beat you up too badly. But -- and it was good, don't get me wrong, but I look at it and I say, you're starting the quarter with more inventory.

You're starting the quarter with the biggest backlog ever. You've got the $16 million in revenue deferrals. So why, I guess, would revenue be down $45 million at the midpoint quarter over quarter kind of given the tailwind that you have coming in? That's it for me. Thanks.

Jim Barr -- Chief Executive Officer

Yeah, sure. I'll start, and then this is a good question for Aina to follow-up. And I think the first thing is to say that the first answer is seasonality, right? I mean it's quite rare in our company history for first quarter to be higher than fourth quarter. So you're just seeing more and more of that happen.

And then we had a pretty good comp in the fourth quarter of 2019, one of the better ones. So when you look sequentially, you'll see that. But we are trying to be as helpful as we can. Honestly, we're focused -- 99% of our brands are focused on the long term, right? We order our inventory, we get things in.

We want to produce a great quarter for you guys, but we're focused on the long run. And if this stuff wasn't going on, we wouldn't be giving any guidance at all, right? We would just keep marching toward our long-term goal, and we would be focused on that. But we want to give you -- we're halfway through the quarter, so we want to give you as much as we can. Anything you would add to that, Aina?

Aina Konold -- Chief Financial Officer

No, you covered it, Jim.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

All right. Got it. Thank you.

Aina Konold -- Chief Financial Officer

Thanks.

Operator

And our next question is from Sharon Zackfia with William Blair.

Sharon Zackfia -- William Blair -- Analyst

Hi. Good afternoon. So I was hoping you could quantify the logistics cost that you're expecting in the March quarter. And it sounded as if from your commentary that you do expect those to abate in the second half of the year.

As I think about -- and I'm talking calendar year, as I think about kind of the buckets here as well, I'm wondering if you're expecting Retail to outpace Direct this year given the addition? It sounds like Costco U.S. is a go. Maybe I misunderstood that, and you're lapping some of the brick-and-mortar shutdowns in the year-ago period.

Aina Konold -- Chief Financial Officer

So let me take it in pieces. So I'm not going to tell you the specific dollar amount for the three drivers of the cost increase, but definitely a lot of weight on transportation and that new thing that's hitting us with steel prices going up. And agree with you that based on what we see right now, we really believe it to be temporary because things are starting to get rebalanced. I mean there's all this demand, the supply will catch up, and it should, from our vantage point, subside as we get toward the tail end of the year.

And then -- oh, I forgot your second question. Can you repeat it?

Sharon Zackfia -- William Blair -- Analyst

Sorry. I was thinking about channel mix as we think about calendar '21?

Aina Konold -- Chief Financial Officer

Yup. So couple of things. So we still are -- Jim had talked about the heights of how quickly can we get supply to not be constrained and be able to just meet demand. We just keep seeing that demand is not abating.

And I don't think we're anywhere near ready to say that we've gotten to that point because the demand is climbing. So we're going to probably still be in some sort of supply constrained situation for most of this year. And we're going to follow the same path that we did in 2020, where you think about what's the best thing to do for overall company and then strategically allocate to retailers as needed while making sure that our direct-to-consumer business can have what they need to also grow that business.

Jim Barr -- Chief Executive Officer

One of the cool things about Retail, which is obvious is they tell us what they want in advance. Whereas our Direct business, while it has many great qualities, it's sort of a day-to-day, week-to-week type of thing and we react based on that. But when we talk to retailers about what they want for the rest of the year, it's robust and it continues. So it was really close last year between Retail and Direct.

But -- so I don't know who's going to win that one this year, but we will tell you, I know a little bit more about Retail than I do Direct at this point because just the way the business works and the forward commits that we get from our retailers.

Sharon Zackfia -- William Blair -- Analyst

And Jim, did I hear you right, are you in full rollout with Costco U.S.?

Jim Barr -- Chief Executive Officer

We've got several programs there. We have more programs hitting in the third and fourth quarter, when you would expect that people would be looking for that seasonally. But we have a great relationship with them, and we have really taken it to the next level. And like many of the other retailers, really, they're very interested in getting their hands on a number of our products.

Sharon Zackfia -- William Blair -- Analyst

And then just one last question on JRNY. I think you mentioned that you are starting to do more off-machine classes. Are you -- I mean, is there a thought here that you might have digital-only subs that kind of are independent of any of the machines that you might sell?

Jim Barr -- Chief Executive Officer

It could be. I mean, as I've said before, I sort of see three use cases. Number one, and really core for the near future is as an operating system for our machines. Second of all, in-home off-machine.

When you want to do every third day, you want to do some yoga or some stretching or some body weight exercises, maybe some strength exercises. We want to be there for you, right? And we want that to be part of the ecosystem. And then finally, when you go outside, even though you're not working out with us, if we want to really provide some view to your overall fitness level, we can't forget that either. So we see those all as future scenario.

Right now, we're focused most on that part where it's an operating system for our products. But more so, we don't want people to churn because, look, they need a different experience to do yoga occasionally, right? We think most of our customers love our machines, are on our machines most of the time. But why leave that door open for someone else to go ahead and do? So we're going to continue to monitor what our customers want and what they use and we'll give them more of that. That's the way we think about that.

But it is, for the first time, getting a little bit into that second scenario.

Sharon Zackfia -- William Blair -- Analyst

OK. Thank you.

Jim Barr -- Chief Executive Officer

Sure. Thank you.

Operator

And our next question is from Mike Swartz with Truist Securities.

Mike Swartz -- Truist Securities -- Analyst

Hey. Good evening, guys. Just one point of clarification. I know on the guidance, the 55% to 75% increase year over year in the March quarter that you're anticipating, is that -- does that exclude Octane? Or is Octane in the base when you're talking about that?

Aina Konold -- Chief Financial Officer

Octane is in the base.

Mike Swartz -- Truist Securities -- Analyst

OK.

Jim Barr -- Chief Executive Officer

That's a good answer, right?

Aina Konold -- Chief Financial Officer

Because it will be higher if we exclude Octane.

Mike Swartz -- Truist Securities -- Analyst

Right. Just a point of clarification. I think everyone probably was just wondering.

Jim Barr -- Chief Executive Officer

Yeah, I know, thank you for asking that.

Mike Swartz -- Truist Securities -- Analyst

And then just in terms of the cadence of product development, Jim, over the last few years, I think, until 2020, the cadence is really maybe three, four products a year in the Bowflex business. This year, it's seven, eight. I guess, what's the right number? And what's the level of R&D spend that will support that cadence going forward?

Jim Barr -- Chief Executive Officer

Yeah. I mean it's been a highly unusual year for COVID reasons, we didn't quite see the seasonality, and we also didn't see our launches go as we wanted in terms of the exact dates and stuff. So we had some delays. That was kind of the learning that I mentioned to be completely honest.

But we knew we were behind in connected fitness. So it had to be part of our catch up to do more than what we would normally do in terms of advancing our portfolio in connected fitness. That's why you saw seven so far, eight total in the cardio line as we really wanted to refresh that whole thing. I feel great about those trends, they're getting great uptick.

The two VeloCore bikes are fantastic. The C7 is doing extremely well in Retail. And then we've got one of the Maxes out already, and we've got the next one to come. So we really kind of profoundly rippled that through the portfolio, which you've got to do when you're a little behind what we've discussed.

So that really drove us. It probably depends on which employee you ask if that was too much or not, to me, it was not a choice. To our Head of Product Development, Chris Q, wasn't a choice. It was something we had to go for.

So going forward, I think we've done most of what we want to cardio. I don't think you'll see seven, eight, nine each year anymore. I think that was a big year for that. But we'll be talking soon about what we'll be doing for other products for 2021.

We've got some exciting things, but it will be fewer, to your point. I think that's -- we did a lot -- we maybe did a couple of years' worth of refreshment to that cardio portfolio in one year. And now we're going to focus on some other modalities coming up.

Mike Swartz -- Truist Securities -- Analyst

OK. Great. Thanks, guys. Thanks a lot for the colors.

Jim Barr -- Chief Executive Officer

Thanks, Mike. Yup.

Operator

And our next question is from Mark Smith with Lake Street Capital Markets.

Mark Smith -- Lake Street Capital Markets -- Analyst

Hi, guys. First one for me is just can you quantify or talk at all about Retail channel inventory and kind of where that's sitting today? And maybe how long it's going to take to catch up there?

Aina Konold -- Chief Financial Officer

When you say Retail Canada, like in the stores, the brick-and-mortar stores or just for the segment?

Mark Smith -- Lake Street Capital Markets -- Analyst

Yeah. We're really kind of in-store, what you're looking at out there, what you can see and what you have visibility into today?

Aina Konold -- Chief Financial Officer

I think I'm probably speaking for our Head of Retail, it's not enough. I mean we get them in and they get sold out really, really quickly. Kind of just going back to our earlier comment, we're still trying to get closer to matching supply and demand. And for both the Direct and the Retail side, demand has just not abated even with vaccines rolling out.

Mark Smith -- Lake Street Capital Markets -- Analyst

OK. And then as we look at Retail versus Direct, maybe talk big picture how you guys are kind of weighing the balance there. Obviously, a lot of profitability that can come through going Direct, but how do you balance that with your partnerships and relationships with your retail partners and getting them the supply that they need.

Jim Barr -- Chief Executive Officer

Yeah. You've laid it out perfectly. I mean that is exactly what happened. And honestly, it's one of those new learnings and muscles that we haven't ever used before because we hadn't had the portfolio on fire all at the same time.

And we hadn't had as many products that crossed over from Retail and Direct. It used to be that Direct had its own products that you could only get in Direct. And Retail, there were a few products that crossed over, but not as many as they do today. And it's true, on an omnichannel sense, you want to give everyone a chance to experience your product however they want to experience.

So we feel really good about that approach. But we have definitely had many, many sit downs. And they're not friendly sometimes. I mean, they're really -- we've got people who are strong advocates for their customer base.

But you're exactly right. The trade-off is, if you only cared about short-term profitability and cash gen, you would give everything to Direct. And we could sell it all. I would say virtually everything, just to cover myself a little bit in my absolutes.

But we know -- and I just told you things we love about Retail, right? It's more predictable, it's more stable. They tell us -- retailers tell us what they want in advance, we have a good picture on what 2021 is going to look like in Retail. We have a better picture of that because they're used to giving us those types of things. So we love Retail.

But we have literally sat down and put retailers in priority order. We've done it product by product. And we've gone through and said, what can we give everyone and still support our own Direct business? I feel like we've done a great job, but it's one of those years where, if you ask any retailer, if you ask our Head of Direct, everyone would say that they didn't get enough. So it's like -- it's one of those things.

But we're doing, I think, a really good systemic way. I would say, it's our and its science together, but it's the way we've been doing it. And we want to grow those long-term retailer relationships in a big way. We want to fuel new retailers that they've never carried this category before because at one point, we were kind of topped off with people who sold fitness, and now that's not the issue at all.

So we want to keep moving the bar on all of those things. And I wish I could tell you there was some magic black box algorithm that would give us the result. But honestly, it's through discussion, debate, and really looking partner by partner, what can we do and how can we do as much for all of our partners and for our Direct business as we possibly can.

Mark Smith -- Lake Street Capital Markets -- Analyst

And as we look at that relationship with your retail partners, as you brought in new partners, as there's significant demand there, how much is you guys talked a little bit about price increases that help boost margin? How much of that may be fit, was there any more that fit into Retail than there was in the Direct segment? And is there opportunities due to the demand environment to be able to take more pricing in that Retail segment?

Jim Barr -- Chief Executive Officer

I don't know, Aina, if it's one more than the other. I will say that when you raise the price and you're an omnichannel, if you have separate products in each channel, you would just -- you would increase the price independently. And it would be a lot easier. When you carry the same products across multiple channels, you have to really coordinate and also it takes a little bit longer to get to your price increases because you set an expectation for a retailer of a cost and then you have to go back to that retailer and say, hey, steel went up.

FX is going against us, we're going to have to do something here to help us. And so it takes a little bit longer. If you were a Direct-only business or you were favoring Direct disproportionately, like I think some competitors do, then that would be an easier decision. But I don't think that there's any price difference.

I mean, I wouldn't say that it helps one versus the other. It's just -- it takes a little bit longer in Retail, and it has to be very much coordinated. We can't do one channel without the other or else we have our own version of arbitrage going on.

Mark Smith -- Lake Street Capital Markets -- Analyst

OK. That's helpful. Thank you, guys.

Jim Barr -- Chief Executive Officer

Thank you.

Operator

And our next question is from George Kelly with ROTH Capital Markets.

George Kelly -- ROTH Capital Markets -- Analyst

Hi, everyone. Thanks for taking my questions. So I have a couple for you. First, on media advertising.

I was wondering if you could -- I may have missed it in your remarks, but could you share what media advertising was in the quarter? And then have you seen it start to kind of normalize at all so far this year? And what's your anticipation just about when we could start to see it get to sort of pre-COVID-type levels?

Jim Barr -- Chief Executive Officer

Yeah. Aina is going to go find the number for you while I'm starting. So the pre- and post-COVID thing is again continues to be a crystal ball exercise. I mean, as we said, we've not seen any change in demand.

We haven't seen any drop there at all. So we feel like that's still going in. So many of the same reasons why we spent less initially are still there. If you're selling your entire portfolio, you don't need to spend to continue to drive that.

At the same time, we look at our brands, and you'll hear more about this at Investor Day, but our brands are so well-known, but sometimes they're not known for what we want to be known for, right? So we get -- sometimes it's -- oh, yes, you guys used to do late night infomercial back in the -- pick your decade. And that ain't who we want to be, we want to be that digital-forward company. We are a technology company now, and so we want to be perceived as such. So if you look at some of the VeloCore advertising that we saw, it's a lot more highlighting our technology.

And as we step forward, you're going to see more and more of that come out. So all that to say that we do marketing for kind of two reasons. One is to drive demand generation, i.e., transactions. And when things -- when we have our back up against the wall, that sometimes all we can afford to do.

But one of the things you'll see in North Star, one of the things we want to stay committed to is to advance our brand and get it to where we'd like it to be. Not where we were, but where we are. Not that it's just known, but it's also driving purchase consideration in a greater way than it has. So we're going to continue to spend there.

So even if we could sell everything we have, you'll see us begin to advertise more just for that reason as well. And we're going to try to put money aside to continue to do that type of thing. So I think that just gives you a view. I don't know exactly when we're going to go heavy on one or the other, we make these decisions not hugely in advance, just by looking at how things are going in the marketplace.

We're going to have some new spots coming up. We're going to take it to the next level. We're going to have brand and transactional advertising. And we're going to make sure we commit to getting our brands and our transactions where they need to be.

When is very tough to tell. That's a short term quarter to quarter. But we'll give you an idea at Investor Day what we kind of think are our more evergreen model for how we think we'll need to spend over time and what we're going to put aside for that. I think that will be more helpful.

George Kelly -- ROTH Capital Markets -- Analyst

OK. Great.

Aina Konold -- Chief Financial Officer

And then you were asking about media advertising, it's about $10 million. It was $34 million for the direct media for the year and about $10 million-ish for Q4.

George Kelly -- ROTH Capital Markets -- Analyst

OK, great. Thank you. And then next question for me about your product portfolio. I saw at least one of your sort of big legacy modalities, get discount speaking, a TreadClimber get discontinued this year.

I was wondering if you think your portfolio now is in sort of a good place. And I think, Jim, I think you said in response to one of the earlier questions that you're working on new modalities. And I was curious if that's something we should learn more about and if that's a 2021 event?

Jim Barr -- Chief Executive Officer

First of all, yeah, I'm not necessarily saying new modalities. I was just saying we hadn't said where we're going to invest in terms of modalities, just to clarify that. And then your question, yes, I think I told you, one of the things I really thought when I first came in here is that we were over skewed in a few areas. I think that happens at companies like ours when you're trying to give each retailer something unique, for example.

We think we can give retailers many, many things in our value equation without having exactly a unique product for each individual retailer. So we're -- I think we're overskewed still a TreadClimber would be the example of that. I did mention in my prepared remarks that we were continuing to skew rationalize, and we'll continue to do that. I think one of the things you'll see when we talk about North Star is its focus, right? You've already seen the focus on at-home and not commercial.

You're going to see focus on fewer SKUs. And we've already seen our sale -- our balance of sales is coming from just the top SKUs, disproportionately to top SKUs compared to other years. You're going to see what we're going to do with brands. We've got five or six brands in our portfolio, but there's going to be a priority, and you'll see that priority.

But you will see lots of focusing decisions because strategy, in my opinion, is deciding what not to do as much as it is what to do. So I'm sorry if we've got real big fans for TreadClimbers. In fact, we have one of our board members that I am sure is chuckling right now, who is a TreadClimber zealot, but you have to make these decisions, these are -- you can't just add. You've got the pair, and you've got the focus.

And that's an example of precisely that.

George Kelly -- ROTH Capital Markets -- Analyst

OK, great. And then last question for me. Your balance sheet is in such improved condition now versus a year ago. What do you think is there any kind of unique use of cash? I'm thinking of big capex projects this year for any reason or M&A? I mean, what is this balance sheet now? Sort of what are you considering anything?

Jim Barr -- Chief Executive Officer

Yeah. As we said, and I'll start and Aina can back me up here. But we've got priorities that will make a lot clearer in North Star when we're talking about that. And I'm talking long-term priorities.

But you've -- you're aware of some of them, right? We want to continue to invest in marketing. We want to continue to invest in JRNY and becoming a more digital company. There's probably a little bit of technical debt on our IT systems that honestly, you discover even faster when you get high-volume like we did in 2020, it'd be one of those learnings that I'm talking about. You've got to say, look, if I want to get places faster, am I strictly organic? Or do I look at inorganic ways to grow the business.

And we're not going to buy another Octane or anything like that. But if we feel like there's great technologies out there, if we feel like there's ways to scale JRNY faster through partnerships, we will absolutely take those bets. And so we feel like that's good fuel. We're not exactly how -- sure how we're going to spend all that fuel just now, but we know what our priorities are, and we'll be even clearer about those priorities when we talk about North Star.

Do you have anything to add, Aina?

Aina Konold -- Chief Financial Officer

You covered it, Jim.

Jim Barr -- Chief Executive Officer

Thanks, George.

Operator

And ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back over to CEO Jim Barr for closing remarks.

Jim Barr -- Chief Executive Officer

Thank you, everyone, for joining today's call. We really appreciate it, and we look to speak to you again rather shortly when we start talking about our long-term vision and growth strategy at Investor Day. Thank you very much, and have a great day.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

John Mills -- Investor Relations

Jim Barr -- Chief Executive Officer

Aina Konold -- Chief Financial Officer

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Sharon Zackfia -- William Blair -- Analyst

Mike Swartz -- Truist Securities -- Analyst

Mark Smith -- Lake Street Capital Markets -- Analyst

George Kelly -- ROTH Capital Markets -- Analyst

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