Nautilus (NLS) Q3 2022 Earnings Call Transcript

Nautilus (NLS)
Q3 2022 Earnings Call
Feb 09, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, ladies and gentlemen, and welcome to the Nautilus, Inc. third quarter 2022 earnings conference call. [Operator instructions] It is now my pleasure to introduce your host, Mr. John Mills.

Thank you. You may begin.

John Mills -- Investor Relations

Thank you. Good afternoon, everyone. Welcome to Nautilus' third quarter fiscal 2022 conference call. Participants on the call today from Nautilus are Jim Barr, chief executive officer; and Aina Konold, chief financial officer.

Please note, this call is being webcast and will be available for replay for the next 14 days. We will be happy to take your questions at the conclusion of our prepared remarks. Our earnings press release was issued today at 1:05 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. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2020. For today's call, we have a presentation that management will refer to during their prepared remarks. On Slide 2 is our full safe harbor statement, which we ask everyone to read.

You can access the presentation by going to nautilusinc.com, then click on the Investor tab and then click on the Events & 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 beliefs of management and information currently available to us as of today. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them.

Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control and ability to predict. For additional information concerning these factors, please refer to the safe harbor statement and to our SEC filings, which can be found in the Investor Relations section of our website. And with that, it is my pleasure to turn the call over to Nautilus' CEO, Jim Barr.

Jim Barr -- Chief Executive Officer

Thank you, John, and thank you all for joining us. Before I discuss our quarterly results, I'll begin with a look at the home fitness industry, the market dynamics at play, and our positioning within the industry. The at-home fitness industry has been in the news quite a bit recently largely due to two issues: speculation about long-term demand and challenges some of our competitors are currently facing. Here's our take on the market and Nautilus' positioning.

First, we are confident that the at-home fitness industry has grown rapidly over the last two years and that the overall opportunity will remain significantly elevated for the long run. Second, we were not surprised that the industry seems to have regulated from its peak and is trending to a new normal level. It's been impossible to be 100% correct in our planning and decisioning at each stage of the pandemic, but we believe we have generally read the market well and have managed our business with disciplined execution through all phases of the pandemic. Third, we have a long-term strategy and a positioning that's quite different from others.

And over the past two years, we've built a stronger team with new capabilities to tackle emerging opportunities and challenges. And then finally, as a result, we're emerging as a much stronger company than pre-pandemic. I'll now give you some flavor on each of these statements. Since the outset of the pandemic, there has been a renewed focus on health and overall well-being.

And on a larger level, people have gravitated toward well-known brands with strong value propositions. Nautilus fits squarely at the intersection of both these tailwinds. At the center of health and well-being is home fitness, and the market has so far behaved largely as we expected. The market size more than doubled over the past two years is regulating from its peak to -- with more normal seasonality and will settle at a new normal significantly above pre-pandemic levels based on profound evolution in consumers' habits.

We've been telling you for several quarters that our surveying shows that about 25% of former gym-goers say they do not ever intend to return to the gym. That figure actually ticked up to 29% during our third quarter and has held remarkably steady now for 18 months. Those attitudes manifested themselves in the formation of new long-term habits that favor at-home fitness. Pre pandemic, about 40% of people for whom fitness was important worked out at home.

Nearly two years later, that number is close to 70% and is holding steady. The evolution of the work model to working from home or a hybrid model is also a long-term driver of home fitness. Another important catalyst for the change in workout habits is the digital transformation that has been occurring over the past few years in-home fitness and was accelerated by the pandemic. More people discovered that connected fitness not only can bring home many of the benefits of the gym, but the variety of programming, such as in JRNY fights boredom and keeps them at their fitness routine for longer.

As a result of these changed habits and sentiments, we continue to believe much of the industry growth opportunity will remain at elevated levels relative to pre-pandemic. This results in stronger opportunity for our industry and for Nautilus. In the face of unprecedented challenges and uncertainty over the past two years, I'm proud of how we've managed our business through disciplined execution. Some examples include inventory management, SKU rationalization, and regulating expense growth.

We have stayed true to our asset-light manufacturing model. We built inventories than regulated our orders once we were ready for fitness season but have not needed to close facilities or ceased production. We are, in fact, now reordering for the first half of fiscal 2023. We focused on fewer SKUs that are largely our best sellers and worked down that inventory during the third quarter as planned.

Utilizing our strong culture, noble mission, and a focus on improving the employee experience, we continue to attract and retain strong talent even though -- even through the so-called great resignation. We have stayed true to our most important areas of strategic investment, such as JRNY and the Bowflex brand but have regulated our other expenses such as G&A until we see where demand normalizes. Just under a year ago, we shared our new long-term strategic plan, our North Star plan. Our strategy differs from other competitors and is built on our key strengths, well-respected brands, a portfolio of products that include multiple modalities and price points, making them more attainable and broad multichannel distribution.

Our strategy adds greater consumer centricity, a new target consumer, modernization of our Bowflex brand, and enhanced team with expanded long-term capabilities. It also improves and scales our differentiated JRNY platform offering. JRNY focuses on being your overall personal trainer, offering a variety of ways to work out on and off our products versus tilting toward any single-use case, such as predominantly one modality or trainer-led classes. JRNY is also more affordable.

We are focused on investing in our company for the long term and have continued to keep our foot on the accelerator through our investments in JRNY, our brands, and our digital transformation. Our commitment to our strategy continues to strengthen as we begin to see our strategic investments succeed. Our board and our management team are united in maintaining our key investments as we continue to balance the long term and the short term. We have also progressed during the pandemic by building enduring assets for the long term, including launching a complete suite of multi-modality connected fitness cardio products, including innovative bikes, treads, and revitalized Max Trainers.

And we have a pipeline of strength products leveraging our VAY acquisition. A new target customer base with nearly 500,000 new customers since the pandemic began, introduced to our brands, encouraging early progress on improving and scaling our JRNY digital platform that makes our equipment even better. I'll share some exciting news about member growth shortly. Significant expansion of our already strong multichannel distribution, including a vastly expanded and a more diversified set of retailers; new talent and capabilities throughout our business, including software, digital product, supply chain, financial analysis, and customer care; and of course, we have a new transformational North Star strategy.

Pulling this all together by leveraging the enhanced long-term industry opportunity and through disciplined execution by staying true to our North Star and by building enduring assets, I'm confident in saying that we are emerging from the pandemic as a much stronger company. Next, I'll speak to our third quarter results. In the third fiscal quarter of 2022, net sales were $147 million, which represents 63% growth versus two years ago, excluding Octane. While down from the pandemic-driven all-time high of $189 million in the same period last year, this quarter's sales performance remained historically strong.

In fact, this was the second-highest December quarter in the past 15 years for Nautilus. Our two largest sales channels, direct and North American retail, while down versus last year, were both up over 60% compared to the same period two years ago. Notably, given our strong holiday performance, direct had a $9 million backlog coming out of the quarter, stocking out on some of our more popular connected cardio products. One area that was softer than expected was international, which is about 10% of our overall business.

We have a different operating model there. We work primarily through distributors. This model has an extra level of inventory and fewer levers for us to clear inventory. The U.K.

and EU are our largest international markets and the shutdowns impacted sell-through. We expect softness in international to continue through the end of this fiscal year. I would characterize our Q3 results to be relatively strong in dollar demand and fantastic from a unit sales perspective. As one response to the chip shortage, we pivoted to aggressively marketing and promoting strength products specifically the incredibly popular SelectTech line, which also helped drive JRNY member growth.

Impressively, I'm proud to say that we shipped more units in the quarter than any other in Nautilus history, showing not only continued strong demand for our products, but demonstrating new capabilities in our supply chain. We are pleased to report that for the first nine months of 2022, net sales were $470 million, a 7% increase over the same period last year and a 144% increase compared to the same period two years ago, excluding Octane. The team is proud to have positively comped the year to date through three quarters. Gross margin continued to be affected by the widely discussed elevated global supply chain costs.

In addition, this quarter's margins were impacted by lower net selling prices resulting from industrywide discounting during a highly promotional holiday season. The bulk of the discounting that we observed during the fitness season, which typically runs through the end of January have now concluded. We believe this gross margin pressure is largely temporary in nature. Aina will provide more detail on margins in her section.

Importantly, despite the lower gross margins in the third quarter, our Q3 operating margin results were in line with our guidance for the first -- for the second half. Moving on to progress on our North Star strategy. We've been working tirelessly to make JRNY a leading fitness digital service that enhances our incredible lineup of equipment, creates an ongoing relationship with our members, and provides a recurring revenue stream. As we communicated last quarter, we made the strategic decision to accelerate our investment in JRNY.

The manifestation of our year-to-date investments in JRNY include: a new JRNY update, which allows customers to track workouts across cardio, strength, and whole body exercises. That means JRNY members can now track their workouts across all the products they own, cardio and strength, and track whole body off-machine workouts on one fitness platform. We expanded the assortment of JRNY-enabled products, building our connected fitness installed base. We introduced the Max Total 16 in the U.S.

and VeloCore 16 in Canada at the beginning of November and have attached JRNY to our Bowflex SelectTech 552 and 1090 dumbbell purchases beginning in mid-October. In the third quarter, we shipped 3.5 times the number of JRNY-enabled products versus the same period two years ago when we launched our first connected bikes. And 70% of our cardio units shipped this quarter were JRNY enabled. SelectTech is one of the strongest selling offerings and attaching JRNY to the strength modality has boosted our member base and is the first time we have combined a digital offering with our strength products.

The results and feedback from our members have been very encouraging. We've expanded content. We continue to add more explore the world experiences with over 150 locations around the world now available. Members love the immersive experience and the escapism.

We continue to build our trainer-led video library, which now includes over 1,250 trainer-led videos, including new whole body workouts. We've added foundational advances such as jrny.com, powered by a new subscription management and billing platform. We began providing a 12-month complementary trial for a limited time to ensure the maximum number of consumers can use the platform. Here's the punch line.

We grew our JRNY member base by nearly -- to nearly 250,000 by the end of this quarter and are tracking to cross 300,000 total members by year-end fiscal '22, above the midpoint of our previous guidance. We've grown members by nearly three times year over year and by 700% versus two years ago. As you know, Nautilus got a late start in the connected fitness. And while it is still early in our digital transformation with JRNY, the strong growth we've experienced to date is exciting.

As such, we continue to invest in the platform. Digital is a key component of the future of Nautilus and we're -- investing here will allow us to best leverage our assets and will position us for long-term profitable growth. A second pillar of North Star is putting the consumer at the center of our decision-making. We are working to transform Nautilus from a product-led hardware company to a consumer-led digital company.

This consumer-led approach has permeated our business, including Bowflex advertising. Our focused approach to advertising has punched above its weight with measured share of voice nearly double our market share in the quarter. A few key highlights. We ran the first-ever Bowflex SelectTech dumbbell campaign that included JRNY.

This also helped drive more JRNY memberships. We continued investments in the Bowflex brand with incremental advertising to drive purchase consideration and position the brand in a more modern and inclusive way. In addition to taking a more customer-led approach to advertising, we bolstered our team by hiring a new director of customer success, our first-ever customer experience manager, and are adding critical staff in email and social marketing. Strength is another pivotal part of our consumer-centric approach.

Bowflex has long been a leader in strength, and we are working to elevate the consumer experience through our connected strength products. In the second quarter, we completed the acquisition of VAY, a leader in motion and vision technology. In the third quarter, we focused on integrating VAY's motion tracking capabilities into JRNY to further advance and accelerate our highly personalized workout experiences, including automatic rep counting and form coaching on and off Bowflex and JRNY products. We expect to begin testing these features with select customers in the spring.

We also focused on hiring more developers. Two years ago, we had about a dozen software developers in U.S. FTEs, and we're mostly a mechanical engineering company. But today, we have more than 250 people engaged in software development.

We are accelerating our software development capabilities and adding new and innovative features to the JRNY platform, moving us closer to our vision for JRNY as your highly personalized one-to-one personal trainer. And the last pillar of North Star that I'd like to touch on today is our supply chain. We continue to battle unprecedented challenges from container and electronic components availability, elevated commodity costs, and cost of shipping and storing inventory. However, our investment and efforts have bolstered overall supply chain capabilities and are enabling us to successfully manage through this period.

Earlier this year, we made a strategic decision in light of the global shipping issues to preorder inventory in preparation for the seasonal -- seasonally strong third and fourth quarters to ensure that we, along with our retail partners, would be fully stocked. As mentioned previously, driven by strength products, we moved more units in the quarter than any other quarter in the company's long history. In summary, we are emerging from the pandemic as a stronger company. We have new leaders, new tools and new processes in place, providing us to make a much stronger and more agile company.

I'll now turn it over to Aina, who'll give us more detail on the third quarter financials and our guidance for the rest of the year. Aina? 

Aina Konold -- Chief Financial Officer

Thanks, Jim, and good afternoon, everyone. Today, I'll talk through results for Q3 and year to date, and we'll provide guidance for the second half of fiscal year '22. I'll start with Slide 14 on the presentation, total company results for Q3 '22. As discussed previously, we delivered the two highest sales quarters in our company's history in the back half of fiscal year '21, fueled in part by pandemic-driven demand.

As expected, demand has moderated in the second half as normal seasonality begin to return. Given the unique nature of last year's results, we'll talk about sales growth versus LY and versus LLY to gauge our growth and overall company improvements when compared to more normalized results. Net sales for the third quarter were $147 million, down 22% versus LY and up 63% versus LLY, excluding Octane. Our strong holiday performance resulted in a $9 million backlog for direct.

Gross profit was $30 million and gross margins were 20%, down 21 percentage points from LY. 18 points of the decline were related to higher logistics, product costs, and FX, plus increased discounting in the quarter. The remaining 3 points are related to increased JRNY investments. Turning to operating expenses.

We closed on the acquisition of VAY last quarter. The next few lines of the P&L have been adjusted to remove the impact of the deferred compensation related to that acquisition. Please see our press release for a reconciliation to GAAP. Adjusted operating expenses were $49 million or 33% of sales versus last year's $36 million or 19% of sales.

Sales and marketing expenses were $32 million or 22% of sales. The $10 million increase to LY is primarily due to increased advertising. Adjusted G&A expenses were $11 million or 7% of sales, up $400,000 to LY. R&D costs were $5 million or 4% of sales, up $1 million compared to LY, primarily driven by increased investments in JRNY.

In fiscal Q3, advertising was $21 million versus $10 million last year, and JRNY opex was $6 million versus $3 million last year. Adjusted operating loss was $19 million and adjusted operating margins were negative 13%. Adjusted EBITDA loss from continuing ops was negative 15% or negative 10% of sales. Our presentation includes a waterfall chart on Slide 16 that describes the year-over-year change in operating margins.

The key drivers of the year-over-year change are lower gross margins, as discussed earlier, and planned incremental investments in JRNY opex and in advertising. Let me now turn to year-to-date results for the nine months ended December 31, 2021, compared to the same period last year. Net sales were $470 million, up 2% on a GAAP basis. Excluding Octane branded sales, revenue was up 7% versus last year and up 144% versus LLY.

Gross profit was $127 million, compared to $193 million last year, and gross margin rate was 27% versus 42% last year. 13 points of the gross margin decline was due to higher cost of logistics, product costs and FX and increased discount in fiscal Q3. 2 points of the decline was for increased investments in JRNY. Turning to adjusted operating expenses, which excludes the impact of this year's legal settlement, the VAY acquisition and deferred compensation costs, and last year's loss and disposal group for Octane.

Adjusted opex was $125 million or 27% of sales versus last year's $94 million or 21% of sales. The $30 million increase was essentially driven by advertising and JRNY investments. Year-to-date advertising was $44 million versus $21 million last year. Year-to-date JRNY opex was $15 million versus $5 million last year.

Adjusted operating income was $3 million or 1% of sales. Adjusted EBITDA from continuing ops was $14 million or 3% of sales. Please see Slide 19 in the presentation for a waterfall chart walking through the year-over-year changes in operating margins. Turning now to the balance sheet as of December 31.

Cash was $20 million. Inventory was $128 million versus $68 million at year end. We're pleased that inventory levels at 12/31 were down 21% versus 9/30 and came in better than planned. Inventory is concentrated in our best-selling SKUs and about 15% of it was in transit at 12/31.

AR was $94 million versus $89 million at year end, AP $62 million versus $99 million at year end, and debt was $56 million versus $13 million at year end. And we had $55 million available for borrowing in our facility. Turning now to our expectations for second-half fiscal '22. Please turn to Slide 21 in the presentation to follow along.

To gauge growth and progress against more normalized pre-pandemic results, we'll be comparing this year's sales versus the same period two years ago for the next few quarters. In addition, because fitness season straddles the last two quarters of the year, we believe it's prudent to consider results on a six-month basis from October 1, 2021 to March 31, 2022. The company now expects total company net sales in the second half of this fiscal year to be between $260 million and $280 million, an increase of 31% to 41% versus the same period two years ago. The decline versus previous guidance is driven by lower demand in international and increased discounting in the U.S.

and Canada this fitness season. This year, the fitness season was much more promotional, driven in part by consumer expectations of good deals during this time period. The deep promotional events have concluded, and we are now back to more normal seasonal promotions. On Slide 22, we provided a waterfall explaining the year-over-year change for operating margins.

At the bottom of the slide, we've noted the second-half guidance we provided three months ago in November 2021. We now expect the impact of logistics, product costs and higher promotions to be 15 to 16 percentage points, higher than previous guidance of 12 points, primarily due to the increased discounting during fitness season. As a rate of sales, we expect total JRNY investments to be 6 to 9 percentage points higher versus last year, advertising to be 8 to 9 percentage points higher and opex to be 3 to 4 percentage points higher, driven by North Star investments and deleveraging of fixed cost on lower sales. Despite lower gross margins, we still expect operating margin loss in the mid-teens, and we're now guiding to adjusted EBITDA loss in the low teens.

We are reiterating full year capex to be between $12 million and $14 million with the majority earmarked for JRNY, and we expect the number of JRNY members at year end to cross $300,000 above the midpoint of our previous guidance. We continue to expect to return to positive adjusted EBITDA in fiscal '23. And because of our investment in the higher-margin subscription business, we believe we're on track to achieving operating margins of 15% by fiscal year-end '25, with margins expanding to high teens by year-end 26. I'll now turn it back over to Jim for his final comments. 

Jim Barr -- Chief Executive Officer

Thank you, Aina. I'll end our prepared remarks by saying that we are in the process of transforming into a digital leader in connected fitness, and that transformation is already yielding tangible results. We continue to execute in a disciplined way as we capitalize on the long-term opportunity and navigate the challenges. Further, we are executing against our North Star plan, and we are succeeding.

These investments are paying off, and we are on track to surpass our goal of 300,000 members by the end of the fiscal year, moving us closer to our long-term goal of 2 million members in fiscal 2026. I would like to end by thanking all of our incredible employees and partners for their tireless dedication and support of our mission. And now I'd like to open it up for questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Mike Swartz with Truist Securities. Please proceed with your question.

Mike Swartz -- Truist Securities -- Analyst

Hey, guys. Good evening. Maybe just starting off on the cardio side of the business. I mean, it sounds like it was maybe a little bit softer than you had anticipated.

So I guess I'm just wondering how much of that is the discounting environment that we saw over the holiday season versus your commentary around international and I think you had also mentioned that you pulled back on advertising around cardio given some of the supply limitations. So second part of that would just be when do you expect advertising to return to more normal levels for cardio?

Jim Barr -- Chief Executive Officer

Sure. Yeah. Great question. For sure, like I think the first thing we have to think about is the fact that on cardio, we are comping a pretty good quarter last year, right? Our all-time high quarter overall.

And then we just launched the VeloCore bikes. So we had a lot of great bikes in the market, and we were coming back into supply for that. So first of all, I think it's a tough comp on the cardio side. Second thing is you're absolutely right.

The chip shortage forced us to pivot away from using the maximum number of chips and go into some of the strength products that don't require chips. So we wanted -- that was one thing. So that was kind of a bit self-inflicted there. I wouldn't say self-inflicted.

It's something we really wanted to do. So that's a key part of it. And by doing that and attaching journey to dumbbells, we got a lot of JRNY memberships that way. We've got a lot of people trying the product, which is what we really wanted to do.

I think part of it is we were stocked out on a few of our best-selling cardio products like one of the VeloCores, I think maybe both of the VeloCores at times during the quarter, the M9 and some of our treads. So we were stocked out and so a little bit more limited on those and we made a ton of dumbbells. And 60% of our cardio unit -- of our backlog is actually cardio units too. So you'll see more of that coming through going forward.

So I think it's really a combination of comping a tough quarter, some stock-outs, then promoting strength on purpose, and really pivoting toward a new mix of products that helped us deal with the chip shortage better. Now we hope that chip shortage goes away. We would like to just go straight up on consumer demand. But I was actually quite pleased with how the team didn't take it lying down and just pivoted to the best way we could succeed this way.

And then in terms of advertising, yes, I mean we're still largely known for cardio. We're still running several VeloCore commercials. We were just kind of highlighting that we had never really done a sort of a SelectTech focused commercial before, and we did that this time. So we're kind of balancing it a little bit better.

And we'll probably see that going forward that we'll look at both strength and cardio products in our advertising. So a really good question. Hopefully, that provides some color.

Mike Swartz -- Truist Securities -- Analyst

Yeah, that's very helpful. Thanks, Jim. And maybe a follow-up question for Aina. If I look at the guidance for the second half of the fiscal year, it looks like the expectation just of the headwind from advertising is a little lower.

The headwind from JRNY investments a little higher. I guess how should we read that?

Aina Konold -- Chief Financial Officer

I think the way that I'd want you to read it is, as we navigate the changing environment, we're going to pull all the levers available to us to achieve our strategic objectives but also meet our short-term target for operating margins.

Mike Swartz -- Truist Securities -- Analyst

OK Thank you. 

Jim Barr -- Chief Executive Officer

Thanks, Mike. 

Operator

Our next question comes from Sharon Zackfia with William Blair. Please proceed with your question.

Sharon Zackfia -- William Blair and Company -- Analyst

Hi. I appreciate the color on the international component. I guess I'm curious do you think their inventory is going to be relatively clean at the distributor level by the end of March, so you're kind of more set up to win overseas as we enter fiscal '23? And I'd also appreciate if you have any insight into retailer inventory levels? I mean are those relatively clean? Or are they still working through any kind of excess inventory?

Jim Barr -- Chief Executive Officer

Sure. I'll start and if you want to add anything. Let me just start with the retail inventory. It looks pretty clean to us.

The sell-through looks like it's going out. It did have a lot of inventory to start with, right? And so that's why we promoted and then, of course, our retailers have to -- when you're omnichannel, your retailers have to have the ability to promote to the same price you're promoting. So if we do it on one side, it gets done on the other. So they started out with a fair amount of inventory as did we, but the sell-through numbers we've seen are quite healthy in that channel.

We did want to call out international. It's not a huge part of our business. We don't talk about it too often, but I don't think people understand structurally how it works in that. Here in North America in retail, for example, we can support our retailers with some discounts and other ways to have them lower the price and meet our price.

So we have some levers here that they don't have over there. When you sell through a distributor, you've got inventory that's resident at the distributor level. And then there's also inventory at the retail level. So there's like an extra level there.

I think in terms of calling the question, I mean, we continue -- we did say we expect it to be slow through the end of the quarter. I don't know where it will end at the end of the quarter. I think -- I mean, we've seen it slow down over there. People are still buying it, but a lot more lockdowns and things like that.

So we're just not sure how long it's going to take to clear through those two levels of inventory. Now fortunately, that's only 10% of our business, but it sort of had maybe half of the impact this time as well. So hopefully, that gives you a little color.

Sharon Zackfia -- William Blair and Company -- Analyst

Yes, that's helpful. And then on the discounting side, I appreciate the commentary year over year, but can you talk about kind of the December quarter, how it looked relative to maybe December of 2019, if there's any kind of comparisons there? And how that comparable period would look so far kind of during New Year's resolution time frame relative to the like pre-COVID early 2020 time frame?

Aina Konold -- Chief Financial Officer

So when you compare to two years ago, so that will be the December 19 quarter, it's an interesting comparison because the company was in a much different place. But I would say that we intentionally chose to be very supportive of our retailers to allow them to clear the inventory kind of in concert with how we are clearing at on direct because we wanted to make sure that we entered the first half of fiscal year 2023 through with cleaner inventories.

Jim Barr -- Chief Executive Officer

Yes. So -- and then I'll just say, look, it starts out that, of course, that's the time of the year everybody promotes, right? It didn't happen last year, but typically, that's the way it was. And when I say we saw that what we -- what was a little bit -- what we didn't expect maybe was our competition went deeper and longer than they typically do. And I guess if you kind of read what you -- read what's out there.

They have a lot of inventory. So they're trying to clear through a lot of inventory. So it's probably a smart thing for them to do in that period. If you don't sell it in fitness season, you might be holding it for a bit longer.

So -- they did that. And around holiday season, you've really got to -- I don't say if you have to match the competition, but you certainly have to play. Once you get out of fitness season like where we are now, it will be more normal discounting. We can decide, hey, do we want to match this type of price or would we rather go for margin over top line for this particular period? And when the volume is lower, you can sort of make that move.

So I think more so than we've seen in a while, just because inventory positions at some of the competition were driving them, they notably drop their prices, and we had to play a little bit. We mostly played with the JRNY -- with attaching JRNY, but we also did lower our prices and did quite a bit of discounting ourselves.

Sharon Zackfia -- William Blair and Company -- Analyst

OK. And then last question for me. The logistics and product costs, I mean we've talked about that, I feel like every quarter of this year for every company I follow. But you didn't really -- it doesn't seem like you really changed your expectation for that component for the second half of this year.

Does that mean or can I infer that you're starting to see that kind of at least level off? Or are you -- I guess, I'm just trying to get a sense of, is it more predictable now? Or is this still volatile worsening? If you can give us any context there and that would be helpful.

Aina Konold -- Chief Financial Officer

Thanks, Sharon. That's a great question. So I'll make sure I answer the three points. Yes, it's about similar to what -- it's fairly similar to what we talked about last quarter and then in the guidance.

So that does mean that we're starting to see some stabilization. We're no longer kind of getting rocked by surprises. And our intent, and this is the path to getting to fiscal year '23 positive EBITDA is we're going to use that lever to get us to positive territory next year for EBITDA, and it's really going to be about improving things like storage costs that will no longer be needing as we go into fiscal year '23. 

Sharon Zackfia -- William Blair and Company -- Analyst

Awesome. Thank you. 

Aina Konold -- Chief Financial Officer

Thank you. 

Jim Barr -- Chief Executive Officer

Thanks, Sharon.

Operator

Our next question comes from Steve Dyer with Craig-Hallum. Please proceed with your question.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Good afternoon. Ryan, on for Steve. 

Aina Konold -- Chief Financial Officer

Hi. 

Jim Barr -- Chief Executive Officer

Hi, Steve -- Ryan. 

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Curious on JRNY. I know you guys have been hesitant to give any paid subscriber metrics. But anything you can share at least qualitatively kind of relative to your internal expectations on the paid side within that total subscriber base?

Jim Barr -- Chief Executive Officer

Yeah. I mean, as you've alluded, we've said for quite some time that starting next quarter, and I think we really mean it next quarter, we'll provide a whole kind of a fulsome set of metrics to begin to analyze the health of our subscription business. So we don't have that right now. We can say, as we said in the script, that we were at 250,000 members at year end at 12/31.

I can also add that since you asked me that today or as of Sunday, we were 280,000 on our way, as we said in the script, to eclipsing our 300,000 goal for the year. So we're doing well there. Engagement is strong. I know that's not a metric, but we have metrics on that.

We haven't provided so we wouldn't have context that I told you anyway. But there's strong engagement, churn is going down, the things you'd want to see still early. But that's all good. And yes, the subcomponent of that is paid subscribers for sure.

But we're kind of in that stage where we're really just trying to get people to use it. We relate to the game. We're giving someone a reason, especially people who love our equipment, the reason to try JRNY, and we're making it really easy for them to do that. So I think that's the right strategy.

We look at some of our competitors that have done that early in their growth of their subscription base, and it has worked very, very well. So we'll continue to do that. And sorry, I can't give you more of what you're exactly asking for, but hopefully, that gives you a little bit of color.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Yeah. That's helpful. Look forward to those metrics next quarter. Two kind of clarification points, just so I'm clear, in the -- for the guidance for the second half, the company expects adjusted EBITDA loss in the low teens that reads like EBITDA dollars, but is that dollars or margin that you're talking there?

Aina Konold -- Chief Financial Officer

Oh, it's rate. I'm sorry. You're right. It's rate.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

OK. Thank you. And then, secondly, Amazon had been a 10% customer for umpteenth quarters in a row. It did dip a little bit below that in the quarter.

Anything to read through there? Or is it just -- yes, anything there?

Jim Barr -- Chief Executive Officer

Yeah. No. I think it's less about Amazon and more about what I mentioned. One of those capabilities we've built during the pandemic and strengthened of ours is, is that retailer base.

We've talked before about Best Buy not even selling ourselves before this started, and now they're at the top. We continue very strong with DICK'S. We continue strong with Amazon. We've got a lot of Costco and Costco Canada and many other valuable retailers there.

So we've really diversified that base, and that's why you see a number like that, we're suddenly they're not they're not a 10% anymore. But we think it's a healthy way to go, right? That just means there's more doors. I think I haven't looked at our doors lately, but I think in our last call, we talked about that growing at a fairly large percentage. So that just means you can get our products more places from us or from any of those great retailers that I mentioned and some that I did.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Great. Thanks, and good luck. 

Jim Barr -- Chief Executive Officer

Thanks.

Operator

[Operator instructions] Our next question comes from Mark Smith with Lake Street Capital. Please proceed with your question.

Mark Smith -- Lake Street Capital Markets -- Analyst

Hi, guys. Just wanted to dig into the pricing trends, just a little bit more for you and the industry. Can you talk a little bit about what you're seeing today as far as competitors' pricing? And maybe how promotional we have to be today to compete kind of post peak fitness season?

Jim Barr -- Chief Executive Officer

Yeah. I mean, most of it was during fitness season. And there's a few famous one where people -- a more expensive bike was lowered under $1,500, pretty famous one. Stayed there for a while.

That company has now gone back to more regular pricing. And they have also -- now charging for assembly and some things like that. So I think you're sort of seeing there that it's going back to a more normalized way of going about it. I think some of the -- you'll still see some promotions as people try to squeeze the last little bit out of the season.

But pretty soon, this is not on consumers' minds the way that it's been in holiday season and New Year's resolution season. So it's coming down. I think the other thing we want -- the way we think about it is you don't always have to follow -- in game theory, you don't always have to follow your competitors when the volume is at a lower level of the year where you may not have a choice when you're in holiday and fitness season. So even if there is some more discounting, we can sit there and decide whether we'd rather promote and get more top line or we want to preserve margin and our units.

And especially with when you run out of a few of our cardio units like I mentioned, you may want to not discount those. So anyway, that's how it's going. And it goes day-to-day generally, and I've been in this industry now for three years, generally, it regulates around this time of year and in February. And so most of our -- we will run maybe a President's Day sale or something like that, you'll see others doing that, but it won't be to the level that anybody was doing in our opinion, most likely will be to that level as we saw in holiday and fitness season.

Mark Smith -- Lake Street Capital Markets -- Analyst

OK. And then you guys talked about regulating G&A expense, it looks like you did a good job there. Would you call it fully regulated today in G&A? Or is there more places and maybe you can trim a little bit?

Aina Konold -- Chief Financial Officer

I'll take that. It's Aina. I think the way that -- and our approach has remained consistent since Jim and I joined the company. I have a really good visibility to what's fixed and what's variable and make sure the variable piece stays in line with revenue and expected revenue.

So we've maintained that. And then as part of our North Star making sure that we don't waver from making the long-term investments we need so that we can achieve those higher operating margins. So it's always a balancing act. So I think the answer is -- there'll always be reacting to adjusting to top-line environment.

Jim Barr -- Chief Executive Officer

Yeah. And maybe I'll just give an example, too. So over the period of the pandemic, our sales roughly doubled, right? So that's a lot more work. We moved more units this past quarter than we've ever done before.

We've -- while doubling the revenue of the company, we increased our headcount 10%. So that just gives you kind of an idea there. Now we still have a lot of contractors and things like that, especially in JRNY. So it's -- we have more FDA working.

And of course, in our asset-light model, we don't have employees. We have people working on our behalf. So that's not a full thing. But I think it is kind of a nice testament of how we try to keep this variable, as Aina said, until we see where that settle point is -- and we try not to get too far out over our skis and things like that.

At the same time, we've added all those great capabilities I listed, too. So it's not like we're standing still. We're just investing in the areas that we really need to invest in and, of course, staying true to both the JRNY and the Bowflex brand investments. 

Mark Smith -- Lake Street Capital Markets -- Analyst

Perfect. And the last one for me. As you talk about investments, as we look at R&D, how much of this is maybe on the product side versus on the technology side, and any insight into your pipeline for new products?

Aina Konold -- Chief Financial Officer

So that's a really great question. So one of the things that we did as we were going through North Star, we did a lot of focusing work. When you do that and you narrow your SKUs and you prove the commercial business, we decided to sunset one of the brands, that kind of frees up some resources from maybe the more equipment side of the business and then allows you to invest them into JRNY. So what we've invested in JRNY, you don't necessarily see reflected as a true year-over-year increase because we were able to kind of be more optimized, cut some costs, and then reinvest them into North Star.

Mark Smith -- Lake Street Capital Markets -- Analyst

OK.

Jim Barr -- Chief Executive Officer

And then in terms of the pipeline, I think what we said was, well, look, we just did all the cardio. So we're going to do some more stuff in cardio for sure. We haven't announced it, but you can expect that. But mostly, we're looking at strength now.

We mentioned dumbbells with VAY and some other strength products that will be coming out over the next year. And so that's a lot of our pipeline. I don't know if I could give you a -- we used to be a completely mechanical engineering company, and now you heard all the software engineers that we've hired. So it's definitely tilting more toward software engineering, thinking that over time, that's one of the main ways that we'll differentiate.

We'll still be trying for strong mechanical differentiation like we have in VeloCore and the new Max Trainer and things like that. And when we get it, it's fantastic. But we've built a bit more to the software. And the way we think about it, it's not either or the software actually makes the hardware better.

So it's sort of the software is a feature, the hardware. And that's the way we've really driven the transformation. It's not like we don't value mechanical engineers anymore. We value them as much as we ever did, if not more.

And then we had this other capability on top of it. And so maybe you're tilting a little bit more that way, and some of it is where we were a little late to the game and we got some catch-up to do.

Mark Smith -- Lake Street Capital Markets -- Analyst

Thanks, guys. 

Jim Barr -- Chief Executive Officer

Sure.

Operator

Thank you. Our next question comes from George Kelly with ROTH Capital Partners. Please proceed with your question.

George Kelly -- ROTH Capital Partners -- Analyst

Hi, everybody. Thanks for taking my questions. 

Jim Barr -- Chief Executive Officer

Hey, George 

George Kelly -- ROTH Capital Partners -- Analyst

So just to start on inventory. So it came down sequentially, but it's still quite a bit above pre-COVID levels. So just curious if you could talk about what is normalized inventory? Or where do you expect it to move to? And how long do you think it will take to get you there?

Aina Konold -- Chief Financial Officer

Yeah. So thanks for the question. It's a great one. So we think about that a lot because what's the right level knowing that overall, our company is a lot bigger than it was two years ago.

So it's a little heavier now than I'd like it to be, and we have a plan. I feel really confident in to guide it down to a lower number in the first half of '23. But obviously, taking it back up again in preparation of fitness season fiscal year '23. So slightly higher than I'd like it to be, but moving in the right direction.

And as reminder, the reason it's high is because when you have this uncertainty in the supply chain environment, we really wanted to make sure that the inventory was on hand -- in our hand in the DCs prior to the big fitness season, which is Q3 and Q4 of this fiscal year.

Jim Barr -- Chief Executive Officer

Yeah. And I do like the way we've worked it down. I know the CFO wants it lower and that's what she should. But we're -- we think we got the right stuff to sell.

We think it's in the right areas. Like I said, we had a couple of stockouts and not have you happy about that, but you can't be perfect in predicting this. And it tells us people to really enjoy our products and demand them. So we've got that for sure.

But I think generally, we're in a good spot.

George Kelly -- ROTH Capital Partners -- Analyst

OK, OK. And then next question on -- just trying to map out next year, fiscal year '23. And you mentioned in your prepared remarks just a return to kind of normal seasonality. So if I play that through, does that -- should we see a sort of summer dip versus the December and March quarters like we saw normally before COVID? And then you would expect it to again climb again in the holiday season of fiscal year '23.

Aina Konold -- Chief Financial Officer

That's what we are planning for and executing against for our direct segment. The retailer segment is still kind of more volatile, again, only related to the ability to ship things FFO or to ship things from where our DCs are in the EU into U.K. So there's a little bit of noise when it comes to the retail side, but for the direct side. That's what we're executing to.

And we saw it kind of play out in the last few quarters. It was matching historical seasonality for direct. So we are expecting that to continue in fiscal year '23.

Jim Barr -- Chief Executive Officer

Yeah. And I'll just jump on. I'll add to Aina's, especially what we -- what is now our first quarter, the quarter ending June. Remember last year, it's just all the retailers loaded in way earlier than they would normally do it.

So that's going to be -- its going to be interesting to see, they really didn't turn to normal seasonality while direct did. So it will be interesting to see if -- because of supply gain shortages that they order that early, I would guess they won't. I would guess that, hey, if they see it the way that we're seeing it, that it's going to be kind of a normalization year that they may go back to their normal ordering because you remember, the first quarter, the June quarter in retail was super, super high. and the second quarter was a little weaker because they had ordered -- preordered in the first quarter.

So I'd say maybe you're going to have some shift there. But like I agree with everything Aina said about direct and normal seasonality through the summer. 

George Kelly -- ROTH Capital Partners -- Analyst

OK. And then last question for me. What was -- so I guess, two advertising questions. What was the media spend in the quarter? And then you've talked about reasons mostly supply chain related for kind of peeling back on some of your ad spending.

But when you look at what peers are doing, I mean, does it seem like folks are getting more rational as far as what the current environment is and not spending as much on direct advertising? Or just what does that look like so far this year?

Jim Barr -- Chief Executive Officer

It's going to -- yeah, I'll start. I think it's going to be interesting just picking up your last part. I mean we've obviously been outspent by several of our competitors for a sustained period of time. And we just had to be smart about it and when we did it and how much we spent and things like that.

I think you're probably right. I mean, we can't speak for competitors, but I -- from a lot of the things you hear about in the marketplace. It seems like it may go a little bit more rational where you're -- you can justify your cost of customer acquisition and things like that. So I would speculate, but it would only be speculation that it would turn out that way.

But I will say that, again, in my remarks, I was -- we measure this thing where it's share of voice, which is how often you hear our name versus any of our competitors. And a good quarter for us is when our share of voice is above our market share. And it was almost twice that this time. So I'll call the third quarter, a good quarter.

But we -- it doesn't happen every quarter that says we're doing a good job. We'll hope that we continue to do that. While at the same time, and we are staying true to the brand spend. Now some of the brand spend does drive revenue.

So that helps us, too, and we're spending more there. But the brand over time, you get a more modern view of Bowflex, and luckily, the way to do that is to use JRNY to make Bowflex more modern. And that's the way the advertising is generally going. So I think it's going in the right direction, but it will be interesting to see.

And I think it does call a little bit for speculation on what competitors will do. But maybe that will exactly happen that it will be a little more rational. I think there wasn't -- there weren't very many people even trying to make money in this space a while ago, and I think it's now turning into a market where that's becoming more rational and more important. And therefore, when you make all your decisions, whether it's inventory or advertising or whatnot, you're going to be considering that.

Aina Konold -- Chief Financial Officer

And then advertising from Q3 was $21 million versus $10 million last year.

George Kelly -- ROTH Capital Partners -- Analyst

OK. Thank you. 

Aina Konold -- Chief Financial Officer

You're welcome. 

Jim Barr -- Chief Executive Officer

Thanks, George. 

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Jim Barr for any closing comments.

Jim Barr -- Chief Executive Officer

Thank you to everyone on the call today for your continued support of Nautilus. We look forward to talking to you again on our fourth quarter fiscal year '22 call in May. Have a great rest of your day, onwards and upwards.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

John Mills -- Investor Relations

Jim Barr -- Chief Executive Officer

Aina Konold -- Chief Financial Officer

Mike Swartz -- Truist Securities -- Analyst

Sharon Zackfia -- William Blair and Company -- Analyst

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Mark Smith -- Lake Street Capital Markets -- Analyst

George Kelly -- ROTH Capital Partners -- Analyst

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