Gaia Inc (GAIA) 2004 Q3 法說會逐字稿

Hello and welcome to the Gaiam Third Quarter Earnings Release Conference Call. At this time all lines are in a listen-only mode. After the presentation we will conduct a question-and-answer session. To ask a question please press "*" then "1"; you will be prompted to record your name. At the request of Gaiam today's conference is being recorded. If you have any objections, you may disconnect at this time. With us today are call, Mr. Jirka Rysavy, Chairman and Chief Executive Officer, Lynn Powers President and Janet Mathews, Chief Financial Officer. Ms. Mathews you may begin

Thank you. Good afternoon everyone and welcome to Gaiam's third quarter 2004, earnings conference call. First, with the legalities; the following constitutes the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Except for the historical information contained herein, the matters discussed in this call are forward-looking statements that involve risks and uncertainties, including but not limited to general business conditions, the integration of acquisitions, the timely development of new businesses, the impact of competition and other risk detailed from time-to-time in the Company's SEC report. The Company doesn't undertake any obligation to update forward-looking statements. I'd now like to turn the call over to Jirka Rysavy, Chairman and Chief Executive Officer. Jirka?

Thanks. Again welcome on our quarterly update covering our results for the third quarter, which ended September 30, 2004 and which was mainly influenced by all transition away from VHS formats. For the third quarter Gaiam revenues were $21 million compared to $23.5 million in the third quarter of the last year. Revenue generated by Gaiam domestic business segment was down 35% up from third Q of 2003. The balance of our business produced solid result.

Direct segment incomes were 3.3%, our international business at 22%. And the domestic business segment, which distributes media and other proprietary products to retailers, we have high product returns, markdowns, discounts relating to inventory sales through and liquidation associated with our format transition from VHS to DVD. Revenue related loss to VHS format was about $1.7 million in the quarter, this approximately 70% impact on operating profit. Net VHS sales were actually below zero as return outpaced shipments for the quarter.

The alternative convertible -- 57000 media and accessory kits to DVD or Dual Media, and as of October 1; we do not support VHS kit. The sales returns and reduction also negatively impacted our gross margin, which declined to 46.7% from 52.1 in the third quarter 2003. Our best performing units were internet and the international, which both boosted internal growth rate of 22%. Mainly due to lower revenues and gross margin, which I just talked about are the loss -- net loss of $1.5 million or 10 cents per share, compared to a loss 0.2 million and 1 cent during the same time of last year.

For the nine month we have revenues of $61.8 million compared to 66.9 in nine month 2003 with the loss of $4.1 million or 28 cents per share. Even with loss we still generated cash contribution of $1.6 million from our operation and as of September 30, we have $9.7 million in cash, up from 8.4 at end of the last year. We still have no debt and unused $15 million line of credit.

For the nine months our depreciation, amortization was $2.7 million and we also have additional $0.7 million in other non-cash expenses for total 3.4. We expect to be fully transition from VHS to DVD by end of the year; DVD is a much better media to represents Gaiam content. We expect that this year market penetration will move digital players that will help us with our plan to increase media category as a percentage of our overall revenue mix. [This though] positively impact our gross rate in the next year as DVD shelf space should increase when VHS unit are out of the stores. But we still expect VHS format transition impacting us during the fourth quarter, we are comfortable with next year estimate overall as well as profitability.

Now, Janet will give you more numbers, more details on numbers and then Lynn business overview, Janet?

Thank you Jirka. Now let me provide some additional detail. For the third quarter sales were $21 million representing a decrease of 10.7% from prior year sales of $23.5 million, current decrease in revenue was due to a decrease in U.S. or domestic business segment of $3 million or 35% for the quarter. This short-fall resulted from lower sales volume in U.S. trade business including $1.7 million impact from VHS and an increase in markdowns and returns primarily associated with the change of VHS stock for DVD. In contrast, the internal growth rate in the international business was 22% for the quarter, revenue from our direct-to-consumer segment which includes our catalog, internet, solar installation programs and services unit was down slightly from $11.6 million in 2003 to $11.3 million for the third quarter 2004 as we suspended distribution of one of our catalog title for the spring summer season in 2004, which has generated approximately $600,000 in revenues during the third quarter of 2003. The internal growth rate in the internet business improved to 22% for the third quarter.

Gross margin for the third quarter 2004 was 46.7%, down from 52.1% for the comparable prior year period. This was primarily attributable to increase markdowns and cost associated with the transition from VHS to DVD formatted product. This cost included markdowns given to incent sell-through of current VHS inventories and the write-down -- on hand VHS inventory components and packaging.

Total operating expenses decreased to $12.2 million for the third quarter of 2004 as compared to $12.4 million during the third quarter of 2003. Selling and operating expense decrease to $10.3 million in 2004 from $10.5 million in third quarter 2003. The year-on-year expense decrease primarily resulted from lower catalog and e-commerce expenses from the direct-to-consumer segment. General and administrative expenses remain constant at $1.9 million for the third quarter in both 2004 and 2003. The net loss for the third quarter 2004 was $1.5 million or 10 cents per share compared to a net loss of $201,000 or 1 cent per share during the same period of 2003.

For nine months ended September 30, 2004 sales of $61.8 million was 7.5% lower than the comparable period in 2003. Net loses for the nine month ended September 30, 2004 was $4.1 million or 28 cent per share compared to net losses of $1.3 million or 9 cent for the nine months ended September 30, 2003. Depreciation and amortization and other non-cash charges were $3.4 million for the nine months ended September 30, 2004. Gaiam generated $1.6 million in cash from operation for the nine months ended September 30, 2004, which was comparable to same 2003 timeframe and help Gaiam end the quarter with $9.7 million in cash, up from $8.4 million at December 31, 2004.

Gaiam has no debt and an unused credit line of $15 million. DSO improved to an average of 36 days for the third quarter 2004 as compared to an average of 56 days during the third quarter 2003. Inventory returns for 2004 were 2.9 times as compared to 3 times for the same period in 2003.

Before turning it over to Lynn I would like to announce our schedule for our next earnings call. The fourth quarter and fiscal year-end 2004 earnings will be announced on Monday, February 28, 2005 at 4:30 PM Eastern Time or 2:30 PM Mountain Time, Lynn?

Thanks Janet. The domestic business channel declined by 35% or close to $3 million from third quarter 2003. The balance of our business segment produced solid results for the third quarter with the direct business up 3.3% and our international business up 22%. The main part of the decline in our domestic business to retailer segment was due to the transition to DVD from the VHS format. As discussed in our previous conference call, our major accounts have carried both formats for the past two years and are now in the process of carrying DVD only.

In this quarter, our VHS business declined 87% or $1.7 million with negative revenue due to the high return. The media industry is a guaranteed sales business with full return privileges; we are working with our accounts to make sure we are fully transitioned in reserves by the end of the year. As of October 1 we are no longer taking VHS orders except in special circumstances in order to assure the negative impact operating results this behind us by the end of the year. The VHS decline has affected both our sales and our gross margin and we have given markdowns to incent sell-through of VHS and are trigging VHS return as liquidation inventory.

We are also continuing the struggle with consumer department store channel as we move to our new [drastic] strategy. The department and mass specialty stores accounted for approximately 1.3 million in Q3 of 2003. This year those channels were down approximately 50%; we do not see that improving in the future as we are not targeting those accounts going forward. We intend to use our grass-roots of store-within-store concept for growth in 2005 and beyond, so we establish a more stable revenue stream in the future.

The book channel which is up 12% for the year had an expected decline for this quarter, as we had alluded in last year that the store-within-store rollout at Barnes & Noble. We are in a process of expanding store-within-store to another 90 Borders stores during fourth quarter. We anticipate full rollout of the balance of the Borders stores in 2005. We also began some new product initiatives with Amazon resulting in almost doubling our business with them in third quarter.

On supporting this channel is up slightly at 3% as our new sales team has initiated some [graphs] -- efforts in this channel; we are 9% at debt our largest account in this channel and expect to experience gains at Gaiam's once that this Gaiam's merger is complete. With several new products launching in this channel in fourth quarter that we expect will have positive impact on our comp going forward.

In the grocery channel we are up 9%. We completed the Whole Foods transition to UNFI at the end of August 2004. This transition allows service to each individual Whole Food store. Gaiam's still maintain its relationship with Whole Foods at the corporate regional level and its involved in our aspects of the business. [Pharmica] an integrated pharmacy is another account service by UNFI who is now going to a Gaiam exclusive in off-stores.

In addition to stronger service for existing accounts UNFI has allowed us to reach a small and natural foods stores. We are also expanding our presence in traditional grocery under the Healing Arts brand; our distribution in the Safeway is now to 260 stores and we have distribution in over 60 Giant Eagle and 40 [Marshall] stores. In addition to our permanent fixtures we have developed a custom [core get] fixture for grocery. Certain locations obtain super surprise and boxes will be testing these [core get] for holidays.

Our mass merchant channel has the largest increase from third Q with over $1.1 million. This is the result of the target reset that happened in late third Q. We are very excited about the reset at target and the 12-feet of Gaiam space at this point all stores should be set with the Gaiam [planogram]. We are particularly pleased with the selling of our media title. This is the first time that Gaiam media has been an all target store and they have expressed how happy we are with the early result.

Sales with Target had been negatively affected in second Q and early third Q by the markdown and sell-off of other merchandise that appear for the three set. This planogram will be in effect with minor changes until next September. As we discussed before, we are taking our sales of soft goods product to a more grass-roots approach. In the week just prior to Thanksgiving we will have our first Gaiam store-within-store for organic soft goods set in ABC Carpet & Home, which a premier retailer in downtown Manhattan. We are excited about this partnership and the exposure that will bring for organic cotton products and for the Gaiam brand. We will continue to partner with premier retailers such as ABC and the Whole Foods Austin store to launch our new soft goods lines rather than the traditional department for a chain store approach.

Our Canadian business declined by $600,000 for the quarter. They are several reasons for the decline. First, Cosco (phonetic) Canada is down as it did not anniversary, the fitness accessory [call it] from last year. Plus as in U.S. we are working through the VHS returns and price reductions on DVD.

However, similar to what we are seeing here in the U.S. our year-to-date sales in the book-store channel in Canada are up 44% compared to prior year. We are in the process of negotiating a new contract with our Canadian distributor, as our current contract expires early in 2005. The direct business segment, which includes our service units was up approximately 3.3% in comps from the prior year. The catalogue division was down approximately 10% for the quarter while the web business was up 22% as we continue to see a shift from phone orders to web orders in the way our direct customers buy. The declining catalog was also due to the weaker than anticipated performance of our second annual sale catalog and a one week delay in our first holiday drop of Harmony (phonetic). In addition, we saw a decrease in our overall consolidated net revenue of $600,000 due to a discontinuation of a catalog title earlier in 2004.

The web business continues to perform very strong; revenues from email marketing campaigns are up 8% from prior year and 2% from last quarter. Revenues from affiliates are up 32% over prior year and 21% from last quarter and revenues from search engines are down slightly due to a change out in advertising partners that's being corrected for both [years].

For the quarter, our average order size was over a $100 and roughly comparable to last year. Fill rates was a healthy 97% compared to 92% for third quarter 2003. During the quarter we had some significant transactions that affected the margin in our business segment. We took an adjustment to our obsolete inventory reserve in anticipation of the end of our selling cycle for VHS as of October 1, we have Dual Media or DVD only in all of our accessory kits that contain media. During the quarter we added a DVD component to all of our current inventory of over 157,000 kits to make them Dual Media. We also took a stand on lowering prices on certain DVDs to maintain our competitive advantage. Finally, we had a one-time charge for additional basic target that will fall in third and fourth quarter this year.

We completed the conversion of the balance of our media library to DVD including all kits during the quarter. We will begin selling these into our channels over the next two quarters. We also completed the first 12 titles of music that were launched in December and January. The domestic business to retailer segment continues to be our biggest challenge as we discuss a large part of the [change] in our retail business as in the overall shift between channels and media format. The majority of our other business segments are achieving positive comp sales to prior year revenues. The current retail channels that are performing well seem to have customer demographics that are much more in common with our direct customers. We are taking a proactive approach to partnering with retailers that fit our core demographics; expanding the Gaiam's service and store and building our grass-roots business.

I'd now like to open the call for questions.

Thank you. At this time if you would like to ask a question, please press "*" then "1"; you will be prompted to record your first and last name; to withdraw your request please press "*" then "2". Once again if you would like to ask a question please press "*" "1". Our first question comes from Mark Rupe with Adam Harkness.

Hi guys this is actually Steve covered in for Mark. I wondered if you could talk a little bit more about the conversion to DVDs; can we expect this to be fully completed in Q4 or is there a chance that could trickle into Q1?

That would be definitely converted into Q4. We did most of the hard work there is still some -- mostly on inventory liquidation of fourth Q but most of the retailers its accomplished and will be definitely done in Q4; we have even no impact to next year, to a little impacted positively because we are preloading some of the liquidation to this year, so we would have more space for the DVDs next year.

Okay that’s great. Another question any updates on the organic cotton products. Could you add any details for me, I know this is something you were moving into?

Yes, we will be launching as I said earlier in ABC Carpet & Home, which is really the premier home store in the Manhattan area and that will launch by 11/15.

Okay that’s great, that’s all. Thank you.

Once again to ask a question please press "*" then "1".

Alright there is no further question. [inaudible]

At this time I show no further questions.

Well that's nice, that participants have no questions. That’s good, so thank you very much and we will talk to you in our [inaudible] fiscal year.

Thank you for joining today's conference; that does conclude today's call. You may disconnect at this time.