Gaia Inc (GAIA) 2005 Q1 法說會逐字稿

Hello, and welcome to Gaiam’s First Quarter Earnings Release Conference Call. All lines will be in a listen-only mode until the formal question-and-answer session. (OPERATOR INSTRUCTIONS).

At the request of Gaiam, today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to introduce Mr. Jirka Rysavy, Chairman and Chief Executive Officer, Ms. Lynn Powers, President, and Ms. Janet Mathews, Chief Financial Officer. Ms. Mathews you may begin.

Thank you, good afternoon everyone and welcome to Gaiam’s First Quarter 2005 Earnings Conference Call. First the legalities. The following constitutes a 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 risks detailed from time to time in the Company's SEC reports. The Company does not undertake any obligation to update forward-looking statements.

I would now like to turn the call over to Jirka Rysavy, Chairman and CEO. Jirka?

Welcome to our update covering our results for the first quarter which ended March 31, 2005. And I am pleased to say that the quarter was again ahead of our expectations. Gaiam revenue for the quarter was $26.3 million, an 11% increase from $23.8 million reported during the first quarter of 2004. The 11% revenue increase was fully generated by our internal growth, and it is the third increase in a row in our comps, and it is also a pretty nice step from the 2% we reported in the last quarter. And based on our recorded sales, we expect another increase in our internal growth rate in the second quarter.

And the first quarter was especially good news because both of our segments achieved north of 10%. Revenues from the business segment increased 12% to $13 million, and our direct-to-consumer segment grew 10% to $13.3 million. The gross margin of 52.2% exceeded our guidance for the year, and the income was $116,000 or $0.01 per share compared to a net loss of $329,000 or $0.02 per share in the first quarter of last year.

During the quarter, Gaiam generated about $200,000 from the operations, and increased its cash position at March 31 to $10.9 million, up from $10.4 million at the end of the year. We still have no debt and an unused $15 million line of credit.

We are focusing on our media, Internet, and changing our direct segment customer approach from transactional to a relationship marketing. We initiated this in late 2004 and have recent made some final changes to support its focus.

Growth in both media and internal revenues were actually behind the positive supplied [ph] in the quarter. Our media programs are currently sold in over 25,000 retail destinations with more than 4,200 of these stores carrying full Gaiam-branded service [ph] representations. We believe we have the capacity to capitalize on the distribution by sending our media offerings through these doors.

During the first quarter, our media also won an additional 12 Tellies. We also signed a new deal with Comcast and LodgeNet to help bring Gaiam brands. And in addition to our existing agreements with Discovery and Fit TV and Fine Living channels.

The focus on our media and especially in market shares is starting to produce results, and we believe that we will develop new growth to our revenue as well as bottom line by the fourth quarter. And now I’ll ask Janet to give you more details on the numbers, and then Lynn the business overview.

Thank you Jirka, and now let me provide some additional details. For the first quarter, sales were $26.3 million, an increase of $2.5 million or 11% as compared to prior year sales of $23.8 million. Gaiam’s business segment generated positive internal growth of 12% for the quarter, increasing revenue generated by the business segment by $1.4 million over 2004 levels to $13 million.

Gaiam’s direct-to-consumer segment continued to deliver solid growth. Revenues for this segment grew approximately 10% to $13.3 million for the first quarter of 2005. Gross profits for the first quarter of 2005 were 52.2% down from 53.3% for the comparable prior year period but 350 basis points higher than the fourth quarter of 2004 gross profit of 48.7% and 120 basis points better than our 2005 guidance of 51%.

Total operating expense increased to $13.5 million for the first quarter of 2005 as compared to $13 million during the first quarter of 2004. The decline to the percentage of revenue by 360 basis points from 54.7% to 51.1%.

Gaiam’s operating expense increased to $11.7 million from $11 million during the first quarter of 2004 primarily associated with an overall increase in revenue of 11%. As a percentage of revenue, Gaiam operating expense decreased from 46.1% in the first quarter of 2004 to 44.4% in 2005.

General and administrative expense decreased 13.5% or $276,000 to $1.8 million for the first quarter of 2005 as compared to 2004 primarily as a result of headcount and occupancy cost reductions. As a percentage of revenue, G&A decreased from 8.6% in the first quarter of 2004 to 6.7% in the comparable 2005 period.

Both of our operating segments produced positive revenue growth and operating contributions for the first quarter of 2005. The business segment revenues were $13 million for the first quarter of 2005, an increase of 12% over the comparable 2004 period. The business segment’s operating contribution was $121,000 for the first quarter of 2005 as compared to an operating loss of $305,000 for the same period in 2004.

The direct-to-consumer segment also produced improved results increasing revenue by 10% to $13.3 million and generating an operating contribution of $166,000. During the first quarter of 2004, this segment had an operating loss of $24,000.

Operating income was $287,000 for the first quarter of 2005 as compared to an operating loss for the first quarter of 2004 of $329,000. Net income for the first quarter of 2005 was $116,000, or $0.01 per share as compared to a net loss of $329,000 or $0.02 per share for the comparable 2004 period.

Gaiam generated $598,000 in cash from operations during the first quarter of 2005, and ended the quarter with $10.9 million in cash, up from $10.4 million at December 31, 2004. Gaiam has no debt, and an unused credit line of $15 million.

GSO improved to an average of 44 days for the first quarter of 2005 compared to 54 days in Q1 2004. Inventory turns remained the same for the first quarters of 2004 and 2005 at 3 times. Depreciation and amortization was $1.1 million for the first quarter of 2005.

I would now like to turn the call over to Lynn for the business overview. Lynn?

Thanks Janet. As Janet indicated, our first quarter results brought a return to profitability and increased internal growth. For the first quarter of 2005, we reported an 11% increase in sales with 12% growth coming from the business-to-retailer segment, and 10% coming from our direct-to-consumer segment.

Overall sales for our business-to-retailers division was up approximately $1.4 million, or 12%. Sales from our top 25 accounts grew by approximately 14% over the first quarter 2004. Modest improvements in the overall retail environment and heightened sell-through from our expanded presence in Target and Whole Food stores contributed to first quarter results.

Product margins were slightly lower than first quarter 2004 due to our decision to no longer sell VHS, which caused a slight mix shift to accessories and the addition of DVD components to our current inventory of kits. We completed the addition of DVD components to our kits during the third and fourth quarters of 2004 and are now realizing the added cost conversion as we sell through this inventory. New production of kits includes only DVD components as we feel the market has now completed the transition to DVD.

The first quarter was positive performance in the mass merchant sporting goods, specialty retailer and grocery channels. Leading the charge in the mass merchant channel was Target. Our expansion in the sporting goods department involved 1,300 doors from 4 feet to 12 feet of shelf space, and continues to drive strong sales exceeding Target’s forecasted projections.

The addition of media to the assortment in all stores has been a tremendous success, and we’re excited about recent opportunities to further broaden our media offerings to Target guests in the upcoming fall resale.

For the quarter, the bookstore channel was down approximately 25%, which is partly the result of the transition of 2 key accounts to new sales reps. During Q1, we also worked with Borders to manage current inventory levels and buying trends in preparation for an expanded rollout of our store-within-store presentations into the balance of their over 300 doors. This expanded store-within-store rollout is expected to begin in late second quarter, and will be finalized by year-end. Borders experienced negative comps as a result of this transition, but increased sales are expected once the expansion has started.

Barnes and Noble continues to show strong sales, and we’re taking steps to maintain these sales levels in the coming year by refreshing the product assortment and rolling out new fixtures.

Specialty retailers were up approximately 74% in the first quarter compared to the same period last year. The addition of a market rep and more focus from our media experts helped drive a large increase in Bed, Bath & Beyond’s business in Q1.

Steady growth in the grocery channel continued through Q1 as we saw a 22% increase in sales compared to first quarter of 2004. Our experienced grocery sales manager has successfully worked with our national foods distributor to increase the level of service and quality of products assortment in Whole Food stores. In early March, Whole Foods held the grand opening of its new 80,000 square foot landmark store located in Austin, Texas. The Gaiam merchandising and sales teams worked to establish a premier lifestyle presentation of all Gaiam product lines, including home, apparel, and an expanded line body fitness section for the store. Our team is working with the Whole Foods team to develop a comprehensive merchandising strategy aimed at educating consumers about organic cotton.

During first quarter, we launched a test through one of our distributors for merchandising our media in checkout lane displays at Kroger. The test was successful, and our distributor will roll out an expanded checkout lane program to over 500 additional Kroger stores in third quarter with 4 media titles. We’re really excited about this opportunity as grocery is an important channel for us for our media strategy going forward.

First quarter performance in the media retailer channel was positive as we experienced a 39% increase in sales year-over-year. Amazon.com remains a strong customer for us and an anchor for our media business.

We’re also exploring other new opportunities in this channel, such as Best Buy’s new lifestyle concept store, Eq-Life, where we secured placement of most of Gaiam product lines in 2004. We are their exclusive provider of mind/body fitness products. The Eq-Life concept stores, aimed at providing a single-stop shopping location for health, wellness, and complimentary technology products to balance and enhance quality of life. We understand that the test results have surpassed expectations and Best Buy’s plans to expand this concept store to additional locations in the future.

Our sporting goods business was up approximately 13% in the first quarter when compared to last year, considering the challenges that we faced over the past year with all the mergers and acquisitions in this channel, this increase represents quite a success.

As we’ve mentioned in previous calls, we’ve also begun a grass roots-based sales approach in certain channels to promote our product and expand our brand awareness among its consumers. Several key initiatives in the grass roots approach took place during the first quarter. In late first quarter, we launched a Safe Fit initiative with Hilton Garden Hotels. This program is intended to offer Hilton Garden guests the opportunity to experience Gaiam’s mind/body fitness accessories with instructional guides designed by Gaiam fitness experts in the privacy of their rooms. This initiative includes Gaiam branding on all Hilton Garden room key cards, as well as onsite Gaiam branded marketing. The Safe Fit initiatives have been adopted by Hilton Garden corporate office, and will be incorporated in all 248 Hilton Garden properties by the end of 2005.

Other hotel chains have expressed interest in this program, and we are currently working with several prospective hotels to develop strategies for expanding this initiative in the near future.

We’re also currently in the early stages of initiating a stress [ph] store media test with Jenny Craig Weight Loss Centers. This test is another exciting opportunity for us to broaden our customer base. Testing will take place throughout the second quarter, and based on the results of testing we’re hopeful we can secure an expanded rollout of this program with possible addition of programming opportunities. Jenny Craig operates approximately 500 counseling centers nationwide.

The fourth quarter grass roots launch of our soft goods program into ABC Carpet and Homes, a premier retailer in downtown Manhattan, continues to produce positive feedback. During the first quarter, our baby line sold out completely and they remain excited about the prospects for additional organic soft goods products in the future.

In first quarter, our Canadian business was up approximately 6% over first quarter 2004, the first positive quarterly comps in over a year. We believe the majority of our inventory challenges have been resolved here. We began the process of converting dual-language kits to DVD in the first quarter, and we expect to complete this process through the 2005 holiday season.

Gaiam media, as Jirka said is carrying over 25,000 doors with over 4,200 doors carrying full Gaiam store-within-store presentation. Our Gaiam media received 12 Telly Awards this year and 18 Aegis Awards, bringing our total media awards to over 100. We’re proud of the quality of the media we produce, and are pleased to be honored by the industry in this way. Our media currently broadcasts on Discovery, Fit TV and Fine Living, as well as being available in 400,000 hotel rooms through LodgeNet. And we recently signed a deal with Comcast for VOD programming.

The direct-to-consumer business had a successful first quarter, growing by over 10% or $1.2 million driven by our online business. Independent web marketing programs have continued to show success, and as a result email campaigns were 15%, affiliate programs 33%, and search engine placement over 51% over Q1 2004. We believe that the Internet growth experienced in Q1 is indicative of the opportunity that exists for the Internet business in the coming year, and as a result we have recently increased the dedicated Internet staff to reflect this outlook.

We’ll be launching our Gaiam store in Amazon.com in late second quarter and believe that will allow new online shoppers to discover Gaiam and look to us to be their preferred [indiscernible] provider. The Gaiam Best Customer, or GBC program continues to be well received, and as a result we’ve expanded membership in the program to 32,000 consumers, up from 18,000 at the end of 2004. We’re changing our business model in direct from transactional base to relationship base, which is showing positive results in the GBC program.

Our operational staff in direct remains strong with a 92% fulfill [ph] rate, up from 90% in first Q ’04 and while our average order size is up on the web, it’s down overall due to shifts in online sales. We recognize this is an opportunity to improve our suggestive selling on the web and are working on some solutions.

On the international front, we’re expanding our presence in Japan. Five of our media titles have now been translated into Japanese and will launch this month through our licensees. Our Gaiam distributors have seen an increased interest in the entire Lo-Hos [ph] industry and are expanding their assortment of Gaiam products. Our UK subsidiary launched new Gaiam products at the recent Natural Products Show in London to a large audience of retailers.

We are very pleased with the results for the quarter, and are upbeat about our opportunities in 2005. We’re focused on media, relationship marketing, and on the Internet. With our consolidation period behind us, we look forward to a growth year. I’d now like to open the call for questions.

Thank you. (OPERATOR INSTRUCTIONS).

Mark Rupe, Adams, Harkness & Hill.

Hi guys, this is actually Steve Colbert in for Mark. Congratulations on a great quarter. I had a question with the gross margin improvement to 52.2%. We were looking for 51% for the year. Should we expect something higher than this going forward?

I think that we would like to stay with the 51% guidance.

Okay.

It was a good quarter, but we would like to see another one like that before we will change the guidance.

Sure thing, and then the internal growth rate of 11%, I was hoping you could touch on some of the growth opportunities in 2 particular segments, the business segment possibly with the reset in the fall into Target, and then with the direct-to-consumer segment. You mentioned a bit about the Internet opportunities as well.

As far as Target goes, we will continue to see really strong growth there. We exceeded Target’s forecasted expectations considerably in the first 3 months of this year, and we expect to see that continue through second quarter. As you remember, last year third quarter was the load-in for the 12-foot section. What we’re excited about our opportunities for the third quarter this year is the expansion of the media presence. We know that we’re going to be adding at least one additional shelf for the media in Target for third quarter.

On the Internet side, as you can tell from what I said earlier our growth is coming from more Internet marketing, particularly search engines. I believe as people are looking for health and wellness over the web, they’re finding Gaiam, and I think the opportunity to open the Gaiam store on Aamzon.com will certainly introduce us to a lot of new consumers in late second quarter.

Overall, the comp sales obviously increased very nicely. Direct business was actually doing pretty good even in the previous quarter. It’s really a change in the business-to-business sector when we get positive after several quarters being behind the transformation of VHS format to DVD, and actually the current trend is very strong and as I said, we actually expect this rate of growth to increase again in the second quarter.

Okay, and then any additional color you could provide me on the Infomercial efforts?

First test results were good, and we’re in the process of continuing to tweak it. As I think you know, Infomercials are a process and we’re continuing to improve response rate each time we tweak it.

We expect the main impact to be in the fourth quarter.

Yes.

Fourth quarter, okay. And then just sticking with the media focus, going forward I was wondering if you could give a little more detail on the proprietary music offerings that we were looking to see.

Music will launch in the third quarter.

Third quarter, is that trending well as far as the planning and sort of lining of the ducks?

Yes it is.

Okay, and then finally…

[Inaudible] extra tests and some stores are doing well.

Okay, great. And then finally on the grocery, I wonder if you could just talk a bit about Kroger and the rollout on third quarter expected.

We tested putting media in the checkout line and it tested very well, and so it’s expanding to 500 additional doors with 4 media titles in third quarter. And we’re hoping to be chain-wide by fourth quarter.

Okay, that’s great. That’s all for me, thank you.

Dale Peterson [ph], Facia [ph] Solutions.

All right, going back to Target in the past you mentioned Target represents about 12% of your business. Is this 12% of the total sales or just business-to-business sales.

Total.

Total sales, okay. I have a couple more questions. The store on Amazon.com, is that going well.

It won’t launch until end of second quarter.

Oh, okay.

In 4 months, it was more to get the name out to sell overall websites.

Okay, and just another question. I’ve been hearing about this litigation initiated by [indiscernible]. Can you tell me a little bit about how that’s going?

There is totally nothing there. I actually don’t know what the deal was, but there was something we’re not even involved in it. There was something we have an agency who does our web search engine optimization, and there is something in search engine placement when you buy the names, what included some pages of [indiscernible]. But when we looked at it, there was no, there’s like $1,000 -- it’s like totally nothing. So I’m not sure where it is, but there is really not a issue there. I think there was just kind of, I don’t even want to comment on it. But the overall sales from those related pages was less than $1,000.

And that’s not liable to happen with any other company on the Internet, is it?

I mean this was not initiated by us. If you buy a name say on Yahoo or something like that or some search and placement, it depends on how they operate. If they sell you the names for something like yoga, and other people’s names come up. Several times other companies will settle lawsuits and they were all thrown out because it’s not what we do or are in control of.

What is the status of the litigation then?

I assume it’s gone. If not, there’s no -- I don’t even want to talk about it.

It’s in the hands of the attorney.

Okay, and I want to get back to Target the other gentleman was mentioning -- I know I’m sorry about that. What about the club stores? How are they doing at Best Buy?

Best Buy is handled through a distributor and the sales for that distributor were up slightly and as far as club stores, we don’t really do a lot of business with the club stores during first quarter. It’s primarily a fitness season, which is a load-in in fourth quarter.

Okay, and you were talking about the promotions down at the Hilton Garden Hotels and Jenny Craig. What are you promoting with them?

Walking products, yoga products, all of our mind/body fitness products.

Sounds good, okay well thank you very much.

Bret Miley, Rutabega Capital.

Yes, it sounds like you had nice growth in the quarter. I was wondering if you had any data of how you guys did versus kind of the category. Do you guys have category data either in terms of the non-entertainment DVDs or do you somehow measure yoga and pilates types of categories in terms of whether or not you’re gaining share?

Oh we actually have a very nice gain in shares in the first quarter compared to last year. It was probably our best gain what we have so far since we launched in sequential quarters. We start to actually rank overall DVDs pretty nicely, including all theatrical, right now we just do the health media and stuff like that. And it’s saturating [ph] pretty nicely as an overall distributor and we want to capitalize on that momentum.

And how do you guys stack up? Do you guys get any category data with regards to some of the accessory sales? In other words, do you have any data on kind of how if I look at this in terms of either in yoga or pilates type categories, do you guys have any sort of aggregate industry data whether that’s still an increasing category? It seems like you guys are going faster than the category. I’m just trying to get a sense of the category itself. Probably this would be less media-oriented and more product-oriented?

All of the mind/body fitness categories are continuing to grow.

Okay.

I can’t give you specifics on pilates versus yoga.

Okay, so basically but they’re all still positive.

Yes.

We have really what’s kind of available on video scans. We don’t break them that way.

Okay. Also I was hoping you could clarify a little bit, help me understand you mentioned the Borders I guess it’s a reset or a transition before you guys are going to roll out the store-within-store. How does that work when you do that? It seems like it’s kind of a pause before you get more business. Can you just explain to me what the process is when you’re resetting the store.

Yes, as we try to bring in new product and reset, we kind of cut off reordering on old product so that they don’t end up with mark-downs or returned product. So it usually takes us about 2 months for the sell-down to occur, and then we can ship in the new product.

Okay, and typically will this be entirely a new slate or is there an, if you had how many dozen videos in there, you will totally change that out? Or do you change 80% of it? How much of a transition is there in terms of product?

It really depends on the account. Someone like a Borders, the transition might be 30% to 40% because they carry a lot of our media titles. So it depends on the account what amount we would transition.

Okay, and one other general question if I could. On the new product side, new video side, on the media side, how may sort of, what’s the net growth in titles that we should expect kind of per year? Is that a number that you guys sort of target? In other words, I assume that some of these perhaps roll off and then others salvage so you’ve got new products every year. Can you just give me a net new title growth that you would expect in a year?

We usually launch somewhere around 20 new titles a year, and then of course titles within kits as well, and that can be anywhere from 10 to 15 new kits as well. So overall DVD titles between stand-alone media and kits it would be anywhere from 25 to 40.

Okay, and am I right to assume that some of those actually, do any of those actually go obsolete? In other words, is there kind of a natural offset if I take your total titles and say you add 30 or 35 a year, should I assume that some of them also roll off? In other words, is there kind of a net number I should be looking at in terms of assuming that you get distribution for these new titles?

We definitely get distribution, but we had a big drop from last year because we had pretty much all titles both in VHS and DVD, so we had a net drop. We had about half than last year. So we had a big net drop from last year, so we can ramp up to make it up basically there because of [inaudible]. Otherwise, you probably look at about a net 20.

Okay, net 20, that’s fine. Okay, I appreciate it. Thanks so much.

James Muller, Power Brokers.

Thank you, sounds great. I have a few questions from the last review. How is the Power [inaudible] doing? Are you selling it to any of your sporting good chains, or is this item just direct-to-consumer?

No we’re actually starting to sell it to particularly specialty sporting goods retailers, and we’re looking to launch it in the health channel as well.

Terrific. How’s the Buddha Kong [ph] been doing?

Buddha Kong’s been doing great. It was I believe number 5 at Best Buy in the past couple of weeks, and it’s just getting ready to launch in certain other channels. It’s been doing very, very well in the book channel as well.

Great, and I don’t know if you already addressed this. I couldn’t catch it. What is the status of the Infomercial?

We are still in the process of tweaking it. The tests have proven to be very good, but any time you do an Infomercial it’s a process to increase your response rate. So we are doing an additional edit over the next 3 weeks. We have some very compelling new testimonials that we’ll be editing into the Infomercial, and then we expect to see the results of it primarily in fourth quarter.

You don’t want to launch something during the summer when no one is watching TV, so it’s really planned when people get back from their vacations when we actually do the launch.

Right, are you guys still launching a TV program with Scooby-Do doing yoga?

It’s the products. We have the Scooby-Do license and those are launching in the second quarter, second and third quarters.

Okay, and finally has the music line sound solution happened?

Yes, I answered that question earlier. It’s launching in third quarter.

That’s okay, very good, thank you.

(OPERATOR INSTRUCTIONS).

Well, if there are no further questions, we would like to thank everybody for participating and thank you for being with us, and we’ll talk to you next time. Thank you.