Gaia Inc (GAIA) 2005 Q3 法說會逐字稿

Thank you for standing by and welcome to the Gaiam third quarter conference call. At this time, all participants' lines have been placed on a listen-only mode until the question and answer segment of today's conference. (OPERATOR INSTRUCTIONS)

I would like to introduce Mr. Jirka Rysavy, Chairman and Chief Officer; Ms. Lynn Powers, President; and Ms. Janet Mathews, Chief Financial Officer. I would now like to turn the meeting over to Mr. John Mills. Thank you, sir. You may go ahead.

Thank you. Good afternoon, everyone, and welcome to Gaiam's third quarter 2005 earnings conference call.

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 risk 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.

Now, I'd like to turn the call over to the Company's Chairman and CEO, Mr. Jirka Rysavy.

Welcome to our quarterly update, covering our results for the third Q, which ended September 30, this year. I'm pleased to say that the results were, again, ahead of our expectations.

Revenue for the quarter was 30.1 million, which is 9.1 million increase from 25 million, which we reported during the third quarter of 2004. The internal growth rate for the quarter was 24%, and the most encouraging about the growth rate is the fact that it was generated equally by both business segments. Internal growth rate for the Direct to Consumer segment was 23.4 and for the Business segment, 24.4.

Our gross margin for the quarter grew a stunning 880 basis points to 55.5% from 46.7, mostly due to success of our media focus strategy. And sequentially, compared to the second quarter, gross margin increased to 660 basis points.

On the expense side, the operational reset we finished last year was the main contributor to our expense. For the quarter coming down, 520 basis points. The decrease came from both selling and operating, as well as from general and administrative.

And as a result of the revenue growth and large improvement in GP and leverage of expenses, we have significantly improved the bottom line.

For the quarter, Gaiam reported operating income of 0.9 million compared to a loss of 2.3 million in the third quarter of last year. This 3.2 million improvement actually represents 10.6% of revenue for the quarter and demonstrates the leveragability of our operating model.

Net income for the quarter was .5 million, or $0.03, compared to a net loss of 1.5 million, or $0.10 for the same period of last year.

Depreciation and amortization for the quarter was 1.0 million.

As of September 30, we have 10.2 million in cash, no debt, and unused 15 million line of credit, which we extended to July 2007.

On September 13, we have acquired substantially all the assets of Good Times Entertainment for 35 million in cash. The Good Times asset included mostly entertainment programming and home video products. We also have invested approximately 7.5 million in LIME Media, TV and radio units were controlled by Steve Case.

To finance the transaction, Gaiam issued new unreduced class-A common stock and raised approximately 18.7 million from funds, advised by Prentice Capital, and about 20 million from Steve Case Revolution Living.

Gaiam Home Media is now carried by more than 40,000 retail stores in the United States alone. We also have over 7 million direct customers, and with the Good Times Entertainment acquisition, we expect to generate over 200 million revenues in 2006.

And now Janet will give you more details on the numbers and then Lynn, some business overview. So Janet?

Thank you, Jirka. Now let me provide some additional detail.

For the third quarter, sales were 30.1 million, an increase of 9.1 million, or 43.4% as compared to prior sales of 21 million. Gaiam's business segment generated positive internal growth of 24.4% for the quarter, increasing revenue generated by this segment by 1.9 million over 2004 levels to 9.5 million.

Gaiam's Direct to Consumer segment also continued to deliver solid growth. Revenue for this segment grew approximately 23.4% to 14 million for the third quarter of 2005. The additional revenue growth not reflected in these internal growth rates was a result of revenue generated from the sale of media acquired in our Good Times asset acquisition, which we commenced shipping in mid September.

The gross profit margin for the third quarter of 2005 was 55.5%, a significant 880-basis point increase over 2004 results of 46.7%. This very positive improvement resulted from higher sales of media and kits containing media, as these products have significantly higher margins than our accessories.

Total operating expense increased to 15.8 million for the third quarter of 2005, as compared to 12.2 million during the third quarter of 2004, but declined significantly as a percentage of revenue from 57.8% in 2004 to 52.5% in 2005, as we were able to leverage our existing capacity and infrastructure and service a 43% increase in revenue.

Selling and operating expense increased to 13.7 million from 10.3 million in the third quarter of 2004, but as a percentage of revenue, these expenses decreased 350 basis points to 45.4% in 2005 from 48.9% in 2004.

General and administrative expense increased to 2.2 million in 2005 as compared to 1.9 million in 2004, due to increased infrastructure costs associated with our New York operations. We are pleased, however, that as a percentage of revenue, G&A decreased from 8.9% in the third quarter of 2004 to 7.1% in the comparable 2005 period.

Both of our operating segments produced positive revenue growth and operating contribution. The Business segment revenues were 13.9 million for the third quarter of 2005, an increase of 43.5% over the comparable 2004 period. The Direct to Consumer segment also produced improved results, increasing revenue by 43.2% to 16.2 million. Operating contributions for the Business and Direct to Consumer segments were 0.7 million and 0.2 million, respectively.

As a result of positive internal and overall revenue growth, significant margin improvements and leveraging our operating expenses, Gaiam improved its financial performance, generating operating income of 0.9 million for the third quarter of 2005, as compared to an operating loss of 2.3 million in the comparable 2004 period.

Net income increased to $0.03 per share, or half a million for the first quarter of 2005, as compared to a loss per share of $0.10 or 1.5 million in the third quarter of 2004.

For the nine months ended September 30th, Gaiam's revenue increased 26.4% from 61.8 million in 2004 to 78.2 million in 2005. The net loss for the first nine months of 2005 at $0.01 per share was significantly reduced from the $0.28 per share loss generated for the first nine months of 2004.

EBITDA for the third quarter and nine months ended September 30th, 2005, was 1.9 million and $2.7 million, respectively.

Gaiam generated 1.3 million in cash from operations for the first nine months of 2005 and at September 30th had 10.2 million in cash, no debt, and an unused $15 million line of credit.

During the third quarter, Steve Case's Revolution Living purchased $20 million of unregistered Class A common stock and Gaiam invested approximately 7.5 million in LIME Media. Additionally, Gaiam raised approximately 18.7 million from the sale of unregistered Class A common stock to funds advised by Prentice Capital Management.

On September 13th, 2005 we purchased assets from Good Times Entertainment for $35 million in cash and the assumption of certain liabilities. This acquisition was funded through our on-hand cash.

DSO for the third quarter was 43 days, up from 36 days in the third quarter of 2004, while inventory turns were 3.1 times, an improvement from 2.9 times in the third quarter of 2004.

Depreciation and amortization was $1 million for the third quarter of 2005, and 2.9 million for the year-to-date period.

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

First, I would like to talk about how each of our business segments contributed to the Company's financial performance during the third quarter. Then I will briefly review where we are with the Good Times acquisition, along with a brief synopsis of our strategy for the next few quarters.

For the third quarter of 2005, revenue was 30.1 million, a 43% increase from 21 million recorded in the third quarter of 2004. This revenue growth was attributable to a 24% internal growth rate, plus the additional revenue generated by the Good Times products. Gaiam has marked its second consecutive quarter of over 20% internal growth.

Operating income for the third quarter was 900,000, compared to an operating loss of 2.3 million reported in the same period last year. This improvement in operating income is a direct result of the initiatives we put in place during the last two years, along with the leverage we are getting from increased sales volume and improved gross margins.

During the last two years, we completed a reset of our business, including centralizing our operations in Colorado, consolidating our distribution to our Cincinnati warehouse, and implementing a fully integrated warehouse management system. We also increased our sales force and added industry experts to sales. We believe this reset has positioned us for substantial top and bottom line growth over the long-term and we now have the proper platform to support our internal growth as well as additional acquisitions for years to come.

Our retail business segment, which distributes media and other proprietary products to retailers, generated revenues of 13.9 million in the third quarter of 2005. Internal revenue growth for the retail segment was up 24.4% from the same period in 2004. We attribute the continued double-digit internal growth in this segment to our focus on media products and kits that contain media, as well as the increased sales staff and sales initiatives instituted over the past two years. It is also a result of additional demand, as people are seeking to live healthier, more active life-styles, and Gaiam represents the leading brand for mind/body wellness.

Our Gaiam Home Media is currently in over 40,000 retail doors in the U.S. This unique distribution is based on Gaiam's strength in the specialty and upscale market, combined with Good Times' strength in the mass and video retailer and the Christian book market. We are also expanding our Media shelf space in many of our existing retailers and have begun placing Gaiam Media with the mass merchant accounts serviced directly by Good Times.

We have several fitness promotions planned for the fourth quarter of 2005 and first quarter of next year and expect to have a great fitness season in 2006.

The internal revenue growth of 24.4% in our retail segment for the third quarter was driven also by successes in the top tier mass merchants and the book store channels. Our distributor business has also seen growth, due to our continued partnership with certain distributors that service our targeted channels of book and media retailers. Our business with Target continues to exceed our expectations, and the Gaiam brand is continuing to perform above plan for them.

We had several new successful media releases this quarter, including a new Budocon release and Yoga Now. This year we've released approximately 15 new wellness stand-alone titles and seven new kit titles.

We are also continuing to add store-within-store presentations, with borders expanding to an additional 50 stores in Q3. Store-within-store is an important part of the Gaiam strategy and has provided a home for consumers seeking wellness and life-style products. We recently grew from 4200 to 4400 store-within-store branded locations, and with current executed plans, we expect to end the year with over 5000 locations. We will seek to leverage this strategy with our new Good Times brands in the future.

The revenue growth for the Direct to Consumer business segment is up 43.2% in the third quarter over 2004 Q3. Internal revenue growth for the Direct to Consumer segment was 23.4%, or an increase of 2.6 million over the same period in 2004.

The positive trend in our Direct to Consumer business continues to be driven by strong growth in our online business. Compared to 2004, our web business is up 32% for the nine months ended September 30th, driven by independent web marketing programs.

The additional revenue came from the Good Times DRTV business. We're excited about the DRTV possibilities, with our asset acquisition of Good Times. The Good Times Billy Blanks infomercial has been the number one fitness infomercial 11 of the past 13 weeks. We believe this can drive our mass fitness business over the next few quarters.

We believe there are additional opportunities for Gaiam products in the DRTV business because of their unique proprietary nature and good margins. The expertise in the DRTV business was one of the attractive assets of Good Times that we felt could be leveraged across Gaiam's business.

Our continued margin improvement is due to a shift in sales mix to higher margin media products and kits containing media, along with our increased purchasing efficiency due to larger volume discounts. We expect this improvement to continue, as we leverage the Good Times volume through our current channels. The revenue growth combined with the improvements in product margin resulted in our improved EPS performance over 2004.

Now turning to more detail on the acquisition of Good Times entertainment. We completed the acquisition in September, and by the end of October, we had successfully transitioned the fulfillment for the Good Times direct business to the Gaiam fulfillment center in Cincinnati, Ohio. We expect the transition of the fulfillment for the retail trade division to be completed within the next 90 to 120 days and look forward to a strong fitness season in 2006 with the combined product offerings.

Gaiam's market share in Fitness grew from 17% in '04 to 20% year-to-date '05, and has a 30% share in September and October, according to Nielsen VideoScan. Combined with Good Times, our market share is over 35% year-to-date and over 50% for September and October. The market share reports from VideoScan also show that the combined Gaiam/Good Times market share for all DVD is in the top ten.

With the Good Times acquisition, we expect to generate over 200 million in annual revenue and in addition to our new television and theatrical distribution ability, our home media is now carried by over 40,000 retail doors in the U.S., which will become the platform to launch all new media and life-style products in Wellness, Kids and Family, and Inspirational entertainment.

In addition, we expect to distribute over 20 million catalogs per year and we now have a direct base of approximately 7 million customers. We expect to begin to be able to leverage our direct customers across all our brands and begin our overall direct strategy to become the online content provider for healthy life-styles and inspirational media.

I would now like to open up the call for questions.

Thank you. At this time, we are ready to begin the question and answer segment. [OPERATOR INSTRUCTIONS]

Our first question will come from Mark Argento. Please state your company name.

Craig-Hallum Capital Group.

Good afternoon. A few questions for you. It looks like the GTS has contributed about 4 million in revenue in the quarter. What should -- what are the expectations? It looks like you only had it for two weeks. It came in a little bit above what we were looking for. Can you help us think about that business a little bit, in terms of seasonality and what we should expect for Q4?

I think the Q4 is definitely the best quarter for both Gaiam and Good Times, so it will continue to be our strong quarter, continue to first. And second quarter is definitely the slowest for both sides. The businesses are very comparable, so the seasonality is pretty much the same.

Was there some back sales that you got booked in the quarter that allowed you to put that much up in the two-week period, or is that kind of a run rate that we should get comfortable with?

There were some holiday sets that were in the quarter.

Okay. In terms of the internal, your internal growth rate, up over 20%, is that something you think is sustainable? Or what would you expect going forward, your organic growth rate, ex the GT assets.

Well, when we provided the guidance, we said 10 to 12%, obviously we are running quite ahead. We expected when we budgeted, we kind of look at it in that kind of range, and so it's-- we obviously are running ahead of it.

In terms of the synergies or the leverage that you're going get out of the GT assets as you integrate them, could you talk a little bit about -- it sounds like you brought half the business in-house already. Now you've had the asset a little bit. Are you comfortable with being able to drive incremental margins out of that business?

And then also, could you talk a little bit about your strategy in terms of additional channels? I think, Lynn, you mentioned right towards the end the online channel and what you could do with that.

I'll kind of break that up into pieces. First of all, Mark, right now we're really focusing on the integration. We're spending most of our time making sure that we are fully integrated over the next 90 to 120 days, so keep in mind that we're doing that. We are certainly looking at how we can leverage and improve margins with the increased volume, both in the DVD replications and certainly in manufacturing. So we expect to see a continued improvement there.

And then as far as channels, we're certainly right now for fourth and first quarter focused on taking the Gaiam Media through the Good Times Direct channels, where they actually sell directly to the larger mass merchants. So we are leveraging that currently for the fourth and first quarter.

What major retailers would that be, other than Target? Are they direct with anybody else that you guys aren't direct with right now?

Yes, they are direct with Wal-Mart, Sam's Club, and Best Buy. And K-Mart.

Okay. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] I would now like to turn the call back over to Lynn Powers.

Well, if there are no further questions, thank you very much for joining us for the Gaiam third quarter results, and we'll look forward to speaking to you in February.

We are planning currently to -- we might change it, but right now we're planning to have the next call on February 28th at 4:30 Eastern, 2:30 Mountain, for our annual report. Thank you very much.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may disconnect.