Gaia Inc (GAIA) 2006 Q1 法說會逐字稿

Good afternoon and welcome to Gaiam's first-quarter 2006 earnings results call. At this time, all participants are in a listen-only mode until the question-and-answer period. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would like to turn the meeting over to Mr. John Mills. Sir, you may begin.

Thank you, Jennifer. Good afternoon, everyone and welcome to Gaiam's first-quarter 2006 earnings conference call. 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 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.

On the call today representing Gaiam is Mr. Jirka Rysavy, Chairman and CEO; Lynn Powers, President; Vilia Valentine, newly appointed CFO and Janet Mathews, newly appointed Chief Administrative Officer. Now I would 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 quarter, which ended March 31, 2006. And the results were ahead -- again, ahead of our expectations. Based on our first quarter, we definitely have a good start for 2006. Our top and bottom-line performance clearly validates our branded media strategy, as well as our leverage of operating model.

In the first quarter, Gaiam revenue grew to $51.8 million, a 97% increase over $26.3 million, which we reported in the first quarter of last year. [Gram] gross in the quarter was due to a combination of strong internal growth and sales of media titles acquired from GoodTimes Entertainment.

Internal revenue growth for the quarter was 27.8%. The best news for the quarter is again the gross margin story. The gross margin in the first Q increased 1190 basis points to 64.1% compared to 52.2% in the same period of last year and 270 basis points from 61.4% in the fourth quarter if 2005.

The increase was mainly due to higher sales of our media and elimination of third-party distributors by going direct, as well as lower cost of goods sold associated with the increase of our DVD sales volume. We are not at this time changing our recently increased expectation of 60% gross margin for the year, but we might revise this expectation upward if we have a good showing in the second Q.

Net income for the quarter was $890,000 or $0.04 as compared to 116,000 or $0.01 per share for the first Q of 2005. Included in this quarter, which we reported in the other income line, was a non-cash gain of about $0.015 per share, which related to our reduction of our minor interest in LIME Media. Without this gain, our earnings for the first quarter were $0.03.

For the first quarter of 2006, according to Nielsen VideoScan, Gaiam was ranked fourth in overall U.S.A. nontheatrical DVD with 8.9% marketshare, up from number five in 6.8% marketshare in 2005 and number 13 at 1.3% marketshare in 2004. After bypassing FOX, Universal, MGM during the first nine months of last year and Lion's Gate in the last quarter, we move ahead of Sony in this one.

Gaiam's marketshare in the fitness rental category in the first Q increased to 42%, which is no more than 3.5 times larger than the next competitor. (indiscernible) Media is now carried by more than 58,000 retail outlets in the U.S.A. alone, which is more than double from a year ago.

We remain on track to deliver over $200 million in revenues in 2006. To support our future growth, we continue to enhance our management team. Lynn will talk about this in a moment, but for right now, I would like to introduce Vilia Valentine, our new CFO.

Vilia joined us from [Varia] where she was I think CFO Manager of Financial Matters for Domestic and International Operations. Varia is the worldwide Internet service provider, which was purchased for about $6.5 billion by NTT Communication, which is the world's largest telecommunications company in 2000.

And prior to joining Varia, Vilia was the Vice President and Controller for Corporate Express and Corporate Supplier I founded them built into the Fortune 500 company. Vilia was a member of our management team as we grew from $30 million to over $3 billion in less than five years. She was also part of our acquisition team, which completed more than 200 deals.

Janet Mathews, who has been CFO in Retail Business Development of Gaiam since '96, was promoted to Chief Administrative Officer. She is with us here as well. And in her new role, she will be responsible for acquisition and will take on additional responsibility for legal and certain operating units.

Now I will ask Vilia to provide some details of our numbers and then Lynn will give you some more complete business overview. So Vilia.

Thank you, Jirka. It is a dynamic and exciting time for Gaiam and I am thrilled to join the management team and contribute to the Company's growth. I am also excited to report such wonderful first-quarter results. Now let me discuss them in more detail.

As Jirka briefly mentioned, for the first quarter, Gaiam generated revenue of $51.8 million, an increase of 97% over the $26.3 million recorded in the same period last year. This increase is due to a combination of strong internal growth of 27.8% and sales of media titles acquired from GoodTimes Entertainment in September of '05.

Revenue for Gaiam's overall direct to consumer segment, including growth from acquisitions, increased 96% to $26.1 million in the first quarter. Gaiam's business segment, also including growth from acquisitions, increased 97% to $25.6 million in the first quarter.

Our gross margin increased 1190 basis points to 64.1% in the first quarter of 2006 compared to 52.2% in the same period last year and increased 270 basis points from 61.4% reported in the fourth quarter of 2005. This increase was primarily due to strong media sales and our ability to leverage additional purchasing discounts with our suppliers as a result of higher DVD sales volume.

Gaiam also benefit from the elimination of fees previously paid for third-party distributions following the GoodTimes transaction. Our selling and offering expenses increased to 55.9% of revenue in the first quarter of 2006 from 44% in the comparable period last year as a result of expenses associated with the GoodTimes asset acquisition, related temporary transitional services, as well as additional amortization of the acquired GoodTimes media library.

Also impacting selling and operating expenses is a change in revenue mix towards increased media, which carries higher selling operating expenses, including merchandising fee and advertising costs, but also carries higher gross profit margins.

Our general administrative expenses decreased 6.3% from 6.7% as economies of scale are achieved on the increased revenue base. As a result of our strong internal revenue growth, significant margin improvement and the leveraging of our operating expenses, we were able to improve our bottom-line performance. We generated operating income of $1 million, up from $287,000 the first quarter of 2005.

Net income for the first quarter was $890,000 or $0.04 per share as compared to $116,000 or $0.01 per share for the first quarter of 2005. Included in the quarter results and shown as other income on our statement of operations as a non-cash gain of $0.015 per share related to a reduction of Gaiam's minority interest in LIME Media. Gaiam sold proximally 75% of its stake in LIME Media back to Revolution Living in early January. Excluding this onetime gain, Gaiam's earnings for the quarter were $0.03 per share.

EBITDA for the first quarter was $2.7 million, up from $1.4 million in the comparable period last year. Capital expenditures were $191,000 in the first quarter and our working capital also improved to $43.1 million, up from $37.2 million at December 31, 2005.

Our DSO for the first quarter was 45 days, which is comparable to the same period in 2005 at 44 days. Our inventory turns were 3.5 times, an improvement from three times in the first quarter of 2005. I would now like to turn the call over to Lynn for the business overview.

Thanks, Vilia. I will now provide an update on our operations, a brief review of our financial performance by business segment and a short synopsis of our strategy going forward. As Jirka mentioned earlier, during the first quarter, we made some great additions to our management team. We are now well-positioned to capitalize on the initial success of our media-focused business model and to continue to expand our offerings in our current channels and enter new channels, such as new media and international.

Most recently, Martha [VanGelder] joined Gaiam as Vice President and Managing Director of Gaiam's international distribution where she will develop and oversee our international business development strategies including programming, content acquisition and distribution across retail and media channels, as well as localized brand management.

Martha joins us with 20 years of international management experience with major media brands, including Disney and Sesame Street. We also welcome Rob Sussman as President of New Media. Rob was a founding member of the Sundance Channel with Robert Redford and most recently served as its Executive Vice President and Chief Financial Officer.

In addition to his financial oversight, Rob was responsible for all business development at the channel, including home video, new media and international. At Gaiam, Rob will oversee our new media initiatives, including video on demand, broadband and wireless.

Additionally, we hired Jane Pemberton as President of Gaiam's worldwide distribution. Having previously served in senior management roles at the Walt Disney Company, 20th Century Fox Home Entertainment and Mommy and Me, she will oversee Gaiam's development of original programming, content acquisition and distribution to worldwide retail.

Rounding out the new operational team is Lou Weiss, our President of direct who became part of the Gaiam team when we acquired GoodTimes Entertainment. Lou's background includes a series of executive roles at Sony, as well as several Internet-based companies, including co-founder of Blue Dolphin, an Internet subscription service company. Lou is also heading up our new community continuity and subscription initiatives.

We are really excited about these new additions to our management team as we begin to capitalize on the opportunities and enhanced Gaiam's position as a major brand in the healthy living and inspirational media categories worldwide. The expertise these people bring to our team will add tremendous value to Gaiam as we continue to leverage the infrastructure and distribution platform we have built for our media strategy.

During the first quarter of 2006, we completed the transition of GoodTimes inventory and fulfillment to our distribution center in Cincinnati and closed their existing 300,000 square foot facility in New Jersey. In addition, the sales and marketing operations were moved to a smaller office in New York reducing the office space by 80%. We are in the process of cleaning up the balance of the integration and expect it to be complete by the end of second quarter.

Including growth from acquisitions, our business segment, which produces and distributes media and other proprietary products to retailers, generated revenues of $25.6 million representing an increase of 97.1% year-over-year.

In the business segment, our growth was driven by strong demand in our existing retailers and expanded distribution into non-traditional retail environments. In the quarter, we launched our media products in over 400 Jenny Craig stores nationwide using our store within store merchandising strategy. We were particularly pleased also with the growth in our book channel where our Gaiam brand of stores in store continues to deliver great results at both Barnes & Noble and Borders. We established an additional 100 stores in store locations in Borders in Q1 bringing our total branded presentation at Borders to 350 doors.

Our business with Target continues to be strong. During the first quarter, we were recognized as one of Targets 2005 vendor of the year for our innovative offerings, as well as our business practices and commitment to Target's success. This is the second time that we have received this honor.

We ended the first quarter with over 5000 store within store presentations, up from 4500 at the end of 2005. This format is an important part of our growth strategy as we strive to create a unique and lasting experience for our customers, giving them a home to come back to for new, high-quality media products. We expect to leverage this strategy with GoodTimes fitness media products, as well as a new genre of DVDs we call movies that matter.

We also continue to expand our Gaiam branded store within store into other specialty store venues and we are planning to utilize this strategy as we expand internationally as well.

Accelerating media sales continued to strengthen our marketshare. The first quarter of 2006, according to Nielsen VideoScan, Gaiam's marketshare was ranked fourth in overall U.S. nontheatrical DVDs with 8.9% share, up from fifth at the end of 2005 with 6.8% share.

Furthermore, our marketshare in the fitness wellness DVD category was approximately 42%, three times greater than our nearest competitor. Gaiam has five in the top ten best-selling fitness DVDs year-to-date.

We have now expanded our media products to over 58,000 doors. We expect their already strong retail distribution to continue to expand as the members of our new management team work to penetrate additional traditional and non-traditional retailers.

On the direct side, we're attracting a very loyal following in our direct to consumer business segment. Our total first-quarter revenue was $26.1 million, up 96.1% from $13.3 million last year. The growth in this segment was driven both by internal growth in our direct business with particularly strong sales in solar products, as well as our new revenue from GoodTimes' direct marketing efforts.

This is another indication that consumers are searching for LOHAS information and finding Gaiam as a trusted source. Operationally, we ended the first quarter with a fill rate of 95% and an average order size of $122 in our Gaiam direct business.

In the direct marketing channel, revenues from DRTV, e-commerce sales attributable to DRTV, continuity DVD sales, and paid subscription web clubs contributed to our high margins. We are excited about the brand building opportunities at this channel for our Gaiam brand, the customer acquisition opportunities for our subscription clubs and the potential additional revenues.

We also believe this is a great channel to help build traffic for our retailers by pulling customers into their stores to buy the TV branded [medium] products.

During the next 12 to 18 months, we expect to invest in our subscription and continuity club business. We currently have over 50,000 web club and continuity subscribers and are continuing to grow this business.

In 2006, we will mail approximately 20 million catalogs. We currently have around 7 million buyers. For the coming months, our direct team will be focused on transitioning to a customer-centric business model as we try to build our community and strengthen our relationship with our customers.

During the quarter, we experienced great margin improvements. Our gross margin improved 1190 basis points to 64.1% from 52.2% in the first quarter of 2005. On a sequential basis, gross margin improved 270 basis points over fourth quarter of '05.

This increase in margin is attributable to several initiatives; our focus on media that carries higher margins, our ability to go direct to almost all of our retailers with our acquired vendor managed inventory systems, the increase in our subscription and continuity club revenues and our ability to be increasingly effective at securing volume discounts on the combined businesses.

We are committed to improving the quality of peoples' lives through our premier products and services. We will continue to focus on acquiring new customers for subscription and continuity clubs, on leveraging our marketshare positioning to drive more content through our retailers and to build the new media platforms for the future.

We continue to believe that we're well-positioned to generate over $200 million in revenue in 2006. We expect to see 60% plus margin during the year as we continue to benefit from more direct relationships with our retailers and new favorable vendor negotiations. I would not like to open the call up for questions.

(OPERATOR INSTRUCTIONS). Mark Argento, Craig-Hallum Capital.

Thanks and good afternoon. A few questions. First off, I was wondering -- it looks like the internal growth rate was well ahead of what we're looking for, near 28%. Could you talk a little bit more specifically what products are really the sell through, really robust on, media versus some of the consumer products in particular and maybe even drill down on if you have any one or two hot products that have really been moving the needle for you. That would be helpful.

A couple of things, Mark. This is Lynn. First, it is expansion of our media products and our current retailers, particularly expansion in our store within store. It is the addition of 500 doors to our store within store presentations and also it is some accelerated selling on media. So it is really threefold. I am particularly proud of the 500 additional doors on the store within store presentation, which really helps drive that internal growth.

Is there anything -- has Wal-Mart become any more significant of a customer for you guys yet now that you can be direct with them?

Yes, they are, but that is not in the internal growth numbers.

In terms of -- are there any new retail strategies that you guys are using? I know you've been very successful with the store in store and given that you are in a lot more storefronts now, in particular a non-traditional storefront like Jenny Craig, are you doing a store in a store within Jenny Craig or is it a smaller kiosk and what is the opportunity to go into some other type of storefronts other than traditional retailers?

Well, we are in all the Jenny Craig storefronts. However, 400 of them have the branded Gaiam store within store displays and it is going to be our strategy to continue to find additional non-traditional retailers that can have store within store display, as well as look for additional types of store within store presentations, including movies that matter, as seen on TV brands and some of the brands acquired through the GoodTimes transaction.

So is it branded Gaiam or are using a different brand?

It is branded Gaiam in the Jenny Craig and many of the non-traditional outlets that we're looking at. When we may go to a more mass-market, then that would not be branded Gaiam. That would be under a brand that we acquired through the GoodTimes transaction, The Firm.

Some questions around the direct to consumer business, in particular the clubs. It's something I know you've talked more and more about. Could you talk a little bit more about the strategy of the club, how does somebody join the club, are you marketing it directly into your seven million previous customers, how do I become a club member, are you going to drive if off the Web, through your catalog? Can you talk a little bit more with some specificity on that initiative and what we can expect to see there?

Well, my response right now is all of the above. We will be acquiring new customers through our catalogs, through our website, through DRTV. This is a real strong initiative for us. We believe because we have such a loyal customer base that continuity and subscription clubs are a natural channel for us.

This is obviously a big deal to us right now because we are really focusing on (indiscernible) heavy over the next 12 to 18 months to build it because what we have -- we have two things very unique for us. First, we own the content directly. So it is pretty much already paid for and we have seven million direct buyers who already have the credit cards, the shipping addresses and phone numbers. So we mostly right now do it just up-selling. They call us to order something else, we offer them the club. Obviously that will expand, but the profitability in this (indiscernible) is the customer. It's going to be somewhere around $5200 per customer per year.

So I sign up and pay a monthly dollar amount, what $10 to $20, and then you provide me with certain additional content either in hardcopy format in the form of a DVD or I get Web access. Is that essentially how it looks?

Yes, that's correct.

It will be all of that. Obviously, we see today as far as any you get online for certain things and a lot of people still prefer DVDs. In the future, we believe that more and more deliverable will be digital. So we're really spending as part of all of our expansion in building a good platform for serving all our customers direct, electronically, that sort of broadband and other means.

In terms of the margins up at 64 plus percent. Is this a run rate level? I know you didn't take full-year guidance up on the gross margins, but is this structural now given the fact that you have a lot more of your businesses media that we could assume that a mid 60s gross margin going forward is more likely than not?

Right now, really want to stick with 60 because we don't know. Our first Q is always our best percentage on margin. So we want to really see where we are in the second Q. And it depends how the mix happens. As I talk about media, it depends on the lines that we sell direct and what we sell through our partners, which the business is about 50-50. As I say, we will not sell direct, but we also want to keep about half of the business in a special offering to our retailers. We just got vendor of the year with Target and we really need to focus on them as well because it is important to support our partners.

It's hard to predict the mix so we want to pretty much stick with the 60% guidance right now. We increased it during the last year for 900 basis points to [guidant] and last quarter for 400 basis points. So we want to at least hold it for another quarter and see how we're doing before we start to increase the guidance.

Where are you guys in terms of the integration of the GT Media or GoodTimes properties? Are you 90% of the way done, 70% of the way done? Can you just give us a little bit of color on that?

I can tell you that we have transitioned all the customers in the fulfillment. There is still cleanup to be done and all I can tell you is we will be done by the end of second quarter.

So some of the onetime expenses -- I know you guys didn't try to break them out in the press release -- but could you help me think about some of the duplicative costs that you had in the model that might come out in terms of extra people, extra warehouses or what have you in the quarter?

No, we really believe that our operating result was strong so we didn't have to break them as we did in the fourth quarter. (indiscernible) definitely will impact those two quarters, might have a little impact on third, but we believe that our operating result will be strong enough so we don't have to break them out anymore because we would like to soon look for the next deal.

The amortization both in terms of stock comp -- I don't know if you guys provided the stock comp number for the quarter -- is that something you have available by chance?

Stock comp meaning under FASB?

Yes. I assume you guys --

We expect -- in first Q, it is a little less than a $0.01, maybe half, maybe even a little less, but we expect about $0.02 for the year.

And then the tax rate going forward, I noticed that in the quarter, I think it was a little bit higher than you normally are running. Maybe some of that has to do with the onetime gain, non-cash gain you took in the quarter. Should we be modeling mid 30% going forward in terms of the taxes?

Yes. I would not change it yet. In the first quarter, we had some different taxes. Depends where they come from because there's really a difference how much comes from for example U.K. where we don't pay state taxes or where I come from New York when it is very high tax. So I would wait a little bit before you change it.

Last question. In terms of the amortization of the intangibles around your acquisition of GoodTimes, do you have that number for the quarter? What the non-cash amortization expense was? What it still a couple, three pennies?

Right now, probably for the quarter, it will be somewhere right there, between -- around -- a little less than $0.03.

Great. Thanks very much for the answers.

Mark, are you just talking about the goodwill amortization or are you talking overall?

No, just the goodwill part.

Yes. So that is the kind of thing -- when we bought it as an outfit obviously, there is a different way to treat it if you treat it as a media library. So that is what we're talking about, right?

Yes. Thanks very much.

Gordon Hodge, Thomas Weisel Partners.

Just had a couple of questions. I don't think you broke out exactly what the internal growth was in each division, direct to consumer and business. If you could share that with us, that would be great in the quarter. And then as it relates to that, if you could break out how GoodTimes or how -- maybe not GoodTimes specifically, but how much infomercial was a component of the -- or direct response television was a component of the revenues in the direct segment in Q1? Thanks.

On the segments, we don't really want to provide you with comps on a regular basis because -- especially right now, we are going through a little bit of a shift between how we treat certain units and so I would rather -- those numbers we then be hard to support. So we don't want to really do it until maybe next year where it is more stable. So the other question was what?

Just infomercial business, which I think Lynn may have mentioned, was very high gross margin, but lower operating margin just as a percentage of revenue. If that is something you can provide or -- roughly -- it doesn't have to be exact. The direct response television revenue.

With the subscription and continuity clubs along with DRTV and Internet coming from DRTV it is about $11 million.

But again, the numbers aren't going to be that easy because it comes from various means as it is recorded. So I would not really try to -- it is hard to follow because some of the Web business, what is tied to it, comes from New York and now it is all merging into one during these quarters. So it is very hard to answer the question in such a way that we can provide some comparable numbers for the future. So I would be afraid to really talk, but Lynn gave you the number of what it is right now.

And then just one last question. I think that the theatrical DVD market has seen some challenges and I think Wal-Mart has obviously a huge customer there. I think your approach is different. Could you -- to the marketplace -- and particularly with Target -- can you talk about whether you are getting anything, any different feedback from Wal-Mart in this environment and whether you would expect to be shifting your presentation more into the fitness area rather than the DVD section at Wal-Mart?

Well, Gordon, a lot of what we do provide Wal-Mart currently is -- or almost all of what we provide Wal-Mart currently is what they consider nontheatrical DVDs, which I am sure, as you know, is the one category of DVD that is continuing to grow. So we have not heard any indication from Wal-Mart of a big change in their strategy with us because that is not really where we play. We play in nontheatrical, including childrens, where we have certain series that sell very well there, fitness and more direct to DVD.

Great. But is the plan -- I know at Target for instance, you're in a completely different segment of the store, at least -- or you're in both segments of the store; entertainment and fitness. Are you likely to be -- I think that insulates you somewhat and differentiates you. Is that something that is going to happen in Wal-Mart? I know GoodTimes was predominantly in the entertainment section?

We currently have a few titles already testing in Wal-Mart in the fitness section, so we will see how that plays out over time.

Terrific. Thanks.

Definitely what we want to have is be clearly the nontheatrical provider and if you pretty much take overall DVD business in nontheatrical, it is pretty much where all the growth is. And also our titles are evergreens. Our returns are so much smaller, I mean several times. If you have a fitness DVD, we might -- because they know the [load] in and the return to new releases, they are permanent. So the returns might be four times smaller than some studios and also we keep the price pretty steady. We don't release it and drop the price. So it is a very different game.

[Arvin Bacchio], Sterne Agee.

I have a couple of big picture questions as it relates to your top-line and bottom-line goals say over the next few years. Including (indiscernible) and (indiscernible), I was wondering if you could help us understand where you see your top line to be and operating margins perhaps at that point of time? Is it reasonable 10% type arrange say in a couple of years and at that point what kind of international versus domestic mix do you see for your business? And then I have a follow-up.

We really don't provide guidance. Historically, if you look at last year's internal growth, it was about 19%, 18.7%. It's 27% right now. However, it is definitely -- it is a high number and we also -- when we did the GoodTimes acquisition in September, that gave us like $70 million in sales and we clearly intend to look at the new acquisitions because we operate from one distribution center. So very, very leverageable and the media comes with 75% gross profit. So that is what we're so confident about gross profit. But talking about a real gross range in revenues in years ahead, that is not what we do.

Let me ask you a question on the next generation of DVD technology. Is that something that you look for sales to be a positive whether it is Blu-Ray or HD, whatever it ends up being, do you see that as something that could be a catalyst or do you think that is so far out in the future that really you are not -- that is not something that you're focused on at this point?

I think if there is an agreement on new HD technology, I think definitely that will help everybody who sells DVD. As far as going beyond that, it is not probably something that will impact anybody in the near future, but we clearly are going to say we intend to spend over the next 12 to 18 months really build a lot to get in the digital distribution. But we're really much technology free so we can go one way or the other. We generally bet on technology. We basically want to have the content that we own, have all the rights so we can play whatever the market goes.

Last question, in terms of risk for your model going forward or from a competition standpoint, what do you think is the biggest risk for you over the next say 12 to 24 months?

We obviously try to be multichannel, so we try to hedge the risk on the channels because different channels get in our favor as Internet group was successful years ago in coming back and we just (indiscernible) management, which I would say was probably fast growth because we doubled the sales right now in the Company in the last two years. So we just made a new hire. So our [competitors] right now, very fragmented.

We have for years had the closest comparison direction we are getting. But the future is always faster and cheaper so there always will be some. But if you want to pinpoint one, it is hard to say. Does anybody here want to say something? Probably a bit enhancing the management was a key part for us.

Got it. Congratulations on a good quarter.

This concludes today's question-and-answer period. I would like to turn it back to you for closing remarks.

Well, we would like to thank everybody for participating and thank you very much and hopefully you will be with us next time. Thank you.