Gaia Inc (GAIA) 2006 Q2 法說會逐字稿

Good afternoon and welcome to the Gaiam Second Quarter 2006 Earnings Results Call. All parties will be in a listen-only mode until the question-and-answer session. I'd like to turn the call over to John Mills. Sir, you may begin.

Thank you. Good afternoon everyone and welcome to Gaiam's Second Quarter 2006 Earnings Conference Call. The following constitutes 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 take undertake any obligation to update forward looking statements.

On the call today representing Gaiam, is Mr. Jirka Rysavy, Chairman and CEO; Lynn Powers, President; and Vilia Valentine, CFO. Now I'd like to turn the call over to the company's Chairman and CEO, Mr. Jirka Rysavy. Jirka.

Thank you, John, and welcome everybody to our second quarter conference call. I'm pleased to say it was another good quarter. For the second quarter, Gaiam generated revenue of $43.2 million, which is 99% increase over $21.7 million, which we reported in the second quarter of last year. This doubling of the sales was due to a combination of internal growth in both segments, business and direct to consumer, as well as the contribution from the sales of media titles we acquired from GoodTimes Entertainment in last September.

We have now successfully integrated the acquisition of GoodTimes entertainment assets. While the 99% increase in our revenues is very similar to 97% what we did in the first quarter, because we have now integrated all the GoodTimes assets in our system, it's not really possible for us to report internal growth numbers with an accuracy until the September anniversary when the acquisition will become part of our comp base.

Gross margin increase of 1370 basis points to 62.3% compared to 68.6% in the second quarter of the last year. This increase was primarily due to strong media sales and leverage on purchasing discounts associated with our higher DVD sales volume, benefits from eliminating the third party fees for distribution, as well as segment revenue mix. Including the transition costs, which was associated with GoodTimes acquisition, our net loss for the quarter was the same for the second quarter of 2005, and it was $0.05 per share.

For the six months ended June 30, our revenue were 94.9%, which is 98% increase from $48 million in the same period last year. Net loss, including the above incremental costs narrow to a $0.01 compared to $0.04 per share for the six months of 2005. At the end of June, according to Nielsen's VideoScan, Gaiam market shares in fitness and wellness DVD categories continues to grow. Gaiam controlled 47% of U.S. market at the end of June compared to 42% at the end of March.

Gaiam [Kish] position at June 30 increased to $105 million from $15 million at the end of the year. Depreciation and amortization for the quarter was $0.5 million and CapEx $200,000. Because most of our sale appears in the second part of the year, we continue to expect revenue for 2006 to be above $200 million mark. Gross margin above 60% and D&A approximately $8 million.

In addition to this, we expect now about a $3 to $4 million revenue contribution to this fiscal year from this week acquisition of 63% of Virtual Cinema Circle. This Virtual Cinema Circle is a subscription base DVD film club that provides a monthly DVD to keep. Virtual films are free of violence, explicit language or sexual content that characterizes mainstream Hollywood releases today.

This acquisition and also a planned launch of our new community site in the fourth quarter are part of our strategy to leverage our 7 million customers to more than subscriptions -- to more and more subscription-based offering. The price we have paid for this acquisition was below six times trailing EBITDA. Now I'm going to ask Vilia to give you some more details on these results and then Lynn will talk about the business. So, Vilia.

Thank you, Jirka. As Jirka briefly mentioned, for the second quarter Gaiam generated revenue of $43.2 million, an increase of 98.8% over revenue of $21.7 million recorded in the same period last year. Our strong top line performance during the quarter was attributable to robust growth in both segments, particularly in the direct to consumer segment and sales of media titles acquired from GoodTimes Entertainment in September 2005.

During the second quarter, we completed the consolidation of GoodTimes Entertainment, including the integration of media titles to our distribution channels. As a result of the successful integration we are not able to compare our segment revenues on a before and after acquisition basis until the September anniversary when the acquisition becomes part of our comp base. During the quarter, revenues generated by the direct to consumer segment increased 125.8% to $27 million and revenues generated by the business segment increased 65.7% to $16.2 million. The direct to consumer segment reflects strong sales from our direct marketing program and the business segment reflects a strong increase in the number of retail doors and our Gaiam branded store within store presentations.

We added 3,000 new retail doors during the second quarter bringing our total number of retail doors to 61,000, up from the 58,000 doors at the end of first quarter. Our Gaiam branded stores and store presentations continue to be well received by both our existing and our new retailers. During the second quarter, our total number of store within store presentations increased by 300 to 5,300, up from the 5,000 at the end of the first quarter.

Our gross margin increased 1370 basis points to 62.3% in the second quarter of 2006, compared to 48.6% in the same period last year. The increase in gross margin was primarily due to increased sales of media and direct marketing products, which carry higher margin, but also carry higher selling and operating expenses. Our increased media sales have allowed us to leverage our purchasing volume to receive improved buying discounts.

Gaiam also continued to benefit from elimination of fees previously paid for third party distribution and improved margins on vendor managed inventory with several of our mass market merchants, following the GoodTimes Entertainment acquisition.

Operating expenses increased to 68.5% of revenue in the second quarter of 2006, from 54.5% in the comparable period last year. The increase reflects a change in revenue mix towards increased media and direct marketing products, which carry higher sale and operating expenses, including merchandising fees and advertising costs, but also higher margins as previously mentioned.

On the GoodTimes acquisition, we now provide vendor managed inventory direct to several of our mass market merchants. The direct distribution method provides improved gross margins that are partially offset by higher operating expenses. Often [pack] and operating expenses are costs associated with the GoodTimes entertainment acquisition including distribution, systems, management and additional amortization expenses associated with this Media Library.

As the GoodTimes Entertainment acquisition was successfully integrated during the quarter, certain operating expenses, such as one time warehouse labor costs, will be non-recurring in future periods. Accordingly, the company expects to see better leverage in the latter half of 2006, as our recent investment and cost reductions from the GoodTimes acquisition are realized.

Gaiam's quarterly sales and operating profits are typically influenced by seasonal factors. On an aggregate basis, Gaiam generates its strongest revenues and net income in the latter half of the year.

Consistent with these quarterly fluctuations, Gaiam reported net loss for the second quarter, which includes the GoodTimes transition costs. This net loss of $1.2 million or $0.05 per share compared to a net loss of approximately $766,000 or $0.05 per share for the second quarter of 2005.

For the six months ended June 30, 2006, net revenues increased 97.6% to $94.9 million, compared to $48 million for the comparable period of 2005. The net loss, including the above mentioned incremental costs, narrowed to $276,000 or $0.01 per share compared to a net loss of $650,000 or $0.04 per share for the six months ended June 30, 2005.

Turning to the balance sheet, at June 30, 2006, working capital was $135.7 million, up from $37.2 million at December 31, 2005. We also ended the quarter with $105.3 million of cash and $206.1 million of shareholders' equity due to the completion of our secondary offering of 5,690,000 shares of common stock in the quarter. Our day sales outstanding for the second quarters of 2006 and 2005 were consistent at 41 days.

Our inventory turns, calculated on a quarterly basis, were 2.8 times compared to 2.7 times in the second quarter of 2005. Depreciation and amortization was $1.5 million for the second quarter of 2006 and our capital expenditures totaled $188,000. I would now like to turn the call over to Lynn for the business overview. Lynn.

Thanks, Vilia. I will now provide you with an update on our operations and briefly review our financial performance by business segment followed by a quick synopsis of our go-forward strategy. First let me say how pleased we are with both our almost 100% revenue growth and the margin improvement over 1300 basis points. Both areas were above our expectations and are a testament to the strength of the brand and our strategies in the midst of a challenging environment.

We're continuing to revise and refine our business strategy and operational efficiencies going forward and believe we have lots of additional opportunities for growth in the future. Our business segment, which produces and distributes media and other proprietary media based products to retailers, generated revenues of $16.2 million, representing an increase of 65.7% year-over-year.

This growth was due to a combination of increased demand for Gaiam's media and media-based products from our existing retailers, continued expansion of our brand in traditional and non traditional retail environments, as well as sales of media products acquired in the GoodTimes transaction.

The end of second quarter, we were distributing media to over 61,000 doors in the U.S., up from 58,000 in Q1, by further expanding our reach in natural products, grocery, media and sporting goods stores. Our Gaiam branded stores and store concepts continued to expand during the second quarter.

In addition to the Jenny Craig stores added during the first quarter, other existing retailers such as Target, Dick's, REI, have rolled out new stores with the store within store concept. Also we achieved several new stores in store placements in the natural grocery channel. The end of second quarter, we had 5,300 stores in store presentations, up 300 from the previous quarter. We will be expanding this concept during third quarter, to include The Firm brand for more mass market retailers.

Our stores in store performance in sporting goods and bookstores continues to exceed our expectations. We see strong growth potential in both these channels as our brand brings female consumers into the section and gives them a reason to make subsequent store visits to purchase additional media. Lest we create a home for our customers and a major branded presence for Gaiam.

Having been encouraged by strong sales and a number of specialty retailers, we rolled out our Power Breeze to key sporting goods stores such as Dick's and Sport Chalet, and to additional stores the specialty channel including running and bike-focused specialty accounts. We believe this is our first step in to the wellness market and Power Breeze will be an anchor product as we build out our wellness stores in store concepts in the future. We will also continue to develop the stores and store format to increase our value proposition and drive customer demand. We are confident that the same strategy can be applied to existing media assets acquired through the acquisition of GoodTimes.

Additionally, at the request of several key retailers, including Wal Mart and Best Buy, we recently rolled out several Spanish language children's and family titles to key retailers. Our Spanish language programming is now available in over 1,000 retail locations and early sales indicate this initiative will continue to grow. This has been a key initiative for several of our top retailers and allows us double facings on many of our top titles.

Our media sales remain very strong during the second quarter, and we continue to expand our market share. The end of June, according to Nielsen's VideoScan, Gaiam was ranked fifth in overall non-theatrical, U.S. DVD sales. Gaiam remains a strong number one in fitness/wellness DVD market share. We grew our share in this category to 47% at the end of Q2, which is 3.5 times greater than our nearest competitor. This compares to 42% share and three times greater in first quarter.

Our Gaiam's and GoodTimes Media year to date market share has also increased from a combined 36% in 2005 to over 44% this year. Currently, Gaiam has five titles in the top 10 best selling fitness DVD's year to date. The fitness/wellness scan sales also grew 25% year on year according to the numbers provided by Nielsen's VideoScan. Gaiam's media products are now sold in over 61,000 doors in the U.S. giving us one of the largest retail penetrations of any media company.

We're continuing to expand Gaiam's reach into additional traditional and non traditional retailers, as well as expand our product mix in our existing retail locations. Our direct to consumer business segment continues to attract a loyal following, and generated $27 million in revenue for the quarter, up 125.8% from $12 million a year ago. The growth in this segment was driven by increasing customer recognition of Gaiam.com as a reliable, comprehensive source of LOHAS information on line, as well as GoodTimes direct marketing efforts around brands like The Firm and Billy Blanks.

Operationally, we ended the first quarter with a fill rate of over 95%. As we discussed on earlier calls, we expect to continue to invest in the direct segment to grow our customer base, and to move from transactional selling to relationship selling, including subscription and continuity sales. We're particularly excited about the opportunities from the acquisition of the majority of Spiritual Cinema Circle. It is an ideal subscription based media offering for our 7 million buyers. We expect to begin marketing the service to our direct customers in our upcoming holiday catalogs.

We also believe there's a tremendous opportunity to market our programming directly to the consumer through downloads on the Web. We're uniquely positioned as the market leaders in health and fitness, and as the content owners of our programming. We've been talking to all the new media distributors and aggregators and we recently completed our first digital download-to-own deal with Google. We'll be featured on the Google video homepage at launch, which receives tens of millions of visits per month. Our offering will represent the diversity and depth of the Gaiam video products, including Rodney Yoga, Billy Blanks Tae Bo, The Firm, Leslie Sampson Walking, Pilates and other various mind/body practices.

This deal will allow us to test various pricing and packaging options at an early stage in this distribution channels growth, as well as give us great branding. In the direct to consumers segment, revenues from the DRTV, e-commerce sales attributable to DRTV, continuity DVD sales and paid subscription Web clubs contributed to our higher margins in the second quarter. We're excited about the brand building opportunity for this channel for our Gaiam brands in the potential additional revenue opportunities. 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.

We're continuing to market The Firm brand, on DRTV to help support our new stores and store initiatives for third quarter. We're also seeing a renewed interest in energy efficient and healthy home products, based on the recent press on the energy crisis in this country. We're working to maximize this trend during fourth quarter, with expanded product offerings to our direct customers and a soft launch of a line of products for our trade customers.

Our Real Goods solar business continues to expand as more states add rebate programs around renewable energy. We will also be creating more content in community opportunities around the genre of media products. During the second quarter, we continued investing in our subscription and continuity club businesses. The key initiative for us in 2006, we will mail approximately 20 million catalogs and have approximately 7 million buyers, many of whom are repeat customers.

During the second quarter, Gaiam was the first direct marketer in the world to provide the opportunity for its customers to go zero, when shipping their orders. The Conservation Fund established this new program in order to reduce the impact of carbon dioxide in our atmosphere by planting trees responsibly, to absorb the emissions for shipping packages. Since its inception on June 8, 2006, Gaiam's customers have purchased trees resulting in over 20+ acres being planted. The conversion rate on our web site is a staggering 24%, with many customers purchasing multiple trees.

Gaiam was brought up as a model for this type of program in the New York Times recently, and we received very positive feedback from our customers for implementing this program. This program is another testament to our customer loyalty. Gaiam has also calculated the emission rate of its two largest facilities, the corporate office and our distribution center, and donated money to plant trees to have both facilities go zero this year.

In summary, the success of our strategic focus on higher margin media products and our ability to go direct to almost all of our retailers, along with strong performance in our direct division, resulted in top line growth and continued improvements in gross margin above our expectations.

With the integration of GoodTimes operations behind us, Gaiam is committed to continuing to expand our revenue base, our market share, our store penetration and our loyal direct customer base. We are now beginning to address additional cost reduction opportunities through best practices and the elimination of redundancies and systems in operation.

We will continue our current strategy as the premier media brand in the LOHAS space. We will seek new customers, partners and acquisitions to leverage our market positioning and expand our market share. We will continue to capitalize on one of the best media platforms in the industry by expanding our stores in store presence, brands and venues.

We will continue to invest in our direct business, to create a robust Gaiam community on line and transition our direct revenues from transactional to relationship. We believe we are on track to produce results of over $200 million in revenues for 2006, with over 60% margins. I would now like to open the call up for questions.

Thank you. [OPERATOR INSTRUCTIONS] One moment for our first question, please. First question comes from Mark Argento. State your company name, please.

Craig-Hallum Capital Group. Good afternoon. Nice quarter. Couple questions for you. Could you, Lynn or Jirka, provide a little bit of color on how you look at the inventory levels you have at retail and looks like you've been generating some pretty decent numbers in the top line. Can you talk about selling vs. sell through? I know it's a little different with the Nielsen data, because it's a little bit limited, especially with some of the larger retailers, but with some of the other products, can you talk about what your inventory levels are at the retailers and kind of what the sell-through looks like?

The Nielsen, you know that's a sell-through. It's a scan on the register. But the rest of it I think Lynn should answer.

I can tell you where we have things like partners on line with Target and we do see actual store data and we are continuing to experience strong sell-through at retail, which obviously reflects in nice reorder for the company.

Have you seen any impact in terms of the products sold relative to what you might expect in a kind of a $3 a gallon gas environment? How's the consumer – you see any buying pattern changes, given some of the consumer issues out there?

Not really, other than what I talked about Mark. We are seeing renewed interest in our whole renewable energy business and energy efficient products more direct to the consumer energy efficient products.

The -- Did you guys quantify, or could you quantify, a little housekeeping here on the stock comp side in the quarter? Did you have any stock comp that you ran to through the P&L.?

Yes.

Yes, we did. We had right around $110,000 in compensation expense during the quarter.

Okay.

However, some new hires during the second quarter get option with no reflecting in the second quarter yet, so it will be more in the third quarter.

And then in terms of - you talk about getting some better leverage out of the GoodTimes Media Business since you've basically completed the integration. Can you quantify for us a little bit on some of the costs that are basically - that you've taken out in the transition from two warehouses down to one warehouse? Can you just refresh us a little bit kind of what the dollars might look like?

Well, I mean we kind of -- Lynn Powers can give you better details, but overall we obviously done with the center totally, so there was about 300 or 250,000 square feet in New Jersey that was gone. The office is down to probably 80% [inaudible] of new office. The employment is from 750 to --

I think it's probably around 100 now.

So from 750 to about 100 right now. And so I think is kind of that's all integration is done we still have opportunities and system being outside vendors something working out maybe over the next quarter or two because we still have some systems cleanup and what else?

We are also on several different Web platforms. We plan to consolidate to one Web platform which will reduce expenses. We also will get some efficiencies now as we put all the Gaiam product through the vendor managed inventory. So we'll get some efficiencies that way as well.

All the transition, the kind of duplicate warehouses and stuff like duplicate labor, that was pretty much even through -- first and second quarter. That kind of stuff. But there are still expenses that clearly can be eliminated, which some of them are pretty significant.

Especially third party vendors for our web-based sales and third party vendors for some customer service and order processing.

Okay. Last question, I'll let somebody else hop in and maybe I'll jump back in the queue. Could you talk a little bit more about your plans for the store in a store? I know you had mentioned that you're doing some direct TV advertising, I think around some of the GoodTimes brands to help push forward the store in a store concept. Can you talk a little bit about how what you're doing with the GoodTimes product within your store in a store footprint right now? Are you taking some Gaiam product out of the existing store in a stores and aggregating to bring in some of the GoodTimes product there? And then, going forward, what are the opportunities to do some more store in a stores and some other retailers and may be something other than the Gaiam brand?

Well, Mark, I think we had some really exciting opportunities that you'll see during third quarter. With the acquisition of GoodTimes, we are now the owners of The Firm brand, which is a brand that has had over $50 million in advertising spent on it in its lifetime. We are continuing to have The Firm brand on the DRTV in anticipation of launching a 4 foot store within store for that brand during third quarter. We've had some tremendous excitement from our retailers, particularly more of the mass-market retailers, and I believe that we'll have some very strong presence – store within store presence – on The Firm brand that we'll be able to announce in the third quarter.

Will you also – will it be media? And will you -- you'll have product to be able to do that, kind of the bundled offer like you've been doing with the Gaiam products at some of the current retailers?

Absolutely. The Firm brand has well over 50 titles of media and we also have produced an entire line of media-based fitness products under The Firm brand, so it will be a full 4 foot store within store. We're also producing some corrugates for stores that can't handle a 4 foot, so we'll get the brand out there, and like I said, the excitement from the retailers has been great.

I think we can start to ship in the third quarter?

We're shipping it in August and September to begin with. Yes.

We already have those built and they are in our inventory for shipment.

Yes.

I'll let somebody else ask some questions and maybe I'll come back in. Thanks guys.

Our next question will come from Gordon Hodge. Your line is open. State your company name, please.

Yes, Thomas Weisel Partners. Good afternoon. A couple questions on – I guess there's a mention about transition cost of GoodTimes that affected the second quarter numbers. It sounds like it won't be affecting going forward. I'm just curious if you could elaborate on the magnitude of those costs? And then, had a question on the Cinema Circle acquisition. The $3 to $4 million of revenue, I gather that's for a five month period, which would imply about an $8 million revenue run-rate and a $2 million EBITDA run-rate. And I guess assuming that the subscriptions are $20 a month, kind of a 30,000 subscriber base. Are those numbers at least within spitting distance?

Sorry. We have to amuse ourselves, I guess.

I guess there are two different questions, so, I'll take one and the other you can ask if I don't answer it more. You don't have to shoot all of the questions and we can do one at a time.

Okay. Fair enough.

So the first on the numbers. Yes, we obviously - how the GoodTimes was done –- first I'll answer this, and the Virtual Cinema after that –- So, when we bought it, because we bought assets, we didn't buy the warehouses per se or employees. We rented them from the bankrupt shell, per se, and paying some kind of cost plus ten for the basis. And basically as we kind of didn't need the services, we could eliminate a person at a time effectively and they would then -- because they were still working for the bankrupt company, there's no severance per se -- so we would be able to kind of rent it down.

So obviously most of the cost was kind of [inaudible] for December and then kind of got to decrease monthly. We're done with those services as of now. So, we didn't break it for first quarter -- What was the fourth quarter was like $0.12 or something? It was very significant number, like $3.something million. And, then, obviously start to decrease. We said we don't want to keep breaking it because, since obviously, we would be doing acquisition, there would always be something in it and I think we would have to start to live with those parties or our number where we have to deliver.

Okay.

Unless it's very significant, like fourth quarter, and it's typically the first few -- after an acquisition is very meaningful. That's if you do something like [inaudible] acquisition.

Just before I finish, I would compare it with Virtual Cinema is very different, because we would have virtually no integration cost there. Not that it will be zero, but there would be obviously some amortization of the purchase price as the customer list -- so, but the EBITDA, obviously has since we paid less than six will be creative.

The GoodTimes if it's of the kind of something looks kind of consolidated into the system -- have this what do you call transitional expenses, which is kind of basically paying two warehouses or two positions for the same for some time until we make sure we don't lose customers. So it's basically refocusing to keeping the revenues and to try and drive it out of the system.

So that was done in second quarter without -– I don't really want to break how much it was, but it's gone and it was affecting first and second quarter. In the third quarter, we still have opportunity of the costs we can take out, but we would not basically call it transitional services, but there's still cost opportunity. So that's on that side. Virtual Cinema, the numbers –- they actually -- the price is $21 per month plus shipping and handling, so about $25 a month.

Okay.

And so you would get about - they would -- a number of subscribers slightly below 20,000.

Okay. Got it. Yes.

And that was the number from now on. I mean, actually we -- we kind of the number we can set for six months.

Okay.

We would start to make that offering to our customers probably somewhere before Christmas, like November/December, so it wouldn't impact heavily that much this year yet for the incremental, but we believe obviously because the rate of subscription we can get from others, we believe that we can really improve that offering significantly as far as the number of everything, boost P&L and the number of customers. It's obviously the purpose of it because we have 7 million customers we can leverage this club through.

Okay.

So, does that answer your question?

Yes. That was great. I guess just following up on the subscribers. The Gaiam subscriber count I think was 55,000 or so or maybe 50,000 as of last quarter. I don't think you've been aggressively marketing it yet, just kind of up-selling I think. So can you give us a sense for where you stand as of Q2 on the --?

We don't want to do poorly update on the numbers of subscribers because the pricing is different. Some of them are $9.99, this is like really $25.

Got it.

We don't really do this before Christmas, and I think we will kind of save it because 100,000. And then we'll see how we report it, but right now since we testing out of the club, I think the project –- it's something what's really part of the big focus for us but we don't want to update every quarter, [inaudible] but we will probably provide some milestones as we grow, but it's something we're obviously very significant with.

Okay and the last question. Kind of interested in the Google and the download opportunity that you have. Is this a –-can you give us a rough sense of what the revenue splits are or how you might make money on the Google -– or maybe if you don't want to talk specifically about Google –- maybe just generally, talk about the download model?

Well currently the download model runs anywhere from a basically a 60/40 to a 70/30 split.

So far all the deals we did are a 70/30.

[overspeaking] industry too so --

We didn't enter into anything else. So everything we do is 70/30 right now and we also working with a lot of our people right now. This big interest, since we have 50% of market shares on this, we just need to evaluate how many titles that we want to provide because we might create some specific offering for that thing and give us a lot of opportunity. Since we have –- most of the titles are produced in house.

And when can we expect it to be up on Google?

I believe within the next 60 days, perhaps in 30. We'll see if we can get everything ready by then.

Great. Okay. Look forward to that. Thank you.

Our next question comes from Robert Ralph. Your line is open, sir. State your company name, please.

Yes, Jefferies. Good afternoon, everybody. A couple quick questions. First you mentioned that at retail you're currently in front of 61,000 doors. I wonder if you can give us an update as far as how July is looking and what your goal is in terms of what you think you could be in front of by the end of the year. And then kind of attached to that, I was wondering comparing that to other studios, it would seem as though you're in front of a lot more retail locations than they are, by a multiple of at least two. I'm wondering if you could comment a little bit on that and the opportunity that that provides with what you have currently?

Well, a couple things. Certainly, one of the strengths of Gaiam is going after non traditional retail environment. Places like Whole Foods where we're pretty much the only DVD supplier in the whole natural products industry, whether it's Wild Oats or Whole Foods. Also going after non traditional like a Jenny Craig, weight loss centers where we can put a Gaiam's store in store.

And with our 47% market share, we're really looked at as the category captains for it, so we can go in and just really kind of take over the fitness section in the non traditional retailers. So, we have sporting goods, natural grocery, grocery, some drug and weight loss centers is just typical of things that you would not find in any of the studios in, as well as beauty stores like Ultra. So, we do try to look at things differently and go after non traditional space for media.

We have started to have some requests from other providers like the studios to help them to get through the doors that they're not in and it is, we believe it's probably somewhere in the factor of two, so we have a lot of doors where be unique and it's really, I think it's going to create one of the key differentiator between us and somebody else.

Also, our model, our returns from our business are kind of a 10% minus, where in fitness or studios do significantly above, maybe four times. So we try to focus on that kind of approach. We kind of expand right now to more to a well known theatrical, I think create a lot of opportunities, obviously the keys are to store in stores in the retailers because as we grow to store in stores. Also, give us basic increase our shelf space, which overall for DVD's now is difficult to really get that for us, obviously that's growing and a store in store is much better, but that demand a complete offering. You cannot just do it if it's just media so it's very difficult for a studio to actually do that.

And as the numbers, even from 58,000, pretty much from 25,000 a year ago to 58, which some of came from acquisition of GoodTimes, maybe 12[inaudible] or something like that. So we're at 61 right now. We already increased little bit more in July they report in next quarter. But this is part of the trend. So this is definitely going to be our strength. We won't say yet how many, because a lot of the stores we would never consider even going, but because this category start to grow. Lynn mentioned that the category grew 25% six months to six months, so obviously the retailers like that approach.

Okay. Great. And then as far as the financials are concerned, curious as to -- it looks like you're going to be free cash flow positive this year for the full year. I'm wondering if you could comment a little bit on that, especially given Q2 is always the slowest, but then coming into the back half of the year, based on what we are seeing, it would look like that would be the case.

And then I was also wondering if you could comment a little bit on the VOD opportunity that you would have because given, unlike most libraries of the media companies that we cover, you seem to have all the rights to the library. You own the copyrights. So, I would think that would make your library that much more valuable than say a Lion's Gate or some of the others who only hold distribution rights in certain locations, but not all distribution rights like you do. I wonder if you can comment a little bit on that.

Okay. That's a lot of questions on that one. So, we start with the ownership of the titles. Obviously since we produce it, we have ownership to or official the licenses same thing, to all the rights. So, that's definitely our strength. And also, how did it flow when we talk about cash flow. So while we don't provide guidance, one thing about cash flow is we cannot start to do more shift to use of the quarter for direct business much like the subscription business.

Obviously, something like this, if you can have the club like that, like what we just kind of acquired, you'd have a 20,000 subscribers what gets shipped pretty much same time. So you don't duplicate a DVD's until you actually ship it, then you hit the credit cards the time you ship it. So in the sense the margin is it kind of 80%, 80%. It's very good for free cash flow. And so that's what's really causing some of that positive shift. Also, in our depreciation right now is kind of $8 million, which would not include anything from these acquisitions, the latest acquisition. And the CapEx is so little right now so that's kind of helping the situation, but specifically we don't want to provide guidance on the P&L or bottom line. Did I skip something what you were asking?

Yes, the video on demand opportunity, possibly a cable network or the video iPod opportunity in addition to download to own?

Yes, all of them yes. We working with all of them. There's a strong interest pretty much we get approached by all those people and we kind of decide to do it. And we hold to our deal and wait till they come to the table because with 50% market share it's obviously in a good position, so we want to capitalize on that. But I would believe that before the end of the year we would have to deal with all those meaningful players out there, from iPod to broadband to everything.

Okay. Great. Just two more quick questions. I was wondering if you considered at all given that part of the GoodTimes library obviously doesn't exactly fit with the company's overall philosophy. I know there were some horror titles in there, etc. I'm wondering if you've considered any title swaps with somebody such as Lion's Gate or anyone else who has some fitness and wellness titles that they're not exploiting, so tax efficiently you could buck for shared library and get rid of things you didn't want.

And also wondering whether you looked at other entities like your Anchor Bay which was part of IDT Entertainment. Liberty Capital just bought it and I really don't think that they're interested in the Anchor Bay titles. Whether or not you've had any conversations along those lines, or whether you intend to?

And then finally, if you could comment on what the GoodTimes library was valued at a few years ago, because I think it was valued at about $150 to $200 million, and you guys picked it up for $35, so it seems as though you picked it up at the right time, but there's a lot of inherent value in there that was never realized until you've got your hands around it.

Okay. So, first about a swap. Yes, there are some titles, we maybe around 200, we might want to swap and we talked to several people primarily but we didn't want to do anything until we finish the integration. Because until we have everything shipped to our warehouse and we have control, we don't want to do any of that. But there's definitely some of those kinds of titles that we don't consider strategically important and we're always interested to obviously increase our library was the mission. So the answer on this is yes.

On people like Anchor Bay, obviously we know they were purchased by Liberty; however for obvious reasons, I don't think we're going to comment on acquisition until it's done. And so we'd say we would or wouldn't talk to them, but for -- we obviously raised some money but as we said our main focus in the short-term are community and subscription base.

And so we probably do some of these little acquisitions first and then we would take something, but we have discussion with several people right now. But, we can also do it as a title swap. You don't have to buy a company to get what you want. And I think it's to be discipline on that, we don't want to kind of subscribe to Hollywood model. We want to stay with what we doing well because we have better margin, significantly less returns, so we want to stay focused in what we do.

An evaluation of G.T. library, the company was purchased for $250 million and the evaluation was obviously a big part of that for the library -- majority. So it definitely was valued by far more than we paid for whole company. We pretty much assigned all the acquisition value to the library because it's taxed more efficient.

For the P&L, since we bought the company, but we bought it affectively asset, so we have a kind of choice of how you treat it. So we treat it as asset purchase, rather than a business combination or rather than having goodwill we basically assign everything to the library, so it kind of depreciates through the P&L in a pretty rapid base right now. So at same with acquisition like Cinema Circle, it's what I'm saying, like it's very creative on an EBITDA basis, on P&L we still have to decide how fast we amortize it. And so, that's how I think we'll comment. Does that answer your question?

Yes, it does.

One more thing on that, Rob, is also just unlocking value like what we're doing with The Firm brand. I do believe that there's a lot of value within the G.T. Library that can still be unlocked if we look for additional opportunities to build out stores in store and to build up the brands like we're doing right now with The Firm.

Okay. Great. Thank you very much.

At this time that concludes today's question and answer portion.

Thank you very much and we'll talk to you next quarter. Thanks for your support.

And that will conclude today's conference call. You may disconnect and thank you for your attendance.