Gaia Inc (GAIA) 2006 Q4 法說會逐字稿

Good afternoon, and thank you all for standing by. All participants are in a listen-only mode until the question-and-answer session of today's call. Today's call is being taped. If anyone has any objections, please disconnect at this time.

I'd like to turn the call over to Mr.John Mills. Sir, you may begin.

Thank you, Katherine. Good afternoon, everyone, and welcome to Gaiam's fourth quarter 2006 earnings conference call. The following constitutes a Safe Harbor statement under the Private Security Litigation Reform Act of 1995. Except for the historical information contained herein, the matters discussed in this call are forward-looking statements that involve risks and uncertainties including but not limited to general business conditions, the integration of acquisitions, the timely development of new businesses, the impact of competition, and other risks detailed from time to time in the Company's SEC reports. The Company does not undertake any obligation to update forward-looking statements.

On the call today, representing Gaiam is 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. Go ahead, Jirka.

Thank you, John. And welcome, everyone, to our fourth quarter call. I'm very pleased to say Gaiam, it was another good quarter and a year. Revenue for the year, which ended December 31st, 2006, increased 54% to 219.5 million from 142.5 million in '05. Consumer segment increased 73.8% to 125.7 million and the business segment 33.7% to 93.8 million. Gross profit margin for the year increased to 63.9%, from 56.5 in 2005 and 49.7 in 2004. So, the improvement 740 basis point on top of 680 basis point improvement reached [inaudible] last year. Net income improved to 5.6 million or $0.23 per share, as compared to 1.3 million or $0.08 per share in 2005. Depreciation and is amortization was 7.8 million.

For the fourth quarter, Gaiam revenue increased to [72.8 million] from 64.3. And last year and the GP increased 410 basis point to 65.5% from 61.4% in the fourth quarter of 2005. And pretax margin increased to 10.4% of sales from 4.2% during last year. Net income for the quarter increased to 4.3 million or $0.16 per share, from 1.5 million or $0.07 per share for 2005. Depreciation, amortization for the quarter was 2.3 million. Internal revenue growth was quite challenging to sort out because of acquisition of GoodTimes asset in September, 2005. And the number of titles sold by GoodTimes even after the acquisition [inaudible] liquidation or [inaudible] basis. So while based on simple comparison comes for fourth quarter at 10% adjusted for liquidation [bins] -- liquidation [inaudible] and another unusuals have come to [our] midteens, which is in line with our historical average.

The number of paying members in Gaiam community and subscription club exceeded 100,000 level, it's increasing average per minute which people pay per month. For 2006, according to Nielsen Video Scan, Gaiam U.S. market share in fitness and wellness DVD category grew to 44.7% from 41.5 in '05. During the fourth quarter, Gaiam [inaudible] again its media distribution at work to over 68,000 U.S. retail doors, up from 65 at the end of the quarter -- end of the third quarter and 50,000 at end of the 2005, which was up from 25,000 end of 2004. We also increased our branded presence of our store in stores, and viewage about the over 6,000 doors right now, up from 5500 at the end of the third quarter and 4500 end of the last year.

In the fourth quarter, we acquired remaining shareholder interest in Conscious Media, which increased our interest to 100% from 86 which we held previously. In Conscious Media and [MIR] business, which operates visual post production facility, which is important to us because we control that facility, we intend to double our lease [plan] titles to about 90 from 45 the last year. We also acquired a 45% of Mark Media, which we didn't own, and new mark is the media distributor which focused on growth sharing -- nature growth sharing and drugstore chains, where we see [inaudible] future for our distribution network.

During the fourth quarter, our cash position remained steady about 105 million even after cash outlay for the acquisition that I've just mentioned. Gaiam disposition at the end of the year it would be pre forma, a repurchase of 2.5 million shares, which we did in February of this year, and [kept our recent] license deal which we did here in the last 90 days, would be approximately 75 million, with no debt in [inaudible] line, this is the pro forma end of the year after those deals.

We are also committed to and continue enhancing our position as our [tenant] branch, which is important for us, and we will not keep leveraging our 7.5 million to our consumers and 20 million catalogs to be circulated a year to grow the number of paying numbers. I think members in Gaiam community and subscription clubs, which is important endeavor, and we clearly wanting to grow far beyond 100,000 we just reached recently. And also, I would like to raise the guidance for gross profit from 60%, what we provided last year, to about 62 to 63%. What we expect during 2007. And now, Vilia will give some more details and numbers and Lynn gives you more business overview and some more detail on the costs.

Thank you, Jirka. I will review with you our results for the full year and the fourth quarter.

As Jirka mentioned, fiscal year 2006 represents the first full year with integrated GoodTimes media business. As such net revenues increased 54% to 219.5 million, compared to 142.5 million in 2005, our direct to consumer segment increased 73.8% to 125.7 million, and our business segment increased 33.7% to 93.8 million. Net income for 2006 totalled 5.6 million, or $0.23 per share compared to net income of 1.3 million or$0.08 per share for 2005. Our success in securing lowering manufacturing costs to higher media sales volume has improved gross margin and net income in the latter half of 2006.

Turning to the quarter, we generated revenue of 72.8 million, up 13.2%, from 64.3 million in the fourth quarter last year. Revenues generated by the direct to consumer segment were 40 million, and revenues generated by the business segment were 32.8 million. Revenues from our direct to consumer segment reflect our successful direct marketing programs, particularly in direct response television and e-commerce. The direct response marketing programs also aided the business segment in 2006 by opening new opportunities and certain retail accounts for additional promotions and placements of, As Seen On TV products. Distribution or business segment has grown to over 68,000 doors in the United States.

Our gross margin increased 410 basis points, to 65.5% in the fourth quarter of 2006 compared to 61.4% in the same period last year. This improvement primarily reflects increased sales of media and direct marketing products, which carry higher margins. Also benefiting our gross margin is our ability to leverage our purchasing volume to receive improved purchasing discounts from vendors. For 2007, as Jirka mentioned, we currently expect our gross margin to be between 62 and 63%.

Total expenses were 56.8% of revenue in the fourth quarter of 2006, compared to 56.4% in the comparable period last year. This slight increase reflects the change in revenue mix toward increased media and direct marketing products, which not only carry higher gross margins, but higher operating expenses, including media buys, customer service charges, and order management charges in our direct division, and co-op, royalties and placement fees in our trade division. Even after investment in additional management and other personnel made throughout the year, our corporate, general and administrative expenses as a percentage of revenue for 2006, decreased slightly compared to 2005.

We continue to evaluate our operating cost structure and are implementing certain cost-saving initiatives that we expect will improve our operating margins begins the latter half of 2007. These initiatives are targeted toward cost reduction and third-party fees paid for direct to cross marketing programs, elimination of [inaudible] systems and reduction of certain fulfillment expenses. We will continue to invest in key personnel, marketing and branding.

In the fourth quarter we experienced improved leverage as our operating income for the fourth quarter increased 97.3% to 6.3 million or approximately 9% of net revenue. Compared to 3.2 million or approximately 5% of net revenue in the same quarter last year. Reported net income for the fourth quarter of 4.3 million or $0.16 per share compared to net income of approximately 1.5 million or $0.07 per share for the fourth quarter of 2005. Improved quarterly profitability over the prior year reflects our success in solidifying our post acquisition transition strategy and organizational structure. Compared to a year ago, we believe we are now achieving more effective use of our fixed resources, thereby driving improved contribution levels.

Turning to the balance sheet, at December 31st 2006, our working capital is 140.1 million, up from 37.2 million at December 31st, 2005. We completed our secondary offering of 5.69 million shares of common stock in the second quarter at end of the year with 104.9 million in cash, and 218.6 million of shareholders' equity. Our day sales outstanding for 2006 improved to 44.4 days compared to 53.9 days in 2005. Our inventory turns for 2006 increased 3.5 times compared to 3.3 times in 2005. Depreciation and amortization was 2.3 million for the fourth quarter of 2006 and 7.8 million for the year. Capital expenditures totalled 1.6 million for the quarter and 3.4 million for 2006 as the capitalized production costs, acquired media rights, and invested in our infrastructure.

Now, I'd like to turn the call over to Lynn for the business overview. Lynn?

Thanks, Vilia. I will now talk more about the milestones we accomplished during the quarter and the year, review our performance by operating segment and briefly touch on our strategy for 2007.

Our business segment, which primarily produces and distributes media, and other proprietary media-based products to retailers, generated revenues of 93.8 million for the year, which is a 34% increase for fiscal year 2005. At the end of 2006, Gaiam's business segment was distributing media to over 68,000 doors in the U.S. That's up from 50,000 doors at the end of 2005. This is the largest retail penetration of any media company. And we continue to do well in all of the major channels of distribution, including mass merchants, natural grocery stores, book stores, sporting goods, media destinations, and specialty stores.

One of Gaiam's key success factors is our store within a store concept, where we showcase Gaiam products in a branded lifestyle presentation including fixturing and signing where possible. We began this concept in 2000 and grew our presence in 2006 from 4500 retail doors at the end of 2005 to over 6,000 at the end of 2006.

For the fourth quarter, the business segment generated most of our earnings improvement, as well as a 400 basis point improvement in gross margin. However, the revenue comparison to 2005 was affected by a few key events.

First, we are no longer selling certain titles and categories that were previously sold by GoodTimes, as they do not fit into our mix or strategy going forward. These titles and categories represented approximately 2 million in revenue in the fourth quarter of 2005. During 2006, we made a strategic decision to limit our participation in dump bin promotions. GoodTimes had committed to these types of promotions for the fourth quarter of 2005 prior to our acquisition. In good faith, we honored GT-committed promotions last year for the holiday season but felt they were not consistent with our business strategy for branded and authentic content.

During the fourth quarter, we initiated a new vendor managed inventory system, with several of the mass merchant retailers. The system is designed to increase turnover at the store level by monitoring store and sku levels of inventory held at participating retailers. We believe implementation of this system reduced our sales for the quarter, as inventory levels were brought into balance, but will pay off over the next few quarters by reducing returns and the operating costs associated with those returns. From our overall revenue as we noted in our third quarter results, which ended 4.5 million over expectations, it appears that we received early holiday placement orders in the third quarter, which would have historically occurred in the fourth quarter. We believe the changes we made to our overall strategy affected reported revenue comparisons around 4 to 5 million in the quarter in addition to the early holiday sales achieved in third quarter.

Gross profit margin for the business segment finished strong at 66.4% for the fourth quarter and 62.5% for the year, representing an over 500 basis point improvement year over year. The increase in margin for this segment is evidence of our increased focus on branded media, a shift away from dump bin offers that were much lower gross margin than standard media sales, going direct with more of our kit manufacturers and volume discounts from our DVD replication. Also, after the GoodTimes acquisition, we were able to go direct and discontinue selling through third-party distributors to many of our larger accounts allowing us better margins.

Late in the third quarter, we launched a test for our mass market fitness brand, The Firm. A brand we acquired in the GoodTimes transaction. The initial test proved to be quite successful, and recently, we expanded tests to include end cap displays and [corraguts] featuring a complete line of the Firm Fitness DVDs and media-based kits. These products are specifically targeted to women who shop mainly in mass and mid tier retailers. The testing grounds where several mass, sporting goods, and drug store chains and resulted in permanent end cap displays, dedicated shelf space and expansion into over 1,000 doors. The success of a mass market fitness brand will allow us to differentiate our product offerings in certain retail channels, and will help us to test products in more traditional fitness disciplines such as aerobics and strength training that have not been explored under the Gaiam brand. This expansion will continue to solidify our position as the industry leader in fitness media.

Our products continue to perform extremely well at target, with 21% growth over fourth quarter 2005. For the 2006 holiday season, we secured a checkout line promotion in 300 Target stores. We took advantage of this promotion to showcase some of our high value, low-cost media mesh bag kits that were packaged as holiday gifts. We value our relationship with Target and have continued to work with them to develop innovative promotions in the fitness and wellness genre.

At Wal-Mart, we implemented the new VMI system that will enable us to better manage inventory and reduce the volume of returns. We anticipate that we will start to see significant payback on this strategy in the first quarter by not only working to maximize our inventory turns, but we expect it to result in diminished returns and lower freight costs.

At Kmart we are moving away from dump bin promotions and towards core business in the sporting goods department with our mass market brand, the Firm. This decision to move the business in that direction is definitely the right strategic decision that has caused a one-time drop in revenue of approximately 2 million for Q4, 2006, as compared to the same period in 2005.

Our media sales continue to be strong, the end of December, according to Nielsen video scan, Gaiam ranks 6th in overall non-theatrical U.S. DVD sales, ahead of 20th Century Fox, Sony and Universal. Gaiam's year-to-date DVD market share for the fitness wellness catagory increased from 41.5% in 2005 to about 45% at year-end 2006. Currently, we have four titles in the top 10 best selling DVDs for 2006.

In order to expand our customer base and improve our brand recognition, we continue to roll out our product offerings and content with new media distribution partners such as Blackberry, Comcast, and Google Video. It's our intention to focus on best in class digital distributors and to maximize online stores in store opportunities. During the fourth quarter, we launched four Gaiam branded channels, Yoga, Meditation, Weight Loss, and Guided Solutions for Stress Relief, with Blackberry's new audio service, and we now have a Gaiam branded block on VOD with Comcast.

Our direct to consumer business segment, which includes results from our direct response campaigns, direct mail, internet sales and membership, generated revenues of 125.7 million for the year, which is a 74% increase over fiscal 2005. Our direct segment, which continues to attract a loyal following increased revenue to 40 million for the fourth quarter, up almost 30% over 4Q 2005. The growth in this segment was driven by respect -- direct response marketing efforts an increase in web marketing, and an expansion of our community and subscription clubs.

Overall catalog circulation and conversion rates remain strong. We currently have approximately 7.5 million buyers and an annual circulation of 20 million catalogs. As we stated before, we are investing in customer acquisition, and moving our existing buyers from transactional selling to membership subscribers. This includes increasing and enhancing our subscription programs and continuity models. As of 12/31/06 our paid membership numbers reached over 100,000 members. In addition, we continue to focus on increasing the retention level of our members by offering more content and services. This in turn increases the lifetime value of our existing members and works toward building our community.

Gross profit margins in the direct segment finished strong at 64.7% for the fourth quarter an increase of over 400 basis points for the same period of 2005. The increase in margin for this segment was driven both by more revenue from memberships, media, and direct response to television, as well as by margin improvements in our catalogs and Gaiam.com division over the 4th Q of 2005, driven by a higher percent of proprietary products. We continued with our strong operational metrics at over 92% fill rate and an average order size over $100.

Our growth strategy for 2007 is a tri-fold focus of resources. In the direct business, as noted earlier, we're focusing on acquiring new customers and on developing a stronger relationship with our current direct customers, moving them from product buyers to subscribers. By marketing directly to consumers, based on their values and by enhancing our online communities or content, we are looking to solidify our position as the leading authority for healthy and conscious living. Gaiam recently launched our initial online content and community sites and the feedback has been very positive.

Secondly, we will focus on overall brand recognition and awareness. To spearhead that effort, we recently hired a new Chief Marketing Officer, Cynthia Ray. Cynthia will be instrumental in building our brand awareness over the next several years. Her background includes 10 years in the advertising business, managing brands such as Evian and Charlie perfume and 10 years at HBO as Senior Vice President, General Manager of HBO's Video Business. We began doing brand research during 2006 that will drive the Gaiam positioning in 2007.

Lastly in our business segment, as the leading authority in health and wellness, it's our responsibility to develop content, brands and product to remain in the forefront of the market. Our business model allows us to leverage those development costs across all of our channels. Our health and wellness business will focus on our core brands, Gaiam and the Firm. The Firm will focus on the mass market and Gaiam will line and extend into wellness a solution based program, by acquiring media distributor, New Mart Media, which specializes in distribution to natural grocery and pharmacy stores, we have positioned ourselves as the category manager in those channels of business. This will provide an opportunity for our wellness launch planned for late in 2007.

For our nontheatrical business we will focus primarily on pre-school aged children with the All About and recently acquired Brainy Baby franchises. Additionally, we intend to launch a new family label this year which will include several existing titles as well as newly acquired library from Tag Entertainment. Overall, our brand-centric strategy will allow us to develop long range marketing and sales plans that will ensure that the investment we make in our brands will have the greatest impact over the long term. We'll begin to launch our brands internationally through licensing in 2007. We believe the Gaiam brand in media present great opportunity for expansion by selecting the right international partners.

Our strong earnings growth for 2006 validates Gaiam's business strategy. We are committed to improving the quality of people's lives through our premiere products and services and our extensive media library, distribution network, and growing subscription business. The activities of 2006 have helped to position us for 2007 and beyond.

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

Thank you. [OPERATOR INSTRUCTIONS] One moment, please, for the first question. Our first question comes from Gordon Hodge.

Yes, good afternoon. Just a couple things. One is, it sounds like you're making some cost saves or some efforts to show some operating leverage in the back half of '07. I'm just wondering if you could get maybe a little bit more specific about that. It sounded like maybe some of it would relate to reducing reliance on direct response television, or was that more just a leveling off? And then, just curious if you could just talk about trends in internet or e-commerce sales? You mentioned that those were strong in the quarter. I'd be curious, a little more specific on that. Thanks.

Gordon, are you asking '06 or '07?

Well, the first question was related to '07, just your comments about showing some leverage, more operating leverage in the second half of the year. And then the question on e-commerce was related to fourth quarter of '06.

Okay. Gordon. This is Vilia. I'll take the question regarding to our direct response initiatives. What we're looking at is bringing our, we had a third-party distributor performing much of the customer service. And we are looking at doing a different outsourcing relationship and bringing a lot of those functions in-house.

She's talking the technology part.

Great.

It's still kind of remnants from the GoodTime acquisition, streamlining it to all one platform.

Okay. Terrific. E-commerce trends, if you can --?

Well, overall, the e-commerce and for right now it's kind of [inaudible] a lot of it due to subscriptions and that kind of activity, so you can start to look at our, the catalog and online business as driver for the subscribers, because we already tried to convert a lot of these customers. And we kind of said, [inaudible] kind of transactional selling to relationship selling. So there's a lot of new initiative. So obviously the subscription customers, they give you much more revenue per customer. Also, they pretty much buy every month by default because it's a monthly subscription. So, the heart of the activity is doing really well.

Okay. That's fine. It sounded like, I think you comments, if I heard it correctly, there was a trend up in terms of the amount that your subscription customers are willing to pay per month?

Yes, there's a slight increase on that. But I think comments actually when you get from Vilia was direct to DR-TV when that was doing really well in the 4th Q. But, the subscribers, obviously, we're happy we get to 100 was our big benchmark by the end of the year. And obviously the monthly subscription is up, is also a very good sign. And that's kind of something we [inaudible] a lot of.

Great. Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Mark Argento from Craig-Hallum Capital.

Good afternoon.

Hi.

Hi. A couple questions for you. First off, in terms of the 100,000 subscribers, can you talk about the different products or services that you have or that make up the 100,000? How many different subscription offerings do you have in the marketplace right now?

Well, Mark, we have about six different offers out there right now. They range from receiving a DVD in the mail on a monthly basis, to being able to belong to a celebrity-based community, like the Billy Blanks community. And we have different offerings from a price standpoint and from how they receive the information.

In terms of Spiritual Cinema Circle, I believe when you guys acquired that company, they had, correct me if I'm wrong, roughly, was it 25,000 subscribers?

19.

19,000, okay. Have you been able to kind of cross pollinate and market that successfully to the Gaiam customer base? Have you seen a nice uptake in the subbase there? Could you talk about your strategy there a little bit?

We didn't really start to market that right at Christmas, so it's really just last two months, 2.5 months that we had, and we right now are a over 25,000.

Okay. And then, so where did you see, when you saw general uptake across the board in this subscribers? And then, when do you hope to launch, kind of come out of what I'll call beta mode and launch at kind of more across here your broader-base customer base?

I think the old world side, we tried to, we kind of put some beta right now for the community, but something what you can see tie everything together would be probably in 3rd Q.

Okay. And then the, you mentioned I think in the script and also in the press release about the number of titles that you expect to launch this year. How that's going to -- I think you said it's going to double or close to double. Is a lot of that content already been created or where are we in terms of the genesis of that new content?

It's all shot here and posted here, right?

Yes, but not all of it has already been created.

Oh, sure, but does it like plan --

It's at different stages right now, Mark. Depending on what the launch is for. We planned to, as I said in my speech, we plan to launch preschool kids, that's not shot yet but in the process of being scripted, wellness is also to be produced and delivered in 2007. And at the beginning of the year, we focused on The Firm, Billy Blanks and other Gaiam fitness products, such as Dance. So those are shot, those are being posted now. Kids and wellness will be the second half of 2007.

Okay. And then when you talk about launching wellness later '07, what is launching wellness? Is that both at retail and on the subscription side? What would you expect to see kind of in the year in terms of products in that category?

On the wellness side, we'll launch probably in test mode more like a store within store concept, Mark. Wellness meaning it's more solution-based programming on specific conditions. We're working on some exciting things right now that we'll be able to talk about in about 30 days.

So it would be both of course media content --

And media-based kits.

Okay. And by the end, this was an offering you'd have both at retail, of course, and the store-in-a-store, but you also expect to have more subscriptions built around this as well?

Yes.

In '07? Okay. And then let's see what else here. Just a couple of house keeping things. Vilia, would you have a stock-based comp number for the quarter handy?

We have about $200,000 in compensation expense.

All right. And then, on a pro forma basis for next quarter with the shares being bought in, what do you expect the fully diluted share count to be?

About 25 fully diluted

Okay.

Maybe slightly less than that. Pretty much what we ended the year from as an average, like 24.5 to 25, depends where the price is.

And then last question for you. In regards to, I think it was New Mark or -- yes, New Mark acquisition, can you talk a little bit about what that kind of what that gets you and how you're going to be able to exploit that?

New Mark Media is basically a media racker into natural grocery and the drug channel. What we expect to be able to do with that is to first of all, expand that and be the category manager for media within those two distribution channels, as well as give us a platform to be able to launch our wellness initiative in late 2007.

Okay. Great, I think that does it for me. Thank you.

Thank you, Mark.

This concludes the question-and-answer session of today's call. I'll return the call back over to Mr. Rysavy.

Well, if there's no more questions, thank you very much, and we will set you next update.