Gaia Inc (GAIA) 2007 Q1 法說會逐字稿

Good morning, afternoon or evening and welcome to the Gaiam's first quarter 2007 financial results conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. John Mills. Thank you, sir, you may begin.

Thank you, Holly. Good afternoon, everyone and welcome to Gaiam's first quarter 2007 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 first quarter call. I'm very pleased to say again it was another good quarter. Revenue for the year, which ended March 31st, this year increased 13% to $58.5 million from $51.8 million in the same period of last year. Gross margin for the quarter remained strong at 64.1%.

Net income for the quarter doubled to $1.8 million or $0.07 per share from $0.9 million or $0.04 a share in the first quarter of 2006. Depreciation and amortization for the quarter was $2.3 million.

During the first quarter Gaiam generated cash of $8.4 million from its operations compared to use of $1 million of cash in the first quarter of last year. The $8 million of cash we generated in this quarter is by far the most in any quarter in Gaiam history. Our cash position on March 31st ended well above our expectations at $83 million, even after we repurchased 2.5 million of our common stock and funded 2 content licensing deals during the first quarter.

Internal revenue gross was still a little challenging to calculate accurately because of the Goodtimes acquisition in late 2005. A number of the titles sold by Goodtimes after the acquisition as inventory liquidation are in dump bins. So while based on the simple comparison, comps for first quarter were 12% adjusted for liquidation of the dump bin sales during the first quarter 2006, our comps continue to be pretty much in line with our historic leverage.

Our DVD market share in fitness/wellness category for the first quarter according to Nielsen's VideoScan increased at faster pace than usual to 48.3%, up from 41.5% in the first quarter of last year and 45% in the fourth quarter of last year.

With control of the production studio we acquired in the Conscious Media acquisition we intend to double the number of visual media programs we will release in '07 and as well to release our first high-definition titles this year. The number of paid subscribers for our community and clubs also continued to grow during the quarter at a very encouraging rate.

Now Vilia will provide you with some details on the numbers and then Lynn will give you some business overview.

Thank you, Jirka. We are pleased with our first quarter performance and our ability to grow revenue, improve operating leverage and increase profitability. We generated revenue of $58.5 million in the first quarter of 2007, up 13% from $51.8 million in the first quarter last year.

Revenues generated by the direct-to-consumer segment were $34.1 million and revenues generated by the business segment were $24.4 million. Our strong direct-to-consumer performance reflects our successful direct marketing program, particularly in direct response and web marketing and an expansion of our community and subscription clubs.

Our gross margin percentage continues to be strong at 64.1% of revenue, which is consistent with the margin in the first quarter of 2006. Total expenses decreased to 61.3% of revenue in the first quarter of 2007, compared to 62.1% in the comparable period last year. We continue to invest in marketing and branding while focusing on cost-saving initiatives including the reduction of third-party fees paid for direct-to-consumer marketing programs and the elimination of certain redundant systems.

We completed the migration of five of our websites to newer, more robust, cost-effective technologies, we continue to consolidate to the scaleable technology and expect to be complete with all Website migrations by the end of the second quarter, further reducing redundancies and operating costs.

Our corporate, general and administrative expenses were 6.6% of revenue for the first quarter of 2007 compared to 6.3% in the same period last year, reflecting our investment in key personnel. We are focused on streamlining our operating cost structure and expect to see further improvement in our operating margins in the latter half of 2007.

In the first quarter we experienced improved leverage as our operating income increased to $1.6 million or 2.8% of revenue compared to $1 million or 2% of revenue in the same quarter last year.

Net income for the first quarter doubled to $1.8 million or $0.07 per share compared to net income of approximately $0.9 million or $0.04 per share for the first quarter of 2006.

During the quarter we generated solid positive cash from operations of $8.3 million as compared to a use of cash of $1 million in the first quarter of 2006. This strong cash generation reflects the multitude of improvements that we have made to the business following the GoodTimes Entertainment asset acquisition. We have fully integrated customer accounts into our credit and collection process, tightened our credit card policy to reduce bad debt and increase timely collections, and induced customers in the direct-to-consumer business to convert from multi-pay to single pay transactions.

Gaiam's cash position at March 31st remains strong at $83 million, even after the repurchase of 2.5 million shares of common stock at $13.14 per share or $32.8 million. Following the stock repurchase we have 24.7 million shares of common stock outstanding. We entered the quarter with $187.7 million in shareholders equity and no debt.

Our days sales outstanding for the first quarter 2007 improved to 33 days compared to 46 days in the same period of 2006. Our inventory turns for the first quarter of 2007 remained relatively unchanged from the prior quarter at 3.4 times.

Depreciation and amortization $ 2.3 million for the first quarter of 2007 compared to $1.7 million in the first quarter of 2006. Our capital expenditures totaled approximately $300,000 for the first quarter 2007 compared to $200,000 in the comparable period last year, reflecting investments in our infrastructure. The upgrade to our infrastructure including enhanced security features and hardware, allows us to leverage new database technology and improve performance.

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

Thanks, Vilia. I will now review our performance by operating segment and provide an update on our strategy for 2007. The first quarter of 2007 was a continuation of the strong growth we experienced in 2006, as we grew both our top and bottom lines and continued to execute on our strategy.

Our business segment, which primarily produces and distributes media and other proprietary media-based products to retailers, generated revenues of $24.4 million for the first quarter of 2007. Quarter-over-quarter sales are slightly down due to the liquidation of Goodtimes titles and formats sold during first quarter 2006 that are no longer carried by Gaiam, as well as the reduction of practices such as selling Goodtimes media titles into dump bins and mass merchants.

The decrease was also impacted by discontinued businesses in the UK as we move that subsidiary to more of the Gaiam branded model versus the distributor model. We continued to expand our media and media-based product distribution including into the mass merchants, natural grocery stores, bookstores, sporting goods, media destinations and specialty store channels, and are currently in over 68,000 retail doors in the US. And that is up from 58,000 in the first quarter of 2006. This is the largest retail penetration of any media company.

We also continued to expand our store-within-store concept, which has proven to be a big success and is where we showcase Gaiam products in a branded lifestyle presentation including fixtures and signage where possible. We began this concept in 2000 and have store-within-store presentations at over 6,000 retail doors, up from 5,000 in the first quarter of 2006.

We also launched this concept for The FIRM brand and have placed the store-within-store display in over 1,000 doors with great success.

Our fitness product was recently placed in a branded eight-foot section at the launch of Ralph's first Wellness store-within-store in San Bernardino, California. This represents opportunity for future expansion if this concept is successful.

For the first quarter gross profit margin for the business segment was 63.4% representing a 500 basis point improvement quarter-over-quarter. Margin improvements in this segment are the result of our increased focus on branded media, a shift away from low-margin media dump bin offers and volume discounts secured from our DVD replication partners and overseas manufacturers.

Also, after the Goodtimes acquisition we were able to discontinue the use of certain third-party distributors allowing us better margins by shipping directly to many of our larger accounts.

We continue to focus on our core health and wellness business and solidify our position as the industry-leader in fitness media, with our launch of our mass market brand The FIRM in late 2006. Following recent testing of end-cap displays of The FIRM Fitness DVDs and media-based kits, we rolled out the product line to over 3,000 doors. Also at Dick's Sporting Goods we successfully completed a test of The FIRM and will be rolling the brand out to the entire Dick's chain over the next few quarters.

In our business segment we're preparing for the late 2007 soft launch of the Gaiam Wellness Solution-based program. We're pleased to announce that we've entered into an exclusive deal with the Mayo Clinic to produce and co-brand our new wellness media titles. We're in the process of shooting 10 DVDs at the Mayo Clinic which will street in late December. We believe there's a large market for wellness media and media-based kits and we expect to have a full selection of wellness titles for branded store-within-store displays for early 2008.

In the fourth quarter we acquired media distributor Newmark Media which specializes in distribution to natural grocery and pharmacy stores. As we move more towards wellness, we expect the acquisition of Newmark Media to fuel the growth in these untapped channels as we leverage the service merchandising model already employed by Newmark with success in many natural grocery chains nationwide.

As we stated earlier, it is our intention to expand the Gaiam brand beyond fitness and wellness into what we call Media That Matters. We intend to launch Media That Matters this year, including several existing titles as well as a newly acquired library which is the result of an exclusive license and first-look rights deal recently signed with TAG Entertainment. TAG is a film production company specializing in family entertainment. This agreement covers 12 existing family films featuring known Hollywood stars and give Gaiam an exclusive first-opportunity to license home video rights to new family films produced by TAG. Gaiam's rights under the deal include not only conventional DVD rights, but also digital downloading, burn-on-demand and subscription clubs.

We also recently signed an exclusive license and a production agreement with the Brainy Baby Company, an award-winning leader in educational entertainment for children 5 and under. The license covers approximately 40 existing video and audio titles under the Brainy Baby, First Impressions and Bilingual Baby brands. The production agreement provides the framework for Gaiam to collaborate with Brainy Baby to produce new Gaiam Brainy Baby video and audio products which will be financed and owned by Gaiam. We expect to have new Gaiam Brainy Baby titles available for sale in 2008. These new titles will augment our already existing successful All About series providing a large base for our children's entertainment initiative.

Recently we hired Bill [Sonheim] as President of Gaiam's distribution and direct response marketing businesses. Bill has a long and distinguished track record in the media business as Executive Vice President with Sony BMG and prior to that as President of PolyGram Video. We believe Bill's expertise in the media business will help us launch our Media That Matters and wellness initiatives.

We'll begin to launch our brands internationally through licensing in 2007. We believe the Gaiam brand in media presents great opportunity for expansion by selecting the right international partners. We recently signed an agreement for the Benelux and have identified three additional opportunities for this year.

We released Billy Blanks through direct marketing in Japan this quarter. This is our first foray into the Asian market and we're very pleased with the initial response, which indicates the opportunity for both significant short-term success and sustained growth as the entire Billy Blanks and Gaiam franchises are introduced to Japan and other international markets. We expect international will start to have an impact on our bottom line beginning in second quarter.

Our media sales continue to be strong at the end of March according to Nielsen's VideoScan Gaiam ranks fifth in overall non-theatrical US DVD sales, ahead of 20th Century Fox, Sony and Universal. Gaiam's year-to-date DVD market share for the fitness/wellness category increased to about 48% at the end of first quarter of 2007 from approximately 42% a year ago.

Currently we have 10 titles in the top-20 best-selling fitness DVDs year-to-date and our market share is over 3.5 times greater than our nearest competitor.

Last quarter we rolled out a number of new media offerings and content including four branded channels with Blackberry's new audio service, which is scheduled to begin marketing to consumers this week. We also launched Gaiam branded block on video-on-demand with Comcast.

In the direct business we're focused on acquiring new customers and migrating our current direct customers from product buyers to subscribers. Our direct-to-consumer business segment which includes results from direct mail, Internet sales, memberships and our direct response campaign generated revenues of $34.1 million for the first quarter.

Our initial online content and community sites were launched in December and we continue to add content and acquire new community members. And at the end of 2006 we passed the 100,000 mark for our subscriber base.

In the first quarter we continued to successfully grow our subscriber base, building on the trend started last year.

Revenue in our real goods division was up 40% for the quarter compared to first quarter 2006 as more and more people are responding to mainstream media's call for eco-conscious choices. The Eco-Tip video clips on the Gaiam community site are among our most popular viewings. In 2007 we expect to mail approximately 20 million catalogs and maintain our average order size of over $100.

Gross profit margins in the direct segment remain consistent with first quarter 2006 at approximately 65%. Our high margins in this segment are driven by our membership programs and direct response.

In summary, we're pleased with our progress and believe that we're well positioned for continued growth in 2007. We remain committed to empowering people to live healthy eco-conscious lives through our high-quality products and services. In '07 we will continue to focus on providing responsible content, brands and products, expanding our distribution network, acquiring new customers, growing our community and subscription clubs and increasing Gaiam's overall brand recognition as a leader in the health and wellness industry.

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

[OPERATOR INSTRUCTIONS] Mark Argento.

Craig-Hallum Capital Group. A couple of questions. First off, can you talk a little bit about the deal you have with the Mayo Clinic specifically? Do you own the content, do you co-own the content, who has the syndication rights if you wanted to take it and put it on the VOD format or digital rights format of some kind above and beyond the DVD? How does that work? Why don't we start there.

The content is wholly owned by Gaiam and it's a royalty deal. They're providing us the science, access to the doctors and to the treatment plans and they are paid a royalty for that. But we have all rights and it will be co-branded Mayo Clinic and Gaiam.

And do you have a multiple year type deal? You said 10 initial pieces of content. Does it extend beyond that?

It's 10 for right now. We'll see how the success is.

And you expect you said street date of December, so you could ship and actually recognize some revenue this year for this product?

It will be a soft launch though. We're really planning it for first quarter of '08.

And do you have retailers privy to the product, do you have interest at the retail level?

We've previewed it with a few retailers and there's obvious interest and wellness is certainly a big initiative for many retailers going forward and this is the first of that type product in the market.

Lynn, similar to some of your other product lines, will you have any hard goods that go along with the content in terms of exercise devices or balls or what-not, any hard good products alongside this?

We absolutely will, Mark. As you know, our success really lies in creating an entire store-within-store display for the retailers and we expect to have all that product ready and available for first quarter 2008.

Looking at the international opportunity, I think you mentioned that you have a deal already in place for the Benelux region in particular. Did you say that you think it's going to be additive to Q2 numbers, did I hear you right?

Not that particular deal. We just think we'll start seeing impact from international, particularly from the direct response in Japan during Q2.

This is pure license type deals, so it's going to be basically a very high margin revenue stream for you guys, is that the right way to think of it?

Yes, that's true, Mark. But we talked about it last year, so it's not something that was unexpected. It's something we've planned.

Okay. And moving over to the existing business on the direct-to-consumer catalog business, I know some of the costs for the postage and what have you to send the catalog is clearly going up. What are your thoughts about the cost structure of that business and how much of that business now are you actually converting and doing online or e-commerce by?

On the catalog side, Mark, we're looking at the structure, the size and shape of the catalogs to see if we can't reduce cost that way based on the postal increase. And we'll be doing some of that for our holiday drop. And as you know, we're continuing to migrate more and more of the consumer shopping our catalog into our subscription as well as our Internet community. So we're seeing a larger increase coming there.

Okay. And last question from me. In terms of store-in-a-store, do you have any target you'd like to exit the year at, a certain number of store-in-a-stores? What's the opportunity? I think the growth has slowed a little bit in terms of new store-in-a-store. Is there another greenfield opportunity out there for you guys to really reaccelerate the store-in-a-store growth? I guess wellness would be one opportunity, but--?

Well certainly wellness would be, as well as the test in Ralph's for an 8-foot section in their wellness section.

Mark, it's pretty much growing pretty steady. You cannot take it quarter by quarter because you see something like FIRM in Wal-Mart you had a lot of stores in one swoop. We try to focus on a bigger opportunity but it's actually growing pretty steady pace.

[OPERATOR INSTRUCTIONS] Gordon Hodge.

Thomas Weisel Partners. Just a couple of questions. One, Lynn, you mentioned the postal hike, so I gather it does impact your business a little bit. I'm just wondering how should we think about it and what can you do to offset it?

And then I guess another question is, you were talking about launching quite a higher number of titles this year than last. I'm just wondering should we be accommodating for that expense and then obviously enjoying that revenue once they're released? Is that something that we should be factoring in our numbers?

And then I guess the last question I have is simply it sounds like the test with Dick's went really well with The FIRM. I think they carry some Gaiam products as well. Are they going to continue with both? In other words, is it purely incremental? Thanks.

The postal rates, definitely the increase effectively the impact is mainly on the catalog side. So we clearly shifted some--we did 20 million catalogs the previous year. We started doing a little more before we knew about it, but now we're saying we'll keep it about at 20 and shift the marketing dollars to Internet, which is doing actually very well. So it kind of should happen anyway because it turns the direction of the company, so it just helps for our speed of process, not just wait up for anybody else.

For the number of titles increase, I don't think that would be a big impact on this year, because as you know, our new releases don't really drive our sales, which our catalog would do. So it's more '08 impact. And the third one I'll leave to Lynn.

On the Dick's, yes, they also carry Gaiam and this is all incremental. The FIRM is really a lower-priced, more mass market, appealing to a younger audience. So they felt it wasn't competitive with the Gaiam product, so it will be all incremental.

That's perfect. One more question if I could. You did update us on the clubs a little bit. It sounds like subscribers are up, but maybe you could give us a sense when you might put some really marketing muscle behind that and when do you think you'll be comfortable with the metrics there?

Pretty much as we said over the last year, we're pretty much in the planning. We're doing a little better than we expected. And so by end of the year we'd like to end this testing and building and start to put some marketing behind it for like this Christmas so there truly is a P&L difference. This year we had a lot of expenses, obviously and that's the difference to '08 as we talked about pretty much from the beginning of '06. There's no change in the plan and it's doing probably slightly above our expectations.

Evan Jones.

From [Brightlies]. A quick question on the business segment. It looks like as you kind of clear out of the [Justian] business and get rid of some of the non-performing titles of Goodtimes that the gross margin is improving nicely. Is that kind of where you'd expect to see it for the rest of the year?

Yes, I think you see overall when we kind of cleared the fourth quarter and first quarter the [calm thing] so probably in the second quarter is pretty much clear so you will see how it was growing and it's obviously contributing more to bottom line as we kind of consolidated all this operation. And so I think it's exactly right what you're saying. You'll hopefully start to have more to the bottom line from the operations.

So by Q2 you'll have kind of cleared through all the anniversarying of the Goodtimes titles that you want to clear out?

Pretty much. I don't know exactly what the dump bin expected but we don't expect to talk about it when we report come second quarter but we don't really know when and how return went, but my practical means we'll be done through the second quarter.

Okay. And last question. I think you might have mentioned this but I didn't catch it. When will the Mayo Clinic pieces start to rollout?

The media titles we'll do a soft launch in December with really a hard launch including media-based kits in January of '08.

I'll turn it now back to Jirka Rysavy.

Okay, thank you very much. Thank you for being with us again and we hope to see you in the next quarter. Thank you very much.

Thank you. This does conclude the conference call. You may disconnect at this time.