Gaia Inc (GAIA) 2007 Q2 法說會逐字稿

Welcome to the second quarter 2007 financial results conference call. All participants will be in a listen only mode until the question and answer session. (OPERATOR INSTRUCTIONS) Today's conference is being recorded, if you have any objections you may disconnect at this time. Now I will turn the meeting over to Mr. John Mills with IRC, sir, you may begin.

Thank you, and welcome everyone to Gaiam's second quarter 2007 earnings conference call. The following constitutes a safe harbor statement under the Private Securities Litigation Reform Act of 1995. Except for 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 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, Jirka Rysavy, go ahead Jirka.

Thank you John, and welcome everyone on our second quarter call. I'm very pleased to say that once again it was a very good quarter. revenue for the quarter which ended June 30 increased 21% to $52.4 million from $43.2 million in the same quarter last year, and this quarter included an internal growth rate of 18%, which we were proud of.

Gross margin increased 190 basis points to 64.2% from 62.3% in the second quarter of 2006, which was actually on top of a 1,370 basis point increase which we had in the second quarter of '05. Operating expenses as a percentage of revenue decreased to 67.9% from 68.5% in the same period last year even after the increased expenses related to Gaiam's expanding online community.

Net loss for the second quarter was reduced by 70% to about $345,000 or $0.01 per share from a loss of $1.2 million or $0.05 per share loss in the second quarter of 2006. Depreciation and amortization for this quarter was $3.1 million. For the six months Gaiam revenues increased 16.8% to $110.8 million from $94.9 million in the same period of last year. Net income increased to $1.4 million or $0.06 per share compared to $.3 million or $0.01 per share for the six months of last year, which was a loss.

We believe that the strong results for the quarter are also pointing to an increasing shift in our seasonal quarter revenue flow that we experienced last year as well, where historically fourth quarter orders were received early. Based on the current demand, we anticipate approximately $6 million to $8 million revenue shift from fourth quarter into third, translating to about $0.04 of EPS which will positively be reflected in the third quarter of this year.

We believe that based on last year and current year experience, the seasonal shift between third and fourth quarter will be continuing, which would be obviously very good news for Gaiam, since our revenue and earnings were historically so Q4 weighted.

We continue to expense our [proprietary] library, and during the first six months we completed 45 new media programs, which is about the same number as we had for the whole year of 2006. In addition we completed the field production of five title shots of high definition format. These titles represent really our first step into the genre of hi def production.

According to Nielsen Video Scan, Gaiam's U.S. market share in the fitness/wellness DVD category increased to 48% in early June from 44% in the same six months of last year. Gaiam currently has 61 titles in the top 100.

During the quarter Gaiam generated $8.1 million in cash from operating, bringing the year to date cash generated from operations to about $16.4 million, which compares to cash use of $3 million during the same six months of last year.

Excluding our repurchase of 2.5 million shares for $32.9 million in February, we increased our cash position since the beginning of the year by about $17 million to $89 million at the end of June. Subsequent to the second quarter we acquired Zaadz, Lime Media, and the majority ownership in Conscious Enlightenment to strengthen our community vision and create a unified source for LOHAS. Each company will add to our community social networking, about 3.5 million unique visitors per month, broadband television, national radio, cell phone and on demand cable distribution, socially conscious credit card, Conscious Magazine and a library of over 1,000 hours of visual content.

The total consideration paid for these companies was approximately $10 million. Our community will be led by internet community (inaudible) Eddie Dunbrauer who joined Gaiam as the President of the community division and he was previously Senior VP at match.com. We plan to launch our overall community site in the fall as scheduled. The number of paid subscribers in our community and subscription club increased in the first six months to approximately 135,000 which is a significantly faster addition rate than we had during the last year.

Our board of directors also authorized a share repurchase program up to 5 million shares of our common stock, and also filing a registration statement for the same amount of shares. This is because shareholders of some potential acquisition targets requested Gaiam shares as acquisition consideration while we obviously prefer to use our growing cash. The repurchase program will give us more flexibility to deal with various situations as they appear. And now Vilia will give you some details on our numbers, and then Lynn will give you a business overview. So Vilia?

Thank you Jirka. We are pleased to report a successful performance, which included double digit revenue growth, enhanced operating leverage and a substantial reduction in the net loss, which is typical for us this time of year. We generated revenue of $52.4 million in the second quarter of 2007, an increase of 21.3% from $43.2 million in the second quarter last year. Revenues generated by the direct to consumer segment were $30.4 million, and revenues generated by the business segment were $22 million.

As mentioned in the previous quarter, we introduced Billy Blank's direct marketing programs into Japan through a domestic distributor. Results of this rollout were very positive and contributed to growth in the business segment in the second quarter. we expect continued growth to be driven from our international sales, especially in Japan during the third quarter as our market penetration takes hold.

For the second quarter we experienced strong growth in our overall gross margins, up approximately 200 basis points from the same quarter for 2006. As a percentage of revenue, selling and operating expenses decreased slightly to 60.1% in the second quarter of 2007 from 60.3% during the quarter ended June 30, 2006, reflecting increased leverage on the higher revenue base, partially offset by planned investments in our online communities and customer acquisition programs.

Our corporate general and administration expenses decreased to 7.8% of revenue for the second quarter in 2007, compared to 8.2% in the same period last year. The improvement in operating results, coupled with interest income from our current cash position, contributed to a significant reduction in the consolidated net loss for the second quarter. Our net loss of $346,000 or $0.01 per share improved from a net loss of $1.2 million or $0.05 per share for the second quarter of 2006. This improvement exceeded our expectations for the quarter.

Year to date revenues of $110.8 million were up 16.8% from $94.9 million for the same six month period in 2006. Overall gross margin remains solid at just over 64%. The improved performance that we've experienced in both the first and second quarters of 2007 have contributed to a net income for the year of $1.4 million as compared to a net loss of $300,000 for the same six month period in 2006.

We generated $8.1 million of cash from operations in the second quarter compared to a use of cash of $1.9 million in the second quarter of 2006. In addition to the many business process improvements mentioned last quarter, we tightened our collection policies in certain international markets, requiring immediate payment upon receipt of goods. These strengthened internal processes, combined with our strong second quarter international revenue, contributed to our increased cash position.

Excluding the repurchase of 2.5 million shares of Gaiam stock for $32.9 million in early February, we increased our cash position from the beginning of the year by over $17 million, bringing our cash on hand to $89.2 million. We ended the quarter with 24.7 million shares of common stock outstanding, $187.8 million in shareholders' equity, and no debt. Our day's sales outstanding for the second quarter of 2007 improved to 22.3 days compared to 41.5 days in the same period of 2006.

Inventory turns for the second quarter of 2007 increased to three times from 2.8 times in the prior year quarter. Our inventory on hand includes product for direct marketing programs that were launched late in the second quarter along with inventory procured for the upcoming direct mail season.

Deprecation and amortization was $3.1 million for the second quarter of 2007, compared to $1.5 million in the second quarter of 2006. Increase of the depreciation and amortization primarily reflect increased production of video titles. Our capital expenditures totaled $400,000 for the second quarter of 2007.

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

Thanks, Vilia. I will now review our second quarter performance by operating segment, introduce our newest acquisitions and provide an update on our strategy for 2007.

The second quarter was a continuation of the strong growth we experienced in 2006 as we grew both our top line and bottom line, added to our cash position and continued to execute on our strategy. Our sales are now comparable, from the Good Times acquisition and liquidation and we're pleased to return to our mid-teens comps with this quarter comping at 18%.

Our business segment, which primarily produces and distributes media and other proprietary media-based products to retailers, generated revenue of $22 million for the second quarter of '07, compared to $16.2 million for the same period in the prior year. The increase in revenue was lifted by higher than expected revenue from the international markets, particularly in Japan and Canada.

We continue to expand our media and media-based product distribution and are currently in approximately 69,000 doors in the U.S. up from 61,000 in the second quarter of '06. We believe this is the widest retail penetration in the U.S. of any visual media company and allows us the opportunity to expand our media offering in these venues.

We currently offer visual media products in most channels of distribution, including mass merchants, natural grocery stores, bookstores, media destinations and specialty stores. We're currently testing new media and product ideas in traditional grocery wellness areas and direct stores.

We also continue to expand our stores-in-store concept, which has proven to be a big success. This concept showcases Gaiam products in a branded lifestyle presentation, including fixtures and signage where possible.

We began this concept in 2000 and have stores-in-store presentations at over 6,500 retail doors. That's up from 5,300 in the second quarter of '06. We continue to see success as we expand the stores-in-store concept for our direct marketing brand The Firm. We grew to 1,500 doors in the U.S. and Canada, up from 1,000 in the first quarter of '07.

We're getting very positive feedback on this brand from our retail partners who found that a branded placement of The Firm products has broadened their reach with the female consumer. We believe the stores-in-store concept creates a home for the consumer that allows her return to the store when she's ready to extend her practice.

In '07 we began to launch our brands internationally and, as we noted on our first quarter conference call, we expected to see these sales positively impacting our bottom line in Q2. We initially focused on the Billy Blanks brand in Japan. We achieved a very successful media tour in June and are currently reviewing our options for replication the Billy success in other countries, as well as new opportunities in Japan.

Domestically, we began to put in place programs that we believe will solidify our product placement for the upcoming holiday and fitness season. In addition, we're working with our direct media retail partners and with the leader of media download technology so that we're in a position to respond to the consumer market as video downloading transitions into the mainstream.

Because we own all of our content and have in-house post production, we're in a unique position to capitalize on the new media technology to brand Gaiam in a variety of channels. This has also created opportunities in the direct-to-consumer segment that people search for the brand on the Internet.

With the Lime acquisition and the Gaiam New Media platform, we currently offer short-form audio or video on Blackberry, Yahoo! Health, Brightcove, Yahoo! Green, iTunes, YouTube, Verizon V Cast, AOL TV, Juiced, as well as Comcast, Cox and Time Warner VoD.

We remain on track to do a soft launch of our new wellness products in time for the fitness season in early 2008. We've received very positive comments from our retailers regarding our upcoming wellness solution-based videos that are co-branded with the Mayo Clinic. We're now in post-production on those titles and we'll plan to ship in late December.

We've almost finalized our wellness product selection in order to offer a full four foot section from our March 2008. We're also working with the Mayo Clinic to market the wellness titles to their 700,000 newsletter subscribers.

Our Newmark store [tracking] team has leveraged their expertise and experience in the natural grocery and service merchandising programs to expand retail penetration for the Gaiam brand. As a category manager for [Ulta], Newmark recently expanded Gaiam's media presence by 30% with the introduction of Gaiam Media skews in exchange for slower turning products. Ulta also agreed to expand the fitness accessory space from four feet to eight feet of Gaiam products, including our direct marketing brands.

During the second quarter, we began the transition of whole food stores back to a direct relationship through our acquired Newmark division, with internal service merchandising and category management.

Our media sales continue to be strong. At the end of June, according to Nielsen Video Scan, Gaiam ranked fifth in overall U.S. theatrical, U.S. DVD sales, ahead of 20th Century Fox, Universal and Sony.

As noted earlier by Jirka, Gaiam's year-to-date DVD market share for the fitness/wellness category increased to 48% at the end of second quarter of '07, up from 44% in the same six months last year. At the end of June, we had four titles in the top five best selling fitness DVDs, year-to-date and 61 of the top 100 titles. We continue to lead the category with over three-and-a-half times greater market share than our nearest competitor.

Recently, we were notified that we won an additional eight Aegis awards and five Telly awards, bringing our overall video awards to 62 Aegis awards and 71 Tellys.

In the direct business, we're focusing on expanding and enhancing our online community programs, 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 campaigns generated revenue of $30.4 million for second quarter, compared to $27 million for the same period in prior year.

We continue to see strong growth in our e-commerce business. Revenue from search engines is up over 150% in the second quarter and similar revenue from e-mail campaigns is up over 200% from Q2 '06. We're continuing to invest resources in these programs.

In addition, we won LinkShare's 2007 Golden Link award for innovative merchant of the year. Out of thousands of merchants on the LinkShare network, they chose Gaiam, Netflix and iTunes as finalists and we came out on top. LinkShare is the world's largest affiliate network and presents this award to the merchant that develops the most innovative way to increase traffic through affiliate advertising. Our use of affiliate linking with in-video teasers lifted clicks by 100% and response rates by 85%. We're honored to accept this award and recognition for innovation.

During the quarter, we grew our e-mail house file by 240,000 addresses. By obtaining our customers' e-mail addresses and their approval to use these addresses, we were able to contact them directly with our Internet-based promotions and offers, thus saving postage costs and increasing our customer touches.

In the six months of '07, we've grown our subscriber base to more than 135,000 members. Membership communities will continue to remain an important focus as we look to expand the business, the internal growth as well as through acquisition.

On the direct operation side, we maintain strong average order sizes of $114.00 and $98.00 for the catalog and e-commerce business respectively. In addition, we've maintained fill rates at over 96%.

As both Vilia and Jirka discussed, subsequent to the end of the second quarter Gaiam completed three acquisitions. I'd now like to give you a brief introduction to each of them.

Zaadz is the leading social networking site in the LOHAS space with 85,000 members and 850,000 unique visitors per month. Zaadz was founded by Brian Johnson, who previously created the world's largest social networking site for amateur sports, eteamz.com, which now profitability serves 3 million teams around the world.

Zaadz's wet site offers its members a community site with discussion boards and home pages, allowing the members to introduce themselves and discuss issues or topics.

In addition, Zaadz distributes newsletters, notable quotes, recommendations of current media for viewing or reading and is in the process of compiling a directory of conscious businesses. Not only do we share a consistent target market of consumers, but we also feel that Zaadz will allow us to extend the foundation of our community web sites.

Lime; Lime's a multi-media lifestyle company with multiple platforms, focused on leading a healthier, greener and more balanced lifestyle. Lime's available on broadband television, Sirius satellite radio channel 114, on-demand with cable providers nationally and at Lime.com on the web and mobile phones.

Lime.com has over 2 million unique visitors per month and 200,000 daily newsletters. Lime previously acquired Wisdom TV and has a library of over 1,000 hours of visual content. The addition of this content to our library will not only fit within our current range of product offering but will also allow us category expansion within our online subscription community. Lime is currently building an advertising network for LOHAS.

Conscious Enlightment is an online and offline-based community that owns and operates the Enlightment Card, Conscious Choice and Whole Life magazines; yogamates.com and MonthlyYogaDVD.com. The Company Enlightenment Card is a Visa sponsored reward card, where you, as a current holder, can give back to charity and earn points towards services such as yoga classes, workshops and retreats as well as Conscious products. We believe this card can be leveraged across our 8 million direct buyers.

Conscious Choice magazines are represented by four separate magazines, like Whole Wide from Los Angeles, with paid advertising that target the specific LOHAS market in distinct communities, such as L.A., San Francisco, Chicago and Seattle. Distribution for these magazines can be found at retailers such as Whole Foods as well as a limited list of paid subscription members.

We anticipate being able to aggregate advertising sales through several of our channels. MonthlyYogaDVD.com provides streaming and downloading of online yoga DVDs, and lastly yogamates.com is an online web community for the advanced yoga practitioner, provides e-commerce outlet for media titles produced and owned by Conscious Enlightenment Publishing, where we expect to add Gaiam yoga DVDs and accessories to these platforms.

We've recently made some notable additions to our management team, as we discussed in our first quarter conference call we hired Bill Sondheim as President of Gaiam's distribution and direct response marketing business. During the second quarter we added Jason Marshall as our Vice President of internet and direct, Jason comes to us from Taylor Corporation, a $2.2 billion company where he served as President of Logostix. Prior to that he was the General Manager of Colorful Images, a catalog and e-commerce company.

We've also recently added Eddie Dunbrauer as President of our community division. Eddie comes to us from Match.com where he was the Senior Vice President with responsibility over branding and product and web design, as well as consulting on new business initiatives for the parent company, IAC. During his 25 years in the world of internet and interactive media, Eddie has served in roles from product designer to Senior VP within Mattel, Atari, Jim Henson, AT&T Wireless, E-Trade and IAC/Match.com.

We've tapped Rob Sussman, our President of New Media, to integrate the Lime acquisition. As you may remember, Rob was CFO and EDP of Sundance Channel prior to joining the Gaiam team last year. We're very excited about the new additions to our team, and feel that we are well positioned to implement the strategies that we have identified for continued growth.

In summary, we are excited about the opportunities for the balance of this year and beyond. We have the management team in place to capitalize on these opportunities; we have the widest DVD distribution in the U.S. of any visual media company, which we intend to utilize to launch new platforms of content that we produce, including our new wellness and kids' line. We have just opened the international arena, which can be leveraged in all our channels.

Prior to our recent acquisitions we had over 8 million direct buyers, over 135,000 paid subscribers to our community and subscription clubs, and now with these newest acquisitions, we have the platform to build the premiere LOHAS community and e-commerce solution. In addition we will continue to explore the markets for potential acquisitions that allow us to expand our product offerings, distribution channels and content libraries, and tap into new consumer touch points.

We're pleased with our second quarter performance and look forward to continuing to execute our growth strategy. I would now like to open the call up for questions. Tamara?

Thank you. We will now begin the question and answer session. (OPERATOR INSTRUCTIONS) One moment for the first question. Our first question comes from Mark Argento with Craig-Hallum; you may ask your question.

Hi, good afternoon. A question for you on Billy Blanks and what you did in Japan. Could you talk a little bit about the model you're using there, is it a pure license model? If you could quantify a little bit of the impact in the quarter and if it was a license versus a product sale, and then going forward how you view the international opportunities.

The business model in Japan right now is sales of product to a direct response marketing company in Japan, and then they are responsible for the marketing of that product.

So Mark, understand we take no risk, effectively, in that market, and there are no returns either.

Going forward do you anticipate using that same model for other international markets?

For the direct response? Yes. However we will do licensing agreements in other international markets such as the Benelux where we've just licensed the Gaiam brand.

Okay. In the quarter, do you care to comment on about how much that contributed to the direct business, or not the direct, but the business segment in the quarter?

It goes through the business segment, and here are several aspects that are different by different countries, but in all our contributing countries.

Okay. And then could you talk a little bit now, give you have 130,000 to 135,000 subscribers, a little bit about the characteristics of those customers in terms of the monthly ASP or the churn, or anything now that you've had these customers for a while, that you've observed in their behavior?

We cannot say, we're not going to provide a matrix; it's still another year till we kind of know which programs really work. But we can clearly say that the average pay per month is definitely higher than I expected at this point, and so that's definitely a good sign. And everything is going very well right now with the acquisition of community we expect another development there but as we go and put everything together and try to launch our overall site in the fall we really don't want to say anything till then. But it's going very well, better than I personally expected.

Then talking a little bit about the e-commerce business, how much of the overall business now is actually transacted online versus somebody calling up? What's the actual percentage of business that is e-commerce related?

It's clearly right now; our e-commerce is definitely bigger than the catalog over last year. We don't typically provide specific numbers but --

Did you guys talk about a growth rate, what is that business growing at? I assume if it's eclipsing that of the catalog it must be growing greater than the whole.

Oh definitely. We're looking to see if we have the growth rate number here.

That's fine; I can follow up with you.

It's definitely, that's where things are heading and we definitely try to -- it's something where we want to push. Typically the internet is growing between 20% and 30%, but right now it's actually probably growing ahead of it.

Then talking about the acquisitions a little bit, are you going to rebrand these assets? Are you going to operate them as separate entities? Can you talk a little bit strategically how you're thinking, at least at this point, about these different entities and how you're going to put them together in your community?

There's a lot of different pieces of these companies, but definitely Zaadz and Conscious Enlightenment, those are very strong assets, they have a good team. So we expect to retain everybody on the teams because they do a lot of things that we don't do. Lime is more, there are certain assets we're going to totally integrate in, and we need to still decide how the pieces will work, this acquisition just happened yesterday, so give us a little more time.

Okay. The overall revenue contribution, is it material at all for these businesses, or is this more of a content and asset play at this point?

I think we planned, also we have the acquirement of some magazines through our Conscious Media acquisitions and we plan to dispose of those, so this will be about net zero revenue for next year.

Okay. I'll hop off and let somebody else ask a few questions. Nice quarter, thanks.

Thanks Mark.

Thank you. Our next question comes from Gordon Hodge with Thomas Weisel Partners; you may ask your question.

Yes, good afternoon. Just a question, just a follow up on the acquisition question. So my understanding with Lime is that they have a number of -- they're carried by a number of cable systems and I didn't know, I think they're on digital tiers, I didn't know if you or if they were collecting license fees on a monthly basis, or if they were 100% ad revenue supported, and if so, shouldn't we be assuming some slight revenue there at least? And also, were they losing money? I think they may have been, but that information may be wrong. The other question I have is, I've been hearing just in the channels, that TV time is getting more expensive and I'm just curious if you experienced that in terms of the direct response TV business that you have, and if there was any change in sort of the channel mix on the direct business. Thanks.

Okay, let's try to take it by pieces. So, I will address the acquisition and allow Lynn to address the TV times. Is that okay?

Yes.

So, Lime is - they were carried on digital and satellite at Comcast and EchoStar as a linear television. And actually, they dropped that at the beginning of the year.

Oh, okay.

So, at this point, everything was there; its ad-revenue based. So, obviously the company was - and the reason why they dropped the coverage, what we were looking for there was the number of uniques and they have a radio channel. And there's a broadband TV because all that television and content, they acquired a company called Vista Media before that existed for, I think, eight years on a linear TV channel.

So, there's a lot of content for the programming and they were the only kind of good channel early in our space. So, we picked up all that programming and we plan to kind of expand and make it a base of our online television.

Okay so were there meaningful losses that they were incurring? Or was it - should we not anticipate much dilution there?

We obviously, you know, the company was losing money and we obviously, as we do with the other acquisitions we expect to change that.

Right; okay.

And then, in regards to the television costs, we actually, over the last few weeks, have felt we actually have beat our budget and have been able to leverage our advertising costs extremely well over the last few weeks. So, we certainly aren't seeing the effects of what you're talking about.

So, are you spending more on Direct Response TV now, rather - or, maybe just comment on - you know, I think you commented on e-commerce and catalog.

Specifically on certain brands, like The Firm, we're spending on DRTV. It's not growing as a percent of our business, though.

We don't want to be an infomercial company. Be very careful. For us, infomercial is a way to promote brand. That's why, like The Firm, it's really important to us because that's a brand we want to get to the retailers. And it helps us to do that and what we'd really want from an infomercial that supports itself because we look at it as a free advertising.

We do not want to be an infomercial company.

Yes, that makes perfect sense. That's great. Thanks.

(OPERATOR INSTRUCTIONS)

Okay, if there are no more questions, I'd like to thank everybody for being with us. We're glad that we can report another good quarter and, hopefully, we'll be with you 90 days from now, or whatever the day will be. Thank you very much.