Gaia Inc (GAIA) 2007 Q3 法說會逐字稿

Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. We would like to thank you for joining us for the third quarter 2007 financial results. (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. Thank you, sir. You may begin.

Thank you. Good afternoon, everyone, and welcome to Gaiam's third quarter 2007 earnings conference call. The following constitutes a 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, 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, Jirka Rysavy.

Thank you, John, and welcome everyone to our third quarter call. And I'm very too pleased again. It was another very good quarter. Revenue for the quarter ended September 30, 2007 increased 36% to $70.3 million from $51.8 million in the same period of last year. This strong performance reflects an internal growth rate of 34%.

Gross margin increased 260 basis points to 65.6 from 63 in the third Q of 2006, which was on top of 750 basis point increase from 55.5% in third quarter of 2005. Operating expenses as a percentage of revenue decreased to 59.7% from 61.0%. (Inaudible) of this increased expense is related to our [expanding] of community business.

Net income for the third quarter increased 77% to $2.9 million from $1.7 million, and with the share buy back we did earlier this year, we have doubled EPS for the quarter to $0.12 from $0.06 in the same quarter of 2006. Depreciation and amortization for the quarter was $3.3 million. For the nine months, Gaiam revenue increased 24% to $181.1 million from $146.7 and net income tripled to $4.3 million, or $0.17 a share compared to $1.4 million or $0.06 a share for the nine months in 2006.

A record 34% internal growth for the quarter is pointing to the increasing shift in our seasonal revenue flow. We estimate that approximately $6 million to $8 million of revenue were received early as compared to the last year. So, I think to normalize extent of internal growth, the comps for the third and fourth quarters for this year should be probably viewed together.

According to Nielsen VideoScan, Gaiam U.S. market share and fitness/wellness DVD category increased to 49% year-to-date from 45% in the same nine months in last year and for the third quarter, Gaiam market share increased further to 53%, up from 46% during the third quarter of last year. And we have currently 66 titles in the top 100.

During the third quarter, which is historically the most demanding period for our cash flow, we have generated $4.1 million cash from the operation ,bringing the year-to-date cash from operation to $20.6 million, which is $20 million ahead of $0.6 million generated during the nine months of the last year.

During the third quarter, as we announced previously, we have acquired Zaadz, Lime Media, and majority ownership in Conscious Enlightenment to strengthen our community vision and create the unified source for LOHAS. We are also in later state with several other acquisitions.

We continue to invest in our community and subscription clubs. The number of paid subscribers is increasing at a pace above our expectations. You can see the beta site of our [community navigation] at Gaia.com. It's G-A-I-A.com or at Gaiam.com at the subscription tab. This site will continue to evolve as we integrate our acquisition. We expect this part of the process to be completed by the end-of-the-year conference call. And on that conference call, we also start to provide some performance data for the subscriptions.

We currently expect that for full year of 2007, over 40% increase in our earnings per share as compared to 2006. We also expect that earnings per share growth will increase in 2008 as compared to 2007, and will be closer to 50%, even with our plan to continue investing in our community subscription business.

Gaiam is also entering in a strategic relationship with Care2 a social networking site with 7.5 million members where, among other things, Gaiam will become an exclusive provider of paid subscription services and E-Commerce for Care2 and they will promote our subscription services and a pre-agreed number of newsletters in other places.

Also, as we informed you earlier during the quarter, our Board of Directors authorized a share repurchase program up to 5 million shares of our common stock and also filing of [shell] registration statement for the same amount of shares. As we said, some shareholders of some of these potential acquisitions, they request Gaiam shares as the acquisition consideration,where we obviously prefer to use cash on hand. We intend to file the [shell] shortly. The repurchase program will give us flexibility to deal with all these situation as they appear and we can accommodate it tax-free.

So, now Vilia will give you some details on our numbers and then Lynn will give you the business overview, so Vilia?

Thank you, Jirka. We are pleased to report successful results for the third quarter, including double-digit revenue growth, improved operating leverage, and positive operating cash, even after seasonal outlays for inventory in preparation for the upcoming holiday season. We generated revenue of $70.3 million in the third quarter 2007, an increase of 35.8% from $55.8 million in the third quarter last year.

Revenues produced by the Direct-to-Consumer segment of $40.2 million reflect the strong performance by our E-Commerce and community divisions. Revenues from our Business segment of $30.1 million reflect our success in the international markest, particularly in Japan.

For the third quarter, we experienced solid growth in our overall growth margins, up 260 basis points from the same quarter in 2006. As a percentage of revenue, selling and operating expenses were consistent at 53.9% in the third quarter of 2007, compared to 54% during the quarter ended September 30, 2006.

Our corporate general and administration expenses decreased to 5.8% of revenue for the third quarter of 2007, compared to 7.1% in the same period last year, reflecting improved leverage of our corporate resources across all divisions.

Our improved operations resulted in a significant increase to consolidated net income for the third quarter. Net income increased 76.5% to $2.9 million, compared to $1.7 million in the same period last year. Our earnings per share doubled to $0.12 per share for the quarter from $0.06 per share in the third quarter 2006. The decrease in other income reflects less interest earned our lower average cash balances as a result of our stock repurchase in the first quarter of 2007 and acquisitions.

Year-to-date revenues of $181.1 million were up 23.5% from $146.7 million for the same nine-month period in 2006. Overall gross margin remained solid at over 64%. The improved performance that we have experienced during the first three quarters of 2007 have contributed to a net income for the year of $4.3 million, compared to $1.4 million for the same nine-month period in 2006.

Earnings per share for the first nine months of the year were $0.17 per share, compared to $0.06 per share for the same nine months in 2006.

We generated $4.1 million of cash from operations in the third quarter, compared to $3.6 million in the third quarter of 2006. Strong international revenue performance contributed to the quarter-over-quarter improvement in operating cash flow. Our cash balance of $81.6 million remained strong at the end of the third quarter, even after the repurchase of 2.5 million shares of Gaiam stock for $32.9 million and $10.8 million paid year-to-date for acquisitions.

We ended the quarter with 24.8 million shares of common stock outstanding, $192.7 million in shareholders' equity, and no debt. Our days' sales outstanding for the third quarter of 2007 improved to 13.8 days, compared to 26.1 days in the same period in 2006, reflecting the growth in the Direct-to-Consumer segment and increased international sales.

Inventory turns for the third quarter of 2007 increased to 3.7 times from 3.3 times in the prior year quarter. On-and inventory reflects incremental purchases for the launch of several new soft good programs in our Direct segment for holiday, as well as a safety stock position taken during the quarter to protect against a potential port strike in India, where many of our soft good suppliers are located.

Depreciation and amortization was $3.3 million and our capital expenditures totaled $1.2 million for the third quarter of 2007. During the quarter, we continued many ongoing capital improvement projects and initiated several new ones. These ongoing projects include the upgrade of our web platform to take advantage of new customer navigation technology and upgrade of our Direct-to-Consumer order management system and hardware purchases to support our new online community infrastructure. As a company, we continue to invest our infrastructure as we feel it's a vital step towards ensuring that we build a solid foundation for future growth.

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

Thanks, Vilia. I will now review our third quarter results by operating segment and outline our strategy for the remainder of 2007 and 2008. Our third quarter was highlighted by a 34% overall internal growth rate, a 77% increase in net income quarter-over-quarter, and the successful execution of our acquisition growth strategy that is further positioning Gaiam as the leader in LOHAS.

The Business segment, which primarily produces and distributes media and other proprietary media-based products to retailers, generated growth $10.9 million, or 57%, on revenues of $30.1 million for the third quarter of 2007, compared to $19.2 million for the same period in the prior year. The increase in revenues was bolstered by continued success of our direct response programs in international markets, particularly in Japan, as well as solid growth in certain key accounts, including Target.

We continue to expand our media and media-based product distribution and are currently in approximately 70,000 retail doors in the U.S., up from 65,000 in the third quarter of 2006. Our broad distribution of media in the U.S. retail market is the largest penetration of any visual media company and continues to be a key factor in our growth strategy.

Our expertise on authentic media content continues to anchor our position in the market. At the end of September, according to Nielsen VideoScan, Gaiam ranked fifth in overall U.S. non-theatrical DVD sales, ahead of 20th Century Fox, Universal, and Sony. Our market share for the fitness/wellness category increased to 49% at the end of September, compared to 45% for the same nine-month period in 2006. For the quarter which ended September 30, 2007, our market share increased to 53%,compared to 46% for the third quarter of '06. At the end of September, we had six of the top ten best selling fitness DVDs year-to-date and 66 of the top 100 titles. We lead the fitness/wellness category with over four times greater market share than our nearest competitor.

As a testament to our commitment to authentic high quality programming and production, we were awarded an additional four Aegis awards, bringing the total overall Aegis awards to 66 to complement our 71 Telly awards. Our stores-in-store concept remains a strong part of our strategy in retail by showcasing Gaiam products in a branded lifestyle presentation, including fixtures and signage.

Since 2000, we have grown this concept to approximately 6,500 doors, up from 5,500 in third quarter of 2006, and expect to further expand this concept as we launch Wellness. After the launch of Wellness in the first half of 2008, we will have three complete and distinct stores-in-store concepts to offer retailers, including Gaiam Fitness, Gaiam Wellness, and the Firm.

Additionally, with the upcoming launch of Wellness, we intend to broaden our reach within the door we already occupy and secure space in non-traditional retail. We expect our last year's acquisition of Newmark Media, a natural grocery and pharmacy store racker, will enhance our ability to leverage wellness in channels that do not currently carry our product. Our upcoming Wellness initiative has received a very positive response from many of our customers. We believe that the best opportunity for early success with Wellness lies within the natural grocery, pharmacy, and book channels, each of which reached the target customer demographic best suited to this initiative.

As the concept of healthy living and wellness takes route in mainstream media, many of our retail partners in other channels are also expressing strong interest in this genre. Gaiam is well positioned to be the first to market with a comprehensive store-within-store wellness concept, which will offer customers a complete shopping experience. This concept will include a series of media productions co-branded with the Mayo Clinic and specifically targeted to health and wellness topics such as heart health, high blood pressure, diabetes and insomnia.

Our partnership with the Mayo Clinic will also provide other marketing opportunities, such as our plans to market the line to their 700,000 newsletter subscribers. As with our Gaiam and the Firm branded store- within-store concepts, the Wellness initiative will include both media and media-based products capable of occupying a branded four-foot section to create a well-rounded buying experience.

In anticipation of the shift away from the fitness category in the Target media department, we began to explore other opportunities by working closely with Target. This partnership has enabled us to secure an opportunity to category manage a four-foot fitness media end cap in the sporting goods department for a 13-week test beginning January 1 for fitness season. We're extremely encouraged by this initiative, because we believe the fitness media category can be closely tied to the other products in the sporting goods department to enhance the store-within-store concept and achieve overall higher performance.

It's a great opportunity to employ a category management model to one of our key accounts. The test will feature both Gaiam and competitive fitness programs, category managed and fulfilled exclusively through Gaiam. Our partnership with Target on this new opportunity is a direct result of Gaiam's recognition as the industry leader in fitness media and mind/body health.

We continue to expand our distribution of our children's programs, as we have secured seasonal placement of four of our children's titles in Walgreen's, another 14 media titles, including children's programs and fitness for new moms, at Toys 'R Us, and placement in the Kmart media department for the first quarter. Our All About series and animated classic titles has sold over $1 million copies in the past three years, and we're looking to expand these franchises further to continue to grow our share of the children's non-theatrical market.

Our international business continued to thrive in the quarter, again driven by the success of our Direct Response products in the Japanese markets. We expect the impact of Direct Response sales in Japan to diminish moving forward as our market penetration matures. As we move towards 2008, we're focused on building the foundation for sustainable revenue based internationally within key markets. We have identified partners in many of these markets and are in the process of expanding our international infrastructure.

Our Direct-to-Consumer business segment, which includes results from direct mail, internet sales, subscriptions, and our Direct Response campaign, is seeing continued success in particular with web marketing, the latest release of The FIRM and direct response, our solar division, as well as our eco-travel division.

For the quarter, the Direct Segment generated revenue growth of 23.3% on revenue of $40.2 million, compared to $32.6 million in the third quarter of 2006. Our latest launch of The FIRM infomercial program has nearly outperformed the most successful FIRM program to date. We're ready to launch the latest FIRM line into retail channels in time for the holiday season and anticipate it will make an attractive gift purchase.

Our E-Commerce business continues to grow at an impressive pace, as revenue from the web grew over 40% from the same quarter of 2006. Web marketing remained a primary growth driver for us in the third quarter. We're continuing to invest in this business as we believe more opportunities exist for optimizing customer shopping and affiliate revenue streams. Our recent strategic partnership with Care2 is an example of the opportunities we see in this channel.

Within Direct Operation, average order size remained strong at $103 for catalogue and $93 for E-commerce. These days green living is getting a lot of exposure in the media. Gaiam has historically been recognized as one of the authentic leaders in this industry. We continue to implement corporate initiatives that conform to our mission and belief.

As noted in previous releases, we were the first to offer the Go Zero program as a part of our order fulfillment process. We're currently transitioning our retail packaging to innovative, eco-conscious packaging. We're also looking to increase the post-consumer recycled paper content for our direct mail marketing and we're working with the Forest Stewardship Council to ensure that the non-recycled paper products we use for the catalogue business has their stamp of approval.

We're seeing an emerging force in the consumer market for products and lifestyle choices that are designed to reduce the carbon footprint. As you are aware, Al Gore recently celebrated a Nobel prize for his involvement with An Inconvenient Truth. John Schaeffer, our president of our Real Goods division was recently awarded the 2007 Green Power Pioneer Award from the Center for Resource Solutions for helping bring renewable energy products to a much wider mainstream market. Real Goods sold the first PV solar panel in the U.S. at retail in 1978. For the past 30 years, John has continued to sell solar and renewable energy supplies from the now Gaiam Real Goods.

As we continue to capitalize on this new green movement, we'll be expanding our Green Living product selection in our Direct Channel, initiating a retail line of Green Living products, launching a new subscription model called Earth Cinema Circle, and looking for additional acquisitions and expansion for our Real Goods solar business.

Our recent acquisitions of Zaadz and Conscious Enlightenment are helping to lay the foundation for a network of community websites based on subscribers whose values closely follow the Gaiam brand and mission. We are in beta testing on our new gaia.com online community. As we head into the holiday and fitness seasons, we continue to be very excited about the opportunities that lay ahead. With the widest DVD distribution in the U.S. of any visual media company, a growing international market, the launch of wellness and new channels of distribution, our solar and green living expansion, and our strong base of direct buyers for our new subscription model, we look forward to an exciting and opportunistic 2008.

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

(OPERATOR INSTRUCTIONS.) The first question today comes from Gordon Hodge with Thomas Weisel Partners. Thank you, sir. Your line is open.

Yes, good afternoon. Just couple of questions. I know you had mentioned you were going to get some metrics on the subscription business later, I guess next quarter, but I was curious if you could just give us the number of subscribers that you have, which I think you've given in the past. And then also it sounds like you have some orders for The FIRM for holiday. I'm just curious how many doors you expect that to go into and were those orders, fourth quarter orders, and wouldn't that suggest that business is going to be pretty strong in the fourth quarter, as well? Thanks.

Gordon, this is Lynn. I'll talk a little bit about The FIRM. First of all, there's two different programs that go on with The FIRM. One is our store-within-store concept, which is currently in about a thousand doors. And the other is individual product, more as an as-seen-on-TV type product that we launch periodically out to retail. That we will see in fourth quarter, but the stores-in-store we've been putting those thousand doors in throughout the year, primarily in third quarter in Dick's.

Got it.

And for the subscribers, we don't do it quarterly, we say we will not do it, but it does increasing accelerating pace.

Terrific. Thanks.

The next question comes from Mark Argento with Craig-Hallum Capital. Thank you, your line is open.

Hi, Lynn. Hi, Jirka. Question for you just going off of the -- focusing on the subscriber model a little bit more. Assuming that you're going to give us an update next quarter in terms of the metrics, I would assume that means that you're actively marketing the products? I know they're up on your new gaia.com site, but could you talk a little bit about how you're going to reach out to your customer base? Is it going to be predominantly e-commerce, e-mail, you know, what different types of ways are you going to reach out to be able to try to draw people into these subscriptions?

Right now we still pretty limit this to up-sell to our existing customers. And they will pretty much continue to probably, you know, mid-first quarter, whenever we launch the site, which will be to kind of -- we take it out of beta, incorporate all these other acquisitions, and so the site will get more robust. At that time we will start to generally market it. So, I think in the next call -- we wouldn't really do any marketing to speak of yet except internal.

So, are you going -- have you actually gone into your kind of big flat file of customers that you've built up over the years, or are you still just kind of -- more active customer kind of touch right now? You're not really going in and mining the database?

No. We're pretty much up-selling it based on customer [past histories] to different clubs, to different people. We just recently launched new club called Earth Cinema Circle, which is another DVD kind of environmental and green film club. And, but it's still pretty much mostly up-sell to our base. I think our overall cost for acquiring new customer, or converting them, is still below $5.

Okay. And then in terms of the Mayo launch, will there be -- is there going to be a soft launch this year yet, or is it going to be basically beginning Q1, Q2?

Well, we're doing it in two phases, Mark. First, we'll launch the ten Mayo DVDs, which have a street date of January 1, kind of a new year/new you launch, but we'll launch the full four-foot wellness section late March/early April, so it'll be first/second quarter kind of launch on that.

And what type of commitment did you say you had in terms of the store-in-a-store?

I can only tell you the channels that are very interested in it are the book channel, natural grocery, and pharmacy.

Okay. And then, Jirka, a little bit about the -- kind of the timetable in terms of reinvestment. Where are you, you know, if you had to say? Are you 50% through kind of the build-out of these new businesses? I know there's continued build-out, but where are we in terms of the reinvestment cycle, because clearly you got big gross margin expansion, you know, you're continuing to spend to build out some of these other programs. Could you just kind of at a high level give us a little bit idea of your thoughts there?

Yes, I mean, it's kind of going pretty much at the plan. We spent a little bit more because our results were a little more, so we took liberty to spend a little more. And it will probably continue through mid next year as this goes. However, when we kind of launch the sites and have the test done, it will probably start to slow down, but it'll continue for at least the first part of '08. And, but we've kind of (inaudible). The result's getting very, very encouraging, so we want to make sure that we don't miss -- leave anything on the table.

Okay. And then last question. You mentioned in your prepared remarks that you're potentially farther down the path on the acquisition front. What type of companies are you looking at? More the social networking/media-type companies or are you looking at content companies or any hints you want to give us there?

Yes, yes, yes.

All right. Fair enough. I thought I'd try. So, thanks.

I meant like all of them.

Okay.

It's pretty much what you said. It's kind of (inaudible).

I should know better. Thank you.

Thanks.

The next question comes from Lloyd Walmsley with Thomas Weisel Partners. Thank you. Your line's open.

Yes, thank you. I was wondering if you could just tell us a little bit more about the Care2 social networking deal, if that's exclusive. And then, just taking a step back, if you could give us your broader view, you know, two years out, how you see that business developing? Is it more an effort to up-sell into the paid subscriptions versus an advertising model and how you see that? That would be helpful.

All right. So, the Care2 deal is not closed yet, so I need to limit my comments on it, but effectively, rom our point, what we really want from the deal is that they would not sell any paid subscription [and would] promote exclusively ours, and we become the exclusive e-commerce partner. That means we provide the e-commerce and paying the fees. And they generate most of their revenue from selling leads to non-profits and we agree, obviously, not to do that. We don't do that in our regular business. So, that's kind of the basics. Our interest, as I said, is mostly (inaudible) obviously have a big future promotion for our subscription business. What is the other question?

Subscription versus advertising.

Oh, subscription is definitely our core model. We acquire a couple companies with some advertising on it and we would plan to do the advertising. However, if you subscribe, you have a choice to undo all the ads, so if you subscribe, you can basically disallow all the ads, what you see even on the free side. But, it's how we intend to do that. But nothing will really be done with that til first quarter. I expect that subscription revenues will well outperform the advertising as we go forward.

Okay. Great. Thank you.

Excuse me. At this time, I show no other questions.

Thank you very much. Thank you, everybody for being with us and hopefully we -- you'll be with us on end of the next quarter and hopefully we have good news, as well. So, thank you very much.

At this time, that concludes today's conference call. We would like to thank you for your participation. You may disconnect at this time.