Gaia Inc (GAIA) 2007 Q4 法說會逐字稿

Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode mode. (OPERATOR INSTRUCTIONS). Today's conference is being recorded, if you have any objections you may disconnect now. I'd like to turn the meeting over to Mr. John Mills. Sir, you may begin.

Thank you. Good evening, everyone, and welcome to Gaiam's fourth quarter and full year 2007 earnings conference call. The following constitutes the Safe Harbor statement of 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, 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 would like to turn the call over to the Company's Chairman and CEO, Mr. Jirka Rysavy. Go ahead Jirka.

Thank you, John. Welcome everyone to our fiscal year 2007 conference call. And I am very pleased to say it was another very good year and a quarter. Revenue for the year, which ended December 31, 2007 increased 20% to 263 million from 219 million in 2006. Internal growth rate was 17.5%.

Our results improved in all aspects, gross margin increased, gross expense declined as a percentage of revenue decreased in spite of increased expenses related to our community. Operating income increased 85% to 10.5 million for about 5.6 million a year ago. Net income increased 51% to 8.5 million from 5.6 million in 2006. EPS increased 48% to $0.34 from $0.23 during last year and depreciation and amortization for 2007 was 12.3 million. For the fourth quarter revenue increased 12.4% to 81.8 million from 72.8 million in the same quarter of last year. This portion of revenue received by the end of the third quarter as we announced in the last call our internal growth rate for the second half was 19.7%. Earnings per share for the quarter was $0.17 and depreciation and amortization 3.7 million.

During 2007, we generated 13.4 million in cash from operations compared to cash use of 0.5 million during the last year. And after 2.5 million shares we repurchased in a year, we ended the year with 66 million in cash and no debt. According to Nielsen's VideoScan in 2007, our U.S. market share in DVD in the fitness/wellness category increased to 49.4% from 44.7% of last year.

In 2007, we strengthened on our online community by acquiring Zaadz, LIME Media, majority ownership of Conscious Enlightenment and also become an exclusive provider of paid subscription services and e-commerce for Care2, which is a social networking site with about 7.5 million members. Subsequent to the year-end, we also purchased remaining ownership in Conscious Enlightenment. Our pretax loss from community during the fourth quarter was approximately 1.7 million or about $0.04 per share. On LOHAS (inaudible - highly accented) Community you can go directly to [Gaia.com] or you can go to Gaiam.com and go in the bottom and click in the subscription tab.

As of March 1, we had over 200,000 subscribers who contributed over 2 million in subscription revenues during the month of February. Subscriptions are between 3 and $21 per month. Subsequent to year-end we also filed Form S-1 for an (inaudible - highly accented) IPO of our sole subsidiary of Real Good Solar, divested all of our magazines businesses which we acquired with purchase and Conscious Media and initiated a restructure of our UK subsidiary. The rest of our International market including Canada and Japan were converted to licensing agreements. Licenses are between 10 and 25% of a product net revenues. We also acquired SPRI a market of professional fitness products. Including these acquisition, divestitures, and reporting International licensing, we expect our revenues for 2008 to be approximately 300 million. Now Vilia we will give you more on the numbers and then let Lynn give you business overview and strategy for the year next year.

Thank you, Jirka. As Jirka mentioned we are extremely pleased with our financial results for 2007.

We achieved double-digit revenue growth, improved our operating margins and generated strong cash flow from operations. For the full year 2007, our revenue grew by 43.5 million to 262. 9 million an increase of 19.8% from 219.5 million in 2006. Revenues generated by our Direct-to-Consumer segment increased 25.8 million or 20.5% to 151.4 million during 2007 from 125.7 million during 2006. This increase reflects the continued success of our direct marketing programs and from businesses acquired over the last year. Revenues from our business segment increased 17.7 million or 18.9% to 111.5 million during 2007 from 93.8 million during 2006 reflecting our success in International markets. Overall gross margin remained strong at 64% of revenue, solid margins coupled with revenue growth contributed to 28.1 million increase in gross margin dollars from 140.3 million in 2006 to 168.4 million in 2007. As a percentage of revenue, selling and operating expenses for the year improved to 53.9% in 2007 from 54.5% in 2006.

Our corporate, general, and administrative expenses as a percentage of revenue improved to 6.2% in 2007 from 6.8% in 2006 reflecting increased leveraging on a higher revenue base. Operating income for 2007 increased 85.3% to 10.5 million compared to 5.6 million in 2006. Operating margins for 2007 as a percentage of revenue expanded 150 basis points to 4% compared to 2.5% in 2006. Net income for 2007 increased 51% to 8.5 million or $0.34 per share from 5.6 million or $0.23 approximate per share in 2006.

Turning to the fourth quarter 2007, our revenue increased 12.4% on top of 35.8% revenue growth in the third quarter of 2007 bringing the growth for the second half of the year to 22.1%. Fourth quarter revenue of 81.8 million increased from 72.8 million for the same period last year. Revenues generated by our Direct-to-Consumer segment in the fourth quarter totaled 46.8 million up from 40 million in 2006, reflecting strong performance from our direct marketing programs and increased revenues from the investment in our solar operations. Subsequent to year-end we filed a Form S-1 for the IPO of our Solar subsidiary which is part of our Direct-to-Consumer segment. Revenues from our business segment increased 6.7% on top of a 57% revenue growth in the third quarter of 2007 bringing the revenue growth for the second half of the year for the business segment to 25.2%. Fourth quarter revenue for the business segment increased to 35 million from 32.8 million for the same period last year.

For the fourth quarter our overall gross margin as a percent of revenue was 62.5% compared to 65.5 for the same period last year. The decrease in gross margin percentage reflects the change in sales mix between the third and fourth quarters with more of our high margin business shipping in the third quarter and the fourth quarter being more heavily weighted toward lower margin division such as Solar and Eco-Travel. As a percentage of revenue, selling and operating expenses improved 120 basis points to 49.4% in the fourth quarter of 2007 from 50.6% during the same quarter of 2006. Our corporate, general, and administration expenses improved 110 basis points to 5.1% of revenue for the fourth quarter of 2007 from 6.2% in the same period last year, reflecting improved leveraging of our corporate resources. Our earnings per share increased to $0.17 per share for the quarter from $0.16 per share in the fourth quarter of 2006.

For the year ended December 31, 2007, we generated 13.4 million of cash from operations which compared to a use of cash of $0.5 million in 2006. This increase is attributable to our strong net income of 8.5 million and non-cash expenses of 13 million, partially offset by increased accounts receivable and inventory driven by higher revenue base. As of December 31, 2007, our balance sheet remained healthy. We ended the year with 66.3 million in cash and cash equivalents even after repurchase of 2.5 million shares of our stock for 32.9 million and business acquisitions. We ended the year with approximately 25 million shares of common stock outstanding, 200 million in shareholders equity and no debt. Depreciation and amortization totaled 12.3 million for 2007 included in the 12.3 million is amortization of 8.7 million for our Media Library. Our capital expenditures totaled 9.5 million for 2007 reflecting 6.3 million of new Media Productions including our new Wellness Titles. Our day sales outstanding for the fourth quarter of 2007 improved to 24 days from 25 days in the same period in 2006. Inventory turns for the fourth quarter of 2007 increased to 4.3 times for 4.2 times in the prior year quarter. Now I would like to turn the call over to Lynn for the business overview. Lynn.

Thanks, Vilia. We had another great year in '07 achieving a 17.5% internal growth and an 85% increase in operating income. Our revenues increased by 20% while we continued to execute on the strategies we laid out during the year. We ended the year with a 48% increase in EPS.

As discussed in our last March 2007 conference call last year, we focused during the year on several key initiatives. Establishing a new line look in branding for Gaiam to allow international expansion, building the firm as a mass market fitness brand, increasing Gaiam market share and U.S. DVD sales, introducing wellness as a concept in media, expanding our position as a category manager in LOHAS through our acquisition of the balance of new Mart Media for Racking, moving our direct buyers to subscribers. Building an online LOHAS Community and pursuing strategic acquisitions for community, distribution channels and content.

I would now like to review our accomplishments in these areas by operating segment and begin to outline our strategy for 2008. 2007 was another terrific year for the business segment. Year-over-year sales increased 19% to 111 million up from 94 million in 2006. Growth in this segment was driven by the success of our International business as well as the expansion of Media and Product categories in Domestic Trade. As of the end of 2007, our Media Titles may be found in approximately 70,000 doors in the U.S. up from 68,000 at the end of '06. Our industry expertise and commitment to high quality media content continued to translate into improved market share. At the end of December, according to go Nielsen's VideoScan, Gaiam ranked sixth in overall U.S. non-theatrical DVD sales, ahead of 20th Century Fox, Universal, and Sony. Our year-to-date market share for the Fitness/Wellness category increased to 49% at the end of December compared to 45% in '06. For the quarter, ended December 31, 2007, our market share increased to 50% compared to 45% for the fourth quarter of '06.

Since we are now close to 50% market share, we will sacrifice some of our share in Fitness in order to take on a category management roll bringing competitive product into the mix to establish the most complete fitness assortment in the business. We tested this in sporting goods department at Target during January with great results and are working with them on the business model to carry this forward. We believe by taking on this category management roll we can improve revenues and profitability. We are also expanding our library of Titles in Wellness and Green Living to position Gaiam as the industry category manager in these areas as well.

Our Store-within-Store concept remains a strong part of our strategy in retail by show casing Gaiam products in a branded life style presentation including custom fixtures designed and produced by Gaiam. Since implementation in the year 2000, we have grown this concept to approximately 7,000 doors up from 6,000 at the end of 2006.

During the fourth quarter we launched the first phase of an expanded partnership with Amazon.com aimed at the developing the first online Store-within-Store concept. This concept was largely designed and influenced by Gaiam to emphasis our Media eccentric merchandising strategy. We are excited about this endeavor and it will be the first online Store-within-Store to offer shoppers a wellness and fitness experience using authentic content such as quarterly get-to-known the training video clips, Gaiam eco-initiative consumer education videos and sample clips of Gaiam media that can be purchased as the consumer browse the online store.. Our acquired in-house studio and post production facility allow this customized approach to online Store-within-Store as well as giving us the ability to increase our new releases from 45 titles in 2006 to 100 titles in 2007.

Last year we focused our business segment strategy on extended the strength of our media assortment in the Firm and Wellness lines. We launched the Firm Line with a new look in '07 and have seen very positive results. In Q4 we launched a full roll out of the Firm and a Store-within-Store concept to all Dick stores. The grocery channel appears to be an ideal venue for the Firm Line as over 160 stores took first-time deliveries of the Firm in Q4. All these initiatives has contributed to our success and growing the Firm Store-within-Store presentation to approximately 1500 doors up from 1000 at the end of 2006.

During Q4 we finalized plans for a soft launch of the Wellness program in early 2008. This soft launch included new Wellness media products, co-branded with our partners at the Mayo Clinic. The bookstore channel launched the media only titles in early January and will be looking to launch the full Wellness assortment as it becomes available in second and third quarter of '08. Through our new Mark Racking division we have taken orders for over 330 Wellness displays from major grocery chains such as Whole Foods, Safeway, Sunflower Markets, and Wagmans.

Based on the success of the Firm and Gaiam Fitness Store-within-Store presentations, we believe there's an opportunity to expand our leadership roll in LOHAS by offering Store-within-Store concepts for Wellness, utilizing our Media with the Mayo Clinic as a base for the offering and adding a Store-within-Store concept on Green Living that includes new Media and Kits hosted by Ed Begley, Jr. We also licensed the "Living with Ed" series. With these two new categories for Store-within-Store and the success of our Fitness category management strategy, coupled with our Racking abilities, we believe we can leverage our Media assets and brand to become the category manager for all LOHAS offerings in the future.

Our relationship with Target continues the strong trend we established over the past several years. As I mentioned earlier we began a 13-week test in the Sporting Goods Department of Target in December, to category manage a 4-foot fitness media end cap through our mart racking division. Based on the success of that venture, we are looking to expand our roll as category manager in other venues.

Our international business performed well in 2007 driven by the success of our direct response products primarily in a Japanese market. During '07 we invested in international operating structure and our marketing and branding for Gaiam and are focused on sustainable relationships in key global markets for 2008.

In '07 we signed licensing agreements with strategic partners in Mexico, Belgium, Luxemburg, and Italy for our Media products. With we believe that the Gaiam brand translates very well internationally and look forward to cultivating more opportunities in 2008. We are continuing to modify our international strategy to move from a distribution strategy to a licensing strategy sacrificing top line for bottom line profitability. We believe this a very positive move and we have executed the strategy in Canada and Japan and in the process of evaluating the balance of our distribution agreements and partnerships.

To grow our distribution channels we recently acquired SPRI products, the leading manufacturing and distributor of are rubberized resistance exercise products for the Professional Health and Fitness industry. SPRI is one of the original companies in the professional market with over 20 years of experience and is well established among health clubs and professional trainers. The company currently offers more than 250 different exercise products ranging from the highest quality resistance strength training equipment to contemporary and cutting edge fitness solutions including educational materials, instructional manuals and videos. SPRI is recognized world wide within the Health and Fitness market place for exceptional product quality performance and innovation. This acquisition offers a variety of synergies as SPRI's expertise and marketing in the professional Fitness World including personal trainers and health clubs is a strong compliment to Gaiam consumer oriented business and a tremendous cross selling opportunity for both companies. We plan to leverage Gaiam strong back-end functions and sourcing ability to add bottom line profitability to the organization.

Sales from our direct-to-consumer which includes results from direct mail, internet sales, community subscriptions and our direct response campaign increased over 20% to 151 million compared to 126 million in 2006. This growth was attributable to the continued success of our web marketing, the growth in our membership base, the latest release of the Firm and Direct Response, and the growth in our Solar division.

During 2007, we identified a major opportunity for our Solar Energy Company, Real Goods to expand in select markets. We determined the best approach for this expansion is as a stand alone company, by enhancing the Real Goods brand presence outside of the Gaiam Corporate name, investing in a stand alone web presence and completing the acquisition of a California based solar company in late Q4, pro forma revenue for 2007 for the division was over [30] million. February 6 of 2008, we filed a Form S-1 with SEC for IPO of Real Goods Solar Inc.. 2007 we made significant progress towards our goal investing in our community to create the premier online network experience for our core consumer.

In 2007 acquisition of LIME, Conscious Enlightenment and Zaadz were designed to become a base of Gaia.com and to form the foundation of the leading online community network of LOHAS consumers. As Jirka discussed we grew our membership base to over 200,000 members that contributed approximately 2 million in revenue in February. E-Commerce business continues to grow at an impressive pace as revenue from the web in 2007 grew over 21% compared to 2006.

We completed a major upgrade in web technology during the first quarter which will enhance the online buying experience for our customers. This new web platform will allow us to customize the buying experience to our customers interest and needs. We'll also improve our ability to present the shopper with buying suggestions specifically tailored to each customers. Average order size for our e-commerce business was strong at $95 compared to $86 for 2006. Revenues from affiliate programs, search engine optimization and e-mail campaigns continue to drive the overall growth in the web business for 2007.

During Q4 we launched a very successful test program for our Fair Trade initiative in Direct which is now slated for a full launch to Trade in early 2009. We are focused in coming year on continued growth in these areas as well as cost savings initiatives to lower overall catalog cost in future quarters. Recent shifts and buying pattern in media coverage in North America as well as around the world are an indicator that the world is more aware than ever of the series issues of health, wellness and sustainability that the U.S. is facing in the coming years. Gaiam is recognized as one of the authentic leaders in LOHAS industry and we will continue to implement corporate and strategic initiatives that conform to our mission and values.

Our strategies for 2008 include increasing revenues from our Community Memberships, expanding our Wellness Store-within-Store, launching Green Living and Fair Trade into retail stores, taking on the roll of Category Manager and Fitness, expanding our brand through international licensing, creating the Premier LOHAS Internet presence, capitalizing on our Solar division and pursuing strategic acquisitions. On the operations side we will look to integrate our acquisitions quickly, improve our operating margin through a centralized operating model and decrease our operating cost in direct removing more sales to online versus catalog. We are committed to continuing to deliver strong EPS growth in the year ahead. To this end we look forward to becoming the globally recognize brand in the LOHAS space. Now I'd like to open up the call for questions. Operator?

(OPERATOR INSTRUCTIONS). Our first question is from Mark Argento with Craig-Hallum Capital. Your line is open.

Yes. Hi. Could you comment at all in terms of we are occuring a slowing economy. Can you comment at all about what you have seen, if any, in terms of buying trends both at the retail product set and also the direct-to-consumer products?

Well overall, obviously,as you can see very much impact on us in the quarter. We actually, went out as best performer in Target. Target overall was down. I will let Lynn talk about it.

Mark, we are continuing to see strong sell through at the retail level, however certainly we as everyone else are reading the publications and watching what's happening at the consumer base but I can tell you sell through at retail has not slowed down for us.

In term of your new initiative with Target you mentioned that in the Category Manager role you might give up share but you think you can grow revenues overall. Does that, are you going to get more square feet at Target or explain a little more clarity,if possible, what, how we should think through that relationship?

Obviously, yes, the plan is to have more square footage at Target as the Category Manager. We tested end cap, a 4-foot end cap of Fitness Media within the Sporting Goods section. As you know, Target Media department discontinued Fitness in third quarter of this year. It was moved with us as Category Manager to Sporting Goods section. We ended up with four additional feet in a 13-week test. The test right now is look to go be successful so we are working with Target on how that would go forward after the 13-week test.

As a Category Manager then are you responsible you end up picking the way the product sits on the shelves or who's representing there?

That's correct.

Us, a lot the stores we were only fitness there before, we actually bring competitors in our space. That's why we think we will (inaudible - highly accented) by increasing our revenues overall because depends how we charge, what we receive, and what's the story but it is focused to increase revenue and profitability and it will be long-term hard, we keep growing this market share forever. We cannot keep growing it farther right now it is important really to expand our presence increased profitability so we take this step to bring competitors to our space. We have 70,000 doors and most have half of that so really holding leverage here which we intend to use.

Then quickly just shifting over to community, you provided a number on the call, about the loss generated from the community of $1.7 million. Was that for the quarter or for the last year? Could you quantify that and explain that number a little bit.

That was just for the quarter. We bought three companies in third Q, virtually no revenues but 90 people about, as well as (inaudible) our product. So it is all the build out on so that was absorbed in the fourth quarter just because people asked how much roughly it is we always say there's a cost to the community so just tri to provide color what it is. Obviously that's improving right now because as we start to get revenues, we mentioned we have right now, 200 members with a little over 2 million for February. So we just try to provide more details. That's why we because-- we don't intend to provide the numbers in every quarter because we had so many question about it.

Sure. Then in terms of the 200,000, is that comparable to the 135,000 number you provided at-- at the end of June last year?

We look at it different, we get some subscription but yes this is effectively, we try the get away from, measuring because some of the clubs-- like right now recently environmental Club Circle. Earth Cinema Circle and it is bimonthly club. So it is hard to say, some pay previous month, we cannot intend to do overall subscribers to revenues because some of the clubs are monthly and some of it will be weekly and some of it will be bimonthly. So that's why we prefer to do this way.

Lastly, in terms of I know you have had an offering out there fine tuning the site. When you to go out and start marketing and spend marketing dollars to go after subscribers proactively go after subscribers. Right now you have it out there and beta testing. When you to go to alpha.

It's not actually beta testing anymore but we still doing a lot of changes, (inaudible - highly accented) so we will probably start to market it when all the consumer pick up for the fall.

Great. Thank you.

Our next question from Lloyd Walmsley with Thomas Weisel Partners. Your line is open sir.

Good afternoon. I was wondering if you could just give us a little bit of color on how much of the fourth quarter and 2008 guidance is from your acquisitions and particularly in the Solar Space and then if you could maybe quantify what the impact of the switch to a licensing model and some of your foreign territories, what either what revenue could have been where your guidance would have been in '08 had those been booked on the old basis?

That's exactly the reason why we provided the revenue guidance which we particularly don't do because it is complex. We-- maybe some of these acquisition which we we can give a little more and more detail but they are relatively are all small. We also won't keep all the pieces of them. And we can divest some, there's obviously a big spend on the licensing work, typical license, if you sale a product which like we used to do in Canada, you sale product you get revenues let's say $15 dollar in U.S. dollars roughly for DVD.

In licensing agreement, it would be somewhere, depends the country between 20 and 25% on those revenues, what we actually we book through the revenue line. Obviously it is pretty much all gross profit. But there is several changes what's going through I think converted last week counted in January.

Fourth quarter.

Fourth quarter, so we always reported that as the product revenues. But to go to detail to say how much it was, I think we will have a heart attack. Okay. To do that. But we run through kind of look alt what's actually going to be and how we saw the activations and that's why we pick about is a 300 million revenue guidance.

So you can't put parameters around how much of that 300 million might be from international licensing just so we could get a sense of what it would have been apples to apples basis?

We can probably try to figure out but we don't have it right now.

Yes. Okay. Then you mentioned sort of expanding Wellness into potentially Green Living titles, if I understood you correctly in your prepared remarks and you mentioned potentially looking to expand as a Category Manager to other categories, would that be associated with Green Living and if you could just give us a little more color that would be great.

That's a little misunderstanding at Target. We our looking to be a Category Manager for the different classifications of business and building out our assortments with that in mind.

And--

Not just as Target but to own the Green Living space and Media and Products as well as the Wellness space.

Right and if I understand correctly the Green Living would be a new category in terms of Media.

Yes.

Is that something you are working on now? Yes and we plan to launch in late 2008, we will be showing it initially at the Natural Product Show this week and Ed Begley, Jr. is, already agreed to be our host for those titles. Wow. That's great. Thank you.

Okay.

I now would like to turn the call back to Mr. Jirka Rysavy, sir you may continue.

Okay. There's no more questions. I'd like thank everybody and hopefully give you another year as good as we just had and we are really happy with what all happened and thank you very much. Thank you everyone for participating in today's conference call.

You may disconnect now at this time.