Gaia Inc (GAIA) 2008 Q1 法說會逐字稿

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

Thank you. Good afternoon, everyone, and welcome to Gaiam's first quarter 2008 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'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, and I'm very pleased to say again it was another good quarter. Revenue for the first quarter ended March 31st this year increased 11.5% from $65 million to $65.2 million from $58.5 million in the same period of '07. Gross margin was 62.9% compared to 64.1% of revenue in the same period of last year. The change in gross margin reflects the Company investment in lower-margin solar business. Excluding solar our gross margin actually improved to 66.8%.

Operating expenses as a percentage of revenue decreased 250 basis points to 58.8% from 61.3%. Selling and operating expenses decreased 120 basis points and G&A expenses decreased 30 basis points. Operating income increased 64%, or 130 basis points, to 4.1% of revenue from 2.8% of revenue in the first Q of '07, which reflects the good leverageability of our infrastructure. EPS increased 29% to $0.09 per share from $0.07 in the first Q of last year. The $0.09 EPS includes $0.03 loss from our community business year end to quarter, which is $0.01 improvement for $0.04 less than in the fourth quarter. Depreciation and amortization for the quarter was $2.5 million.

During the first quarter we acquired SPRI, Carlson Solar and the remaining 49% ownership in Conscious Enlightenment, and also divested our (inaudible) publication, which were a part of the previous acquisition. Also year end to quarter we sold our ownership in the UK subsidiary which completed our strategy to change how we operate in international markets. We expect that the transition from sales of products to licensing arrangement will improve our profitability, reduce complexity of the operations, lower capital requirements and limit the impact to a weak U.S. currency. Because of the impact of reporting change of international revenue we will provide this time some additional revenue information and some guidance. So the change in international strategy to licensing is expected to reduce reported international revenue by approximately $25.7 million, from $3.7--$33.7 million recognized in 2007 to approximately $8 million in 2008. Our international licensing fees average between 20% and 25% of the product sales.

The companies we acquired during the first Q of 2008, net of divestiture of the publication, represent approximately $12.5 million in 2007 revenues. The companies we acquired through the last year, 2007, if we would had acquired all of them as of January 1, 2007, would increase on pro forma basis Gaiam '07 revenues by $10.9 million. Including this conversion of international product sales to licensing, acquisitions and divestitures, Gaiam expects the revenue for 2007 to be approximately $300 million, which implies there again strong internal growth. With all the first Q activities, including acquisition and divestitures, integration of acquisition into the Gaiam existing sales infrastructure, and also a transition in international approach, it is virtually impossible to reliably report a first Q comps, but Lynn will provide some gross data for the quarter as we can reliably calculate. As a guidance for second quarter, if we deliver internal growth in the mid-teens, which was recent rate and we do expect that, we would -- it would result in approximately $56 million in reported revenues in the first and second quarter.

And lastly, to capitalize on our solar-energy -- I mean solar strategy, we felt the best way for our solar subsidiary, Real Good Solar to grow and enhance its strong 30-year old brand would be as a stand-alone company, so last week Real Good Solar prices IPO of Class A common stock and sold 5.5 million shares at $10 per share. Approximately $200 million of the proceeds will be paid to Gaiam for loans we provided to our solar business. Post-offering Gaiam owns ten million shares, or approximately 65% of Real Goods. We do not intend on this earnings call to answer questions about Real Goods and ask you defer such question until the Real Goods call.

And now before Vilia will provide you some details on our numbers and Lynn a business overview I'd like to talk about our consideration of changing our segment reporting and instead two direct-to-consumer and business segments we report currently we are evaluating the creating of three segments, which would be to Solar, Community and the Life Style. We believe that such reporting might create transparency, but I'd like to hear from you on that, if possible. And now Valia.

Thank you, Jirka. We are pleased with our first quarter performance, the continued growth in revenue, and increase in operating income. In the first quarter of 2008 we achieved another quarter of double-digit revenue growth, with sales of $65.2 million, up 11.5% from $58.5 million in the first quarter of 2007. Revenue generated by our direct-to-consumer segment increased 13.8% to $38.8 million from $34.1 million in the first quarter of 2007, reflecting the strong performance from our direct marketing and community programs and businesses acquired since the first quarter of 2007. Revenue from our business segment increased 8.2% to $26.4 million during the first quarter of 2008, from $24.4 million in the first quarter of 2007, driven by our successful rollout of category management in retail and the acquisition of SPRI partially offset by change to licensing arrangements in our international business.

As we discussed in our last quarter conference call we are transitioning our international businesses to licensing arrangements, which has and will continue to have an impact on our revenue line. This change is expected to reduce reported international revenue by approximately $25.7 million from the $33.7 million recognized in 2007 to approximately $8 million in 2008, as international license arrangements average between 20% to 25% of product sales. Converting our international businesses to a licensing model will contribute a higher percentage of bottom-line income and will allow us to better leverage the infrastructure of our international partners. During the first quarter we divested our UK direct operations and transitioned this relationship to a license agreement. This divestiture completes our transition to licensing agreements on all international markets.

During the first quarter we also divested our non-LOHAS publications that were included as part of a previous acquisitions. Giving [effect] to these divestitures our recent acquisitions and our international shift from a distribution strategy to a licensing strategy, we reaffirm our revenue estimate of 2008 of approximately $300 million. This equates to strong internal revenue growth for 2008. As expected our gross margins were 62.9% for the first quarter of 2008 compared to 64.1% in the first quarter of 2007, primarily the result in a shift in our sales mix to lower margins solar and an increase in transportation costs. Excluding the margin impact of our solar business our gross margin, even after absorbing increased transportation costs, increased to 66.8%.

Our selling and operating expenses declined 220 basis points to 53.6% of revenue from 55.8% in the same period last year, as we were able to leverage our infrastructure across higher sales and acquired businesses. Our corporate, general and administration expenses improved 30 basis points to 5.2% of revenue for the first quarter of 2008 from 5.5% in the same period last year, reflecting our continued focus on leveraging corporate resources. Operating income for the first quarter of 2008 increased 64.1% to $2.7 million compared to $1.6 million in the same period last year, even after our community spend. Operating margins as a percentage of revenue expanded 130 basis points to 4.1% compared to 2.8% last year. Our interest income for the first quarter of 2008 decreased to $0.5 million from $1.1 million in the same period last yea, reflected our repurchase of 2.5 million shares of our Class A common stock and the decline in average interest rates received on our cash investments from 5.18% as of March 31, 2007 to 2.37% at March 31, 2008.

As our invested interest rate decreased over 50% we are reducing our accounts payable to gain leverage with our vendors to help offset the devaluation of the dollar compared to international currencies. Our capital expenditure in the quarter were $2.5 million, reflecting investments in our infrastructure of $1.1 million and video production costs of $1.4 million. We also paid a $4 million deposit on an option to acquire a new facility. In April we exercised this option and purchased a property for a total purchase price of approximately $13.2 million, representing a purchase price of approximately $88 per square foot. Included in the total purchase price is the $4 million purchase option that was paid in the first quarter. We will consolidate our three existing Colorado operations to this newly-acquired property during the second quarter of 2008 when our existing lease expires.

As a result of our strong operating financial performance our earnings per share increased 28.6% to $0.09 per share from $0.07 per share fort first quarter of 2007. Our balance sheet remains strong at the end of first quarter, with cash of $48.2 million and no debt. Our shareholders equity at the end of the first quarter was $205 million. Subsequent to the first quarter our subsidiary, Real Goods Solar, Inc., priced its 55 million initial public offering of shares of Class A common stock. Real Goods Solar sold 5.5 million shares in the offering at $10 per share. Post-offering Gaiam owns ten million shares, or approximately 64.5% of the outstanding stock of Real Goods Solar. Gaiam will receive approximately $20 million of the proceeds from the IPO to prepay Gaiam for loans previously advanced. We enter the second war with a strong financial position, solid opportunities to expand upon our product offerings and distribution channels, and our community.

At this time I'd like to turn the call over to Lynn for the business overview.

Thanks, Vilia. Following another year in 2007 of strong internal growth and bottom-line performance we continued this trend into Q1 with double-digit revenue growth, a 64% increase in operating income and a 29% increase in earnings per share. We began this year focused on executing our 2008 strategies outlined in our year-end earnings call. During Q1 we began the process of capitalizing on our solar division by filing an IPO, finalized our international market transition to a licensing-based model, including divesting our ownership in our UK subsidiary; launched our wellness media into retail and expanded our stores-within-store presence; executed on our strategy to be the prominent category manager for fitness media; acquired SPRI products and initiated its integration into our trade business; continued to drive our catalog customers to utilize our eCommerce site and join as community members; and evaluated several acquisition opportunities in the media space. I would now like to elaborate on some of our key initiatives and accomplishments by business unit.

Early in the first quarter our Solar subsidiary, Real Goods Solar, completed the acquisition of a solar integrator in Southern California, increasing Real Goods' presence in the lucrative Southern California market. On May 8th, Real Goods Solar announced that it priced its 55 million initial public offering of Class A common stock. Approximately $20 million of the proceeds of the offering will be used to repay inter-company debt to Gaiam. Post-offering Gaiam owns ten million shares, or approximately 65% of Real Goods Solar. Our business unit segments performance in Q1 remains strong, despite an overall weakening of the retail sector as a result of a variety of unfavorable economic conditions.

While we have certainly felt the impact of increased fuel costs and the weakening U.S. dollar we executed a number of innovative sales strategies that we began in 2007 designed to strengthen our market position and diversify our retail portfolio. These strategies have helped to insulate us from the difficult economic conditions that have affected many other consumer products companies in recent months. For the quarter the business segment, excluding international, achieved internal growth of 10%. First quarter results were highlighted by the successful rollout of our category management strategy into retail, the first full quarter of our Amazon.com online stores-in-store concept, and the acquisition of SPRI products, adding new channel of distribution to our current sales portfolio.. Placement of our media titles grew to approximately 71,000 doors in the U.S. through the end of March.

Our market share in fitness/wellness media remains a core strength for this segment. At the end of March, according to Nielsen VideoScan, Gaiam ranks sixth in overall U.S. non-theatrical DVD sales, ahead of 20th Century Fox, Universal and Sony. Based on Nielsen VideoScan statistics the overall fitness/wellness market overall grew 16% in Q1 compared to the first quarter of 2007. This growth is largely the result of incremental sales from Gaiam's category management initiative in designated channels during the first quarter.

As I mentioned in the last call one of our key strategies for 2008 is to utilize some of our market share in the fitness category in order to take on a category management role, which we feel will further solidify Gaiam as the leader in fitness/wellness media as well as increase revenues and profitability. Our Q1 implementation of this strategy successfully grew the overall fitness category while preserving strength in the Gaiam market share at 41% and controlling placement of almost 50% of this increased fitness media market. By continuing to focus on this strategy in the year ahead we believe we can drive overall growth of the fitness category through controlled placement of media in Gaiam managed sections.

Our 2008 strategy to take on a category management role in fitness media market began with a 13-week test in Target during the first quarter. Based on the success of that test, Gaiam was awarded an additional four feet of permanent media space in the sporting goods department to accommodate this media offering, expanding our presence in Target to 12 feet. We believe that this expansion will create a more complete overall fitness offering for the consumer, drive incremental sales for both Target and Gaiam in the coming months, and is a strategic use of our leading market share position. We believe our successful implementation of the category management role partially contributed to double-digit quarter-over-quarter revenue growth from Target. Target remains a strong partner in furthering our reach to the mass market LOHAS and the fitness/ wellness oriented consumer. For the third time in five years Gaiam was named a vendor of the year for outstanding partnership in Target sporting goods department for the year 2007.

Another key strategy for 2008 includes growing the number of our branded stores and store concepts at retail, including custom fixtures designed and produced by Gaiam. As of the end of March our stores-in-store concept can be found in approximately seven thou -- 7,100 doors up from approximately 6,000 in first quarter of last year. After our launch of the first on-line stores-in-store concept with Amazon in the fourth quarter, we saw for the first time the impact that the branded lifestyle concept can make when migrating from a traditional retail merchandising strategy to an on-line environment. Results were very positive, including a jump in sales of more than 60%.

This concept was designed by Gaiam to emphasize our proprietary media-centric branded merchandising strategy and includes both fitness and wellness offerings made available through an interactive shopping experience for customers. We believe there is a growth opportunity in offering our retail partners the same store-within-store experience for their on-line customers as more and more consumers are choosing to shop on line. We believe we're uniquely positioned to offer this customized on-line experience to our retail partners based on our in-house studio and post-production facility.

During the first quarter we executed a soft launch of the wellness program into retail. The wellness programs includes a full assortment of media, co-branded with our partners at the Mayo Clinic, to address specific medical conditions. Early results from the soft launch of wellness are positive and we recently moved to the branded store-within-store presentation of the wellness line within the book store channel to be shipped in Q2. Several of our media distributors picked up the line as we see this new brand gaining momentum. The firm, wellness and our green living initiative will each play an important role in our strategy to expand store-within-store concepts in retails for the remainder of the year. Our green living store-within-store concept initiative will include new media and kits featuring well-known green movement advocate, Ed Begley, Jr. We will launch a full line of green living media and products during third and fourth quarter and we are working with retail partners in our racking program to begin tests for green living line in Q2 and Q3. Whole Foods, Safeway and Pharmaca have each committed to tests of this line in the months ahead.

In first quarter we acquired SPRI products, the leading manufacturer and distributor of 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. We began the integration of SPRI into our business segment. We expect to realize cost savings beginning in Q3 as we move all distribution to our facility in Cincinnati and centralize back office administration. This is the model we've been so successful in the past, as we realize synergies from our target acquisitions.. During Q1 we completed our strategy to move to a licensing model for our international business. While this strategy has reduced top-line revenue it will contribute a greater bottom-line percentage as we leverage the infrastructure of our international partners versus establishing an infrastructure ourselves.

International market volumes declined in the first quarter as compared to prior years as we implemented this model in Canada, Japan and Mexico. We also completed the sale of our UK subsidiary during the quarter. The UK represented approximately $2 million a quarter in revenue. We expect to realize only approximately $100,000 quarterly licensing revenue from that base in the future, as that subsidiary revenues included a majority of third-party products. We remain focused on building sustainable relationships in key global markets for 2008 and are now working with a core group of international partners that we feel are well aligned with the branded lifestyle strategy that Gaiam employs domestically.

Sales from our direct-to-consumer business, which includes results from direct mail, internet sales, community subscriptions and our direct response campaign increased 14%. As we announced recently our community and subscriber networks have over 200,000 members. While topline revenue in the direct business remains healthy we continue to invest in our community efforts, which contributed a negative impact of $0.03 a share during the quarter which is an improvement from a negative $0.04 a share in Q4, 2007. Efforts to migrate our core catalog customer base to an on-line point of sale are succeeding.

Our eCommerce business grew nearly 29% over first quarter of 2007. As this trend continues we expect that the benefits will two-fold; first our ability to customize the buying experience to each customer, and to enhance the overall buying experience will increase, and overhead cost to the Company will decline as compared to current marketing efforts made through the catalog business. Revenue from affiliate programs, search engine optimization and e-mail campaigns continued to drive the overall growth into web business for Q1. Also during Q1 we launched a test program for our fair trade initiative on the web. A full launch of the fair trade initiative and direct is slated for later this year and a test in trade for early 2009. We're focused in the coming year on continued growth in these areas as well as cost saving initiatives to lover o -- to lower overall direct marketing costs in future quarters.

In summary we made some great strides during first quarter executing on our strategy to improve our operating results and focus on our core business. We continue to review and revise strategy across our different business units to better position Gaiam for future earnings growth. Gaiam continues to be recognized as the authentic leader of choice in the LOHAS industry. We're focused on the execution of our key corporate initiatives to further this message in the year ahead. Our strategies for the remainder of 2008 include: Increasing revenues from our community memberships; expanding our wellness store-within-store; launching green living into retail stores; expanding our category management role on fitness; expanding our brand and improving profitability through international licensing; creating the premier LOHAS internet presence for our retail partners, as well as our direct business; and pursuing strategic acquisitions that can be tucked into Gaiam infrastructure. We continue to be excited about the opportunities we see for 2008 and future periods.

Thank you. And, Mary, I would now like to open the call up for questions.

(OPERATOR INSTRUCTIONS) And our first question comes from Mark Argentino. Your line is open.

Good afternoon, good quarter. Just got a couple of quick questions for you. Lynn, you were talking about how you guys got another four feet at Target after the original test, the 13-week test. Could you talk a little bit -- is that going to be in line with other Gaiam feet or is that an end cap, or can you talk a little more specifically on exactly what that's going to look like?

Sure, Mark. Obviously we're still working with Target but it is anticipated that the four feet will be in line as a lead in to the department.

Got you. And is it going to be -- can you use it for both hard good products and media or just media?

This will be 100% media and it will be our official category management role for fitness media within Target.

Great. And how many different brands are you guys carrying right now in terms of the different media products, or how many different brands are you managing roughly?

I think we're probably working with about five or six.

Got you. Have you seen any -- any mix shift at all? I know one of the things you guys had talked about when entered just in the category management role would be there's an opportunity to increase revenue and you might see a down-tick in share. Is that played out at all?

Absolutely. We saw certainly an increase in revenue and an increase for the entire category according to Nielsen VideoScan, which is a nice increase at 16%. So, yes, we saw our -- the Gaiam share go down but overall what we managed maintained around 50%.

Great. Is the category definition expanding to include wellness, or is that a different channel altogether?

That's up to video -- Nielsen VideoScan but right now I believe that they'll be putting wellness under the fitness category.

And just quickly following up on the Mayo Clinic launch, as well, do you know roughly how many stores you guys were able to get distribution for that product in in Q1?

Well over 1,000 doors.

Okay. And then you said also you're going to just see a store-in-store there in the book channel?

We are, and we are launching the wellness kits or products in Q2, so we'll see some full store-within-store rollout in Q2.

All right. And then Jirka, in terms of the community, I know you didn't provide an updated subscriber number -- I know you don't do that every quarter -- but overall trends on the subscriber community and subscription side, still seeing the adds where you'd like them, customer acquisition costs, is there anything there that you could touch on?

Oh, we provided the update as March 1, [so I remember March 1 and March 30] we're going to do it monthly, but we will do it quarterly on pretty much every quarter we intend to do update. Yes, I think that it continues pretty nicely and we mentioned the losses dropped for $0.01 which is 25% from the $0.04 to the $0.03 and I think it will -- as we go and start to market it, as we always said, end of the year, so that's when you're going to see a dramatic impact and expansion of our marketing efforts.

All right. And that's still planned second half of this year, is that the goal, Q3, Q4?

Yes, it's going to be definitely after people get back from school so probably from like mid to end September. Really the push is for Christmas.

All right. And then Vilia, I don't know if you have handy any of the cash flow metrics in the quarter. I know it looks like you guys prepaid some of your payables a little bit, so do you have free cash or operating cash for the quarter?

Yes. Just as an FYI we just filed the Form 10-Q so that information is out there, and our cash flow from operations was a use of cash of about $1.4 million, which is showing our planned reduction into accounts payable during the quarter.

That's $11 million between payables and accrued libs when we pay down, so that's really causing that.

Great. Thanks, guys, appreciate it.

Thanks, Mark.

And our next question comes from Lloyd Walmsley with Thomas Weisel Partners. Sir, your line is open.

Great, thank you. I was wondering if you could provide us with what your plans are for the $20 million in proceeds to Gaiam from the Real Goods IPO?

Not immediate plans. It is up to the board. We're going to the board on June 3rd.

If you had to just guess now where that would be focused do you think more buy backs versus M&A opportunities?

Not going to guess, we wait for the board meeting.

Yes, okay. In terms of the M&A opportunity do you see a lot of interesting targets out there for tucking in?

Yes, we actually -- as Lynn mentioned we recently reviewed one and we expect to probably have couple deals -- announcements second quarter.

And which segments will they be focused in, do you think?

Media.

Media.

Media.

And the business segment.

Yus. And then is it possible to provide a quarterly breakdown from last year of the international revenue that's converting from direct to licensing?

Well, we can look at that. We can probably -- the question -- the problems -- we can probably look at what was actually reported, but as we introduce these changes by countries and by product line it's going to be quite a project for accounting to do something what our auditor's going to bless to release. But I don't want to commit to it because I'm sure -- really that's kind of putting -- not like to because it would be a lot of work for her to do, so I don't want to commit to it, but when we follow up let's talk about it.

yes, okay. And did I hear you right, you said for the second quarter you think its revenue existing internal growth rates equates to $56 million?

Yes, I said if you were to deliver existing climate mid-teens number what we -- historic the last two years we did probably between $15 million and $19 million, so if you stay within a range for the second Q, which we fully expect to do, that would equate to about $56 million, and I'm just saying it because the impact of international from last year, so -- so you can -- it's hard to adjust it differently. And I understand fully your question to the international for quarterly so that's why we try to assess, and so I try to provide a guidance, which we usually don't do. So assuming we deliver in the mid teens it will be about $56 million and we expect to deliver in mid teens in the internal growth for second Q.

Okay. And then is it possible to quantify the eCommerce portion of your business? It sounds like growth there is really strong.

Yes, that business growing pretty strong and so, Lloyd, maybe I would like to also hear back from Mark, what do you guys think about changing our reporting for reporting community and solar separate?

I think that would be helpful.

The more transparency the better.

Yes, thank you. Sir, I might have stopped you from the questions.

That is -- that's it for now, but thank you.

Hey, Mark, can you put your opinion in from changing to reporting to back? Operator, if you have another question in the meantime?

I'm not showing any further questions at this time.

Okay. Thank you very much and we'll talking to you next quarter.

Thank you.