Gaia Inc (GAIA) 2008 Q2 法說會逐字稿

Welcome, and thank you all for standing by for today's second quarter 2008 financial results call. At this time, all parties 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. I will now turn today's meeting over to Mr. John Mills. Sir, you may begin.

Good afternoon, everyone, and welcome to Gaiam's second 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. And 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 second quarter call. I'm very pleased to say again it was another good quarter. Revenue for the quarter which ended June 30 increased 9.3% to $57.2 million from $52.4 million in the same period of 2007. The internal revenue growth was 19%.

Just for comparison, if you would exclude solar revenue which was held by acquisitions as well as international revenues, which were heavily impacted by our change to licensing approach, our top line gross was 18.8%. Gross margin was 63.2% of revenues compared to 64.2% in the same period last year. The gross margin reflects our investment in lower margin solar business. If you exclude solar, our gross margin actually improved about 270 basis points to 69.3% from 66.6%.

Expenses as percentage of revenue also decreased, about 390 basis points to 64% of revenues from 67.9%. That included G&A expenses separately, decreased as well about 80 basis points. Operating results improved 76% or 280 basis points which reflects good leveragability of our infrastructure. Our interest income declined reflecting about 280-basis-point drop in average interest rates we received on our cash investment.

The 280 basis-point-drop decline in prevailing interest rates actually represent over $0.06 hit to our annual EPS. Earnings per share in the quarter improved to break even from a loss of $0.01in the second quarter of last year and EPS for second quarter includes the cost of relocating our headquarters and consolidating three of our Colorado locations into one, as well as $0.03 loss from community business in the quarter.

Depreciation and amortization for the quarter was $2.3 million. For the six months, our revenue increased 10.4% to $122.4 million from $110.8 million and operating income improved to $2.2 million from a loss of $300,000 and net income increased to $0.09, $2.2 million, from $1.4 million or $0.06 from the first six months of '07.

These numbers, what I just gave you, do not include gain on issuance of Real Goods Solar stock which will be partially offset some known cash tax deductible impairment of our Gaia Media library and related assets we recorded as a part of acquisition of Good Time Media and LIME Media which will net result in additional gain to these earnings per share I just quoted. (inaudible) will be finalized and reported in our 10-Q form on Monday. We expect that the EPS gain will be approximately $0.10.

During the quarter, Gaiam's sole subsidiary, Real Goods Solar, completed its IPO raising a net of $48.2 million and approximately $20 million of those net proceeds were repaid to Gaiam for loans we previously provided to our solar business. Now Gaiam owns 10 million shares and which is now about 63% of Real Goods Solar outstanding shares. Even our sales through this year year-to-date was very strong.

We anticipate that our large retail account given the really challenged overall retail environment will take cautious approach for our holiday buying, and so we expect this will result in concentration of holiday orders in the 4th Q as we did all the experience historically as opposed to early in third quarter the holiday orders that we saw last year.

So we would suggest that we look at the rest of the year together, third and fourth quarter together, as we did last year for comparability of the periods and also that we expect that the break will be resemble much more our historical '06/'05 than the '07 anomaly. Because we believe the U.S. economy might get worse before it gets better, we intend to take advantage of it and use this weakness and our strong sell-through and try to get some additional market share gain. We plan aggressively increase our control of shelf space at retailers by expending store in store units.

We believe that our strong balance sheet and current low returns (inaudible) investment in combined with our recent excellent performance in overall poorly performing retailer environment gives us a one-time unique opportunity. So during the quarter, we grew our overall doors to 72,000 and we increase our brand at store-in-stores to 7,500 from 6,500 at the end of the second quarter of '07.

But we intend to get much more aggressive and we plan to maintain our retail pricing, so we'll take a hit in observing the significant cost increases what we have from weak U.S. dollar and increased oil prices, but we want to be aggressive as the retailers.

And we also budgeting additional expenses as we plan to contribute to retail's markdown for the display merchandise from vendors we intend to displace in floor plans. And we want to set aggressive goals and we'd like to get to 10,000 store-in-stores by the end of January, as well expand our overall coverage to 75,000 doors.

So this is obviously very aggressive target, but we believe we have a one-time opportunity because it's unique that our strong sales through on a weak environment and retailers where we started talk to are very -- are receptive to it, so we want to go aggressively to it. Obviously, if you go to a big retailer and they give us a space for next, for several years or at least a year or two, what we typically do, we might have to take these markdowns to the quarter when we actually get the space.

Also in our direct segment we will focus on relationship revenues. During the three months from March 1 as we last updated you to the June 1 this year the number of subscribers in our community business increased to 220,000 and contributed approximately $2.1 million of monthly revenues. This is a very similar increase as this same period of last year when the numbers grew from 100,000 to 135,000 during the six months of the year. So this is slightly higher paced.

However, with our new aggressive plan we're just putting together we intend to get to 300,000 subscribers for in our community business by the end of January, which would represent increase of 100,000 members in just 11 months. We also plan to reduce our catalog prospecting and some DRTV brand building. Catalog prospecting is getting very costly and this increase in postage, freight and paper prices, and the DRTV branding we realize discounted excess TV inventory of advertising time, which this coming election and Olympics we don't expect they will see too much of it.

So we don't know how this will play, but we expected those two changes or this change I mentioned will probably reduce our revenue about $15 million in the rest of the year.

Obviously, we believe that our strong market position and our strong market position and this is why we try to get aggressive with retailers. We believe that if we can accomplish to get to our 10,000 doors, they'll make a significant upside in the future. And, therefore, we also repurchased 1.3 million shares recently or over 5% of our outstanding common shares, our average price was $14.75. This is on the top of 10% of the shares outstanding we repurchased during the last year.

So this repurchases net of shares what we issue through acquisition which is a little (inaudible) the option exercises brought our shares outstanding down from 27.2 million when we start purchases to current 24.0 million. We still have over 3.5 million of our shares buyback left. Our cash position remains strong with over $62 million at end of the quarter.

We believe in the leveragability of our business model and we believe that the leveragability position as well for continued improvement in our operating results.

We believe now that this reduced catalog prospecting and controlled DRTV that about 10% of internal growth shall translate to on an annual basis to about 30% growth in operating income, so pretty significant 3 to 1 leverage.

And those are the kind of numbers we believe that we will deliver this year and the year to come even if it's taking on the cost of the opportunities that we mentioned and absorbing costs for raw materials (inaudible) and declining value of the U.S. dollar and using the strong -- our strong retail sales-through and the current tough economic environment as opportunity to distance ourself from any potential competitors. So now Vilia will give you more detail in numbers and lend the business overview. So Vilia?

Thank you, Jirka. We are pleased with our second quarter performance. Despite the current challenging economic conditions, we continued our revenue growth and improved operating margin and expenses as a percent of revenue. Our results for the three and six months ended June 30, 2008 exclude a gain on the issuance of Real Goods Solar Inc. common stock and a partial offset of non-cash tax deductible impairments to Gaiam's Media Library and related assets.

The majority of these assets are recorded as part of the acquisition of GoodTimes Media and LIME Media. The combined impact of these transactions is expected to result in a net gain and earnings per share for the quarter in excess of original expectations. These amounts will be finalized and reported in Gaiam's Form 10-Q to be filed on Monday, August 11.

In the second quarter 2008, we achieved another quarter of revenue growth with sales of $57.2 million, up 9.3% from $52.4 million in the second quarter of 2007. As a result of the Initial Public Offering of Real Goods Solar Inc. in May, we are now reporting Solar as an independent segment, formerly a part of the direct-to-consumer segment.

Accordingly, we now have three business segments including business-to-business, direct-to-consumer and Solar. This additional information will provide shareholders with improved visibility and insight into the operational performance and strategic direction of the Company.

For the second quarter, revenue from our Real Goods Solar segment increased 95.9% from $4.5 million to $8.8 million reflecting the acquisition of two California-based solar companies in late 2007 and early 2008. For more information concerning the results of Real Goods Solar a separate earnings call will be held on Thursday, August 7, at 9:30 a.m. Mountain Daylight time.

Revenue generated by our direct-to-consumer segment increased 12% to $28.9 million from $25.8 million in the second quarter 2007 reflecting the strong performance from our online business, direct marketing and community programs. Revenue from our business segment decreased 11.7% to $19.4 million during the second quarter of 2008 from $22 million in the second quarter of 2007.

Excluding international revenue, which was impacted by our shift to a licensing model in Q1, our revenue from the business segment increased 53.6% reflecting strong sell-through of Gaiam products to retail. We expect the impact of reduced international revenue to continue into the third quarter as this represented the peak of international performance in 2007 under a traditional sales model.

Our gross margins were 63.2% for the second quarter of 2008 compared to 64.2% in the second quarter of 2007, primarily the result of a shift in our sales mix to lower margin solar business and an increase in transportation costs. Excluding the impact of our Solar business, our gross margin increased to 69.3% from 66.6% for the second quarter 2007 while still absorbing the increased transportation costs.

Our selling and operating expenses improved to 58.9% of revenue from 61.7% 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 to 5.4% of revenue for the second quarter of 2008 from 6.2% in the same period last year reflecting our continued focus on leveraging corporate resources.

Our operating loss for the second quarter of 2008 declined 76.5% to $0.5 million dollars compared to $1.9 million in the same period last year even after continuing to make investments in our community business this quarter. Our interest income for the second quarter of 2008 decreased to $300,000 from $1.1 million in the same period last year reflecting our repurchase of 1.3 million shares in our Class A common stock, at an average price of $14.75 per share, payment of the remaining balance due for our new corporate building and building improvements of approximately $11.7 million and the decline in average short-term interest rates from 5.2% as of June 30, 2007, to 2.4% at June 30, 2008.

Our capital expenditures in the quarter were $16.3 million which includes the buildings purchased and improvements I just mentioned, as well as other investments in our infrastructure of $1.8 million and video production costs of $2.8 million. Earnings per share improved to $0.00 per share from a $0.01 loss per share from the second quarter of 2007. Our balance sheet remains strong at the end of the first quarter with cash at $62.9 million and no debt.

We had 24 million shares of outstanding common stock as of June 30, 2008. When considering our current cash balance combined with our ownership position in Real Goods Solar we currently have approximately $6 per share in cash and ownership position in Real Goods.

To mitigate some of the softness in overall consumer spending we are focused on improving overall leverage of our infrastructure, diversifying our business portfolio and consumer offerings and strengthening the connection with our core consumer through community and subscription services. As we move into the latter half of the year with weakened economic conditions, we believe our retail partners will take a cautious approach with respect to inventory positions and holiday buying decisions.

In anticipation of a softer consumer environment in the months ahead, as Jirka mentioned, we will decrease our catalog circulation and direct response brand building. Accordingly, we are adjusting our revenue expectation for 2008 to approximately $285 million which will reflect approximately a 10% top line growth year-over-year, in line with our year-to-date revenue growth.

Overall we continue to expand our market share through new product offerings, distribution channels and our online communities. Despite the temporary soft consumer environment we are encouraged about the long-term opportunities that lie ahead. We expect to continue to grow organically as well as through strategic acquisitions.

Now I will turn the call over to Lynn to provide more detail on how we are positioning ourselves for long-term growth.

Thanks, Vilia. While operating in a challenging economic climate Gaiam has demonstrated that our socially responsible content and brands continue to be well in demand. Our revenue of $57.2 million and break-even results during what is normally the slowest season of the year confirms this. Internal growth remained very strong at 19% quarter-over-quarter.

During the second quarter, we finalized the purchase and renovation of our new corporate campus outside of Boulder, Colorado. We are pleased with our new home as it exemplifies our unique mission and culture in the best possible way. With the recently installed solar power system, companywide recycling and composting programs and a bright vibrant working environment encouraging health and wellness our mission and values are at the forefront of the minds of our employees and welcomed visitors. The costs associated with our move are incorporated into our second quarter results.

As we move towards the holiday selling season, we remain focused on the core strategies that will support the long-term growth and health of our business. During the second quarter, we executed plans for category management of fitness, media and retail including the expansion into Target.

We expanded our product mix into fashion, fitness and wellness, completed the integration of SPRI Products into our trade business with the intent to fully leverage our existing infrastructure in Q4. We continue to encourage our direct catalog customers to utilize our e-Commerce site to drive optimization and retention and we continued efforts to transform our direct business from a transactional model to a relationship model through our communities and clubs.

I would now like to elaborate on some of our key initiatives and accomplishments by business unit. Our domestic business-to-business segment showed significant top line quarter-over-quarter improvement with nearly 54% revenue growth and margins of approximately 63.5%. Our initiatives to strengthen our market position and diversify our retail portfolio were a significant factor in our ability to achieve strong sell-through at retail in an underperforming economic environment.

However, because of the challenging economy we expect our customers to take a cautious approach to buying leading into the holiday season in order to control their inventory levels. This, coupled with a later Thanksgiving holiday, will likely result in the reversal of last year's third quarter early holiday build-up orders back into the fourth quarter more accurately reflecting prior historical results.

As we announced this time last year, last year's early Thanksgiving and resulting holiday orders amounted to approximately $6 million to $8 million in revenue in 3rd Q '07 that will likely fall back into fourth Q this year. International quarter-over-quarter comps remain down for this year as a result of our transition to a licensing strategy in Q1 2008.

Profitability in this segment continues to be impacted by freight costs including additional fuel surcharges, increased raw material prices, the devaluation of the U.S. dollar in the overseas market and added emphasis by our customers on retailer vendor income programs. Bolstered by overall growth in the fitness media market our market share and fitness wellness media remain strong.

According to Nielsen's VideoScan, Gaiam ranks sixth in overall U.S. non-theatrical DVD sales ahead of 20th Century Fox, Universal, Sony and Starz Entertainment. Based on Nielsen VideoScan's statistics Gaiam continues to be the market leader in fitness/wellness media with a 44.5% market share for the quarter. Through the successful implementation of our category management and stores-in-store merchandising strategy we control approximately 50% of the fitness media market as of the end of June.

By continuing to focus on these strategies in the year ahead, we believe we can drive additional overall growth in the fitness category and open additional doors for fitness media. Our category management strategy took a significant step forward during Q2 as we finalized the placement of an additional four-foot section of fitness media in the sporting goods department at Target as part of the fall reset for third quarter.

With this additional space, Gaiam will manage approximately 12 feet of permanent space in the sporting goods department beginning in the fall. As Target's partner in this department, we are excited about the additional space and the opportunity it presents for adding depth to the fitness and mind, body offerings and a home for the Target guests to find the latest in fitness media.

We continue to diversify our retail distribution and into the second quarter with placement in over 72,000 doors compared to 69,000 in Q2 '07. We remain focused on anchoring our market share through expansion of store within store concepts at retail. As of June 30, 2008, we had branded stores-in-store presentations placed in over 7,500 doors which is up from 6,500 in Q2 '07.

We believe that the stores-in-store concept is one of the keys to Gaiam's success and have set a goal of having 10,000 doors set up by January. The initial start-up costs for stores-in-store will contract margins this year, but allow us long-term growth and brand expansion at retail.

As a part of our aggressive retail approach, we are also absorbing all cost increases from our manufacturers due to increased costs of raw materials, freight and the devaluation of the dollar. As we pursue our goals, increasing our market share and shelf space at retail, we feel it is important that we maintain our retail price points and contract our margins short term in order to build our long-term branded presence at retail.

The Amazon.com online stores-in-store concept continues to perform well above expectations with over 150% quarter-over-quarter growth. The resounding success of this initiative has laid the groundwork for other similar online initiatives in the future. We are building our library of video clips and content to make the online store within store experience interactive and current.

We believe this concept, while costly to set up initially, will bring long-term success and differentiation from any other brand of fitness products or media. We recently signed an agreement to license the brand of the Biggest Loser for branded equipment based kits in the fourth quarter. This is an exciting opportunity that will allow us to leverage our expertise in placing kits in the mass merchant channel.

This offering will be targeted at the broad consumer base that has arisen out of the popularity of "The Biggest Loser" television show and we've received numerous expressions of interest from our retail partners including from Target, Dick's, Wal-Mart and others. During the second quarter, we completed the integration of SPRI Products into our trade business. Certain corporate services are now shared and as of the start of the third quarter all fulfillment for SPRI Products is now handled out of our distribution center in Cincinnati, Ohio.

We expect cost efficiencies resulting from the integration to be fully realized in fourth quarter 2008 as certain commitments and costs associated with the previous ownership structure expire. In summary, while the retail business continues to be challenged during these difficult economic times, Gaiam's sell-through remains strong as is evidenced by a 54% revenue increase.

Because of this strength we are taking an aggressive stance in going after shelf space, category management and store within store growth including in our retailers' online businesses. We believe that our decision not to raise prices in spite of the increased costs in order to further our market share along with our aggressive pursuit of store within store expansion will contract our margins and affect our third quarter P&L in the short term, but will give us a long-term competitive advantage as we continue to aggressively grow our market share in category management in LOHAS.

Sales from our direct-to-consumer business, which includes results from direct mail, Internet sales, community subscriptions and our direct response campaigns, increased 12%. We're committed to a strategy of developing a relationship-based business model which focuses on customer acquisition through clubs and communities while reducing our dependence on direct mail catalogs and costly prospecting.

Our investment in the community contributed a negative impact of $0.03 a share during the quarter which is the same as in Q1. As part of our overall strategy, we continue to encourage our core catalog customer base to explore and use the Web as an alternative. Continuing to encourage this migration will allow us to build closer relationships with our core consumers through greater customization of the buying experience while lowering overhead costs associated with the traditional direct mail model.

We are also reducing our circulation to prospects by over 2 million catalogs in response to the increased costs for freight, postage and paper. This will negatively impact revenues for third and fourth quarter.

Revenue from affiliate programs and search engine optimization continue to drive the overall growth in the Web business for Q2. We expect this more efficient way to attract new customers to Gaiam will be a large driver of customer acquisition in the future as we move our direct business to more of an online presence.

The direct response division reported modest growth over the second quarter 2007. Media costs per order in this division were markedly higher than in the prior year which affected operating income. We anticipate the cost of television time to continue to rise in the third and fourth quarters as the Olympics and the election nears and the availability of air time decreases.

Based on these factors, we expect that the direct response division will experience decreased revenue in the third and fourth quarters as we weigh the return on investment based on market pricing for media. In summary, we believe we're well positioned to continue our strong brand momentum and leadership in the LOHAS industry. Gaiam strives to maintain standards that will provide our customers and our shareholders with excellence in all aspects of our business.

We believe we have a unique advantage in these difficult times to capitalize on our strong sell-through results by growing our market share and our store within store locations as our media and media-based products continue to be in demand. We're conscious of the macroeconomic environment and are reducing our marketing efforts in catalog and DRTV to minimize expenses in these areas and putting our efforts into online, customer acquisition, community and our retail initiatives.

We are also reviewing our infrastructure to reduce operating costs further. By ensuring that we are fully aligned with the core values of our customers and implementing strategies designed to diversify our business and capitalize on our market leadership position we believe we can mitigate the impacts of an economic downturn.

We're committed to expanding our high quality, socially responsible content and brands and we continue to review and revise strategy across all of our business units to better position Gaiam for continued earnings growth. Thank you and I would now like to open up the call for questions. Deborah?

Thank you. We will now begin today's question-and-answer session. (OPERATOR INSTRUCTIONS) And our first question comes from Mark Argento. Your line is open.

Thank you, and good quarter in a tough environment. A couple questions for you.

In terms of the 19% internal growth rate, Jirka, that you have you mentioned in the press release and talked to, can you just walk us through a little bit in terms of the mechanics, or the reconciliation there relative to the year-over-year that you reported? I think it was 9%.

Yes. It's the international because, if actually the international number over the quarter what we have previously was like $11 million. So you have to basically, for us to report any comp, we just exclude the comps, the international business because effective with the international business do is say last quarter we reported about $11 million.

This quarter it will be probably around like $1 million because of first we just taking the 20%, 22% of revenues through it. Second, we sold to U.K. which dumped about $9 million of business and third, when we switch from products to licensing, say take Canada as an example, we would sell them products and then we switch to licensing. But they would have inventory probably for two quarters to sell through, so they will not really pay us license on new products because they still have products they bought from us previously as the DVD.

So you have a big shift on international like that. So for us to provide any comps we have to take it out or the comps would not really be reportable.

So the 19% essentially excludes the impact of international?

That's correct.

Okay. And in terms of the -- I know there's some moving parts here in terms of, you're throttling back on [DirecTV] and catalog on the second half of this year and that's going to impact revenues. I mean historically [DirecTV] from what I understood, you weren't really making a whole lot of money in that business. What kind of cost savings are you going to be able to see and what kind of net margin impact do you think this will have for you?

Well, yes, you're right. Most prospecting in the direct catalog and DRTV, why they affect comps because obviously we get revenues from it. We don't really gain anything on bottom line actually opposite. We really don't know, we just provided you estimate what we think might be.

We don't know what the air time will be for DRTV. It's just our guess this election because, you know, historically in election time it's really hard to get the discounted -- basically the infomercial kind of run -- you know, the goal is to break even on them. We're lucky if you make any money on, it but it's really dependent on buying cheap media. If you cannot buy cheap media, the concept doesn't work.

So we don't really expect we be able to buy it. So we think we need to reduce it, but we really don't know what's actually going to happen. This is just our guess. The catalog on the other side we pretty sure we're going to cut a couple million catalogs from circulation because the price increases both on paper and postage and transportation of the goods just making catalogs more and more difficult.

So we encouraging our people to shift to Internet as we do for a while, but we just will really try to use our community base to replace that customer drive and shift. That's why we kind of shift, basically we are relocating some of these dollars to the community plus, so we can go aggressively more there because I don't think long term the catalog business will really be in a better position. Even paper prices are cyclical, but transportation costs and postage I think it's a one-time stream.

So to kind of summarize the answer, yes, from revenue impact this is not really -- I mean from earnings impact -- the revenue cut on catalogs and the DRTV, there's not much there.

In terms of the push towards 10,000 doors by the end of the year, what kind of -- could you quantify at all how we should think about the costs? I mean should we think about it per door it's going to be an incremental X-thousand dollars and then also on the subscription, the 300,000 by the end of January, what, if any, kind of marketing efforts you can point us to that you're going to kick off that would be able to support that type of growth?

Well, Mark, let me answer on the store within store. There's three different costs that are usually associated with putting in store within store. First is fixturing and in many cases we supply fixturing and/or signing for an account.

The second is, in many cases if we are displacing competitive product, we help the retailer become profitable on that displaced product either by helping out with markdowns and then finally through co-op and advertising so that the retailer can put it in. So there's three costs associated. I can't tell you, it depends on the retailer how much the cost is on a per door basis.

And in terms of what type of retailer would you be looking at bulking up your store-in-store presence with? Is it a new retailer or going deeper within an existing customer base?

Well, it's both, but it could be picking up a store-within-store in a different section of the store such as wellness versus in the fitness area. It's also looking at expanding in the whole grocery channel as more and more grocers are going after natural grocery.

So should we read that you got a wellness store-in-a store opportunity that you're going to try to take advantage of? Is that --

We're working on it.

All right.

But, you know, Mark, this is, getting from where we are heading 2,500 stores to typically took us like two years, so kind of saying we do it, we basically believe in one-time opportunity because we have such a good sales-through better than we used to have on the retailers space in a retailers kind of struggling. So he is really kind of like we want to use this kind of shining star example saying hey, give us a try because in another environment we might not have a good try on it with some other retailers and we go there with the whole financial program.

So we do this and give this a try so we aren't risking any money because if we can get the 10,000 doors that give us such a good base for the next two years because, obviously, if it works, other retailers will follow on the top of it. And so we just kind of feel that if it's kind of looking at it -- I kind of look at it -- I own 30% of the Company almost. This is like no brain opportunity when we discuss in the board. It was like yes, absolutely.

The thing is if you go to retailer to mark the cost up and if you don't know when this happen, won't happen in a month. We already talked to a few but, you might have orders up front because if you do mark, you pay that time, right.

So it will basically take the, you know, cost of it up front, but it's like opportunities we might not repeat because environment might be tougher, but who knows how our sale-through will look to those retailers. Because sometimes retailers in tough environment they buy less and the shelf time, it's hard to get a good sell-through but right now we have advantage to have excellent sale-through up to like 30% in some of our retailers and on comps, environment, when comps great.

So it's our main effort. Getting to consumers, subscribers to get into but those we can probably do later. It's more that we believe that any environment, in a tough economy if you come with a strong effort you spend more from competitors but the cost-wise is really on the retailers side on the store-in-stores. So the second part of the question you ask about --

Subscribers.

The subscribers, yes. So and obviously from we give you the number of the pace, a little stronger pace than we were last year but we still were just kind of upselling to our base and we kind of said we'd be going from start to market in fall but we didn't know how much or what we would do. So kind of setting the goal.

We don't know what it's going to cost but we want to get to the 300,000 because we believe that that's really a magic number once we cross that line. Every subscriber dropped to bottom line and huge -- if you have a $120 per year for subscribers at 85 GP, so you have almost $100 per subscriber per year contribution after the break-even because for us if you have, you know, as I mentioned, if you have eight or 10 clubs at 5,000 members, so one club at 50,000 members it costs us almost the same because we duplicate the cost. After investing the initial content and set-up.

So we want to get aggressive on that one and because again believe everybody is pulling back, so it's a good time to run. I kind of learned that when I was in a track team, you know want the best way is to attack in the hills when everybody is kind of getting tired, so --

Fair enough. I'll hop back in the queue. Thanks.

(OPERATOR INSTRUCTIONS) And our next question comes from Lloyd Walmsley. Your line is open.

Yes. My first question was just getting back to the internal growth rate. Is it correct that there should be a ramp back up in international licensing revenue, but that while they continue to sell through the product it's just going to cause some weakness for a few quarters, and, therefore -- I guess I'm struggling a gross profit even adjusting for the licensing business the gross profit was only up 1% excluding Real Goods' quarter.

Okay. Well, that's a complex question. So first maybe address -- well, the gross profit is up about 270 basis points or something, 270 basis points to 69.3% from 66% which part of is switched to licensing, this excluding Solar, okay? So it's 270-basis-point increase.

The comps are really, we just excluded in the comps of international numbers, but regardless what we good international numbers until we get to anniversary of the first quarter would have -- will be like one-fifth of last year, doesn't matter how well we do effectively because we're just recording instead of record, 100 cents on the dollar on products, we just record $0.20 and $0.22 on the dollar in license.

So it's hard to kind of measure comp on -- we either will have to restate and say if we would sell products or we can say if we would do licensing last year, but to get it this kind of theoretical stuff and it can change by percentage, so it will be difficult to get auditor's blessing, so we said the simple thing is to exclude it. I mean you'll roughly again be going like from $33 million last year of revenues because you sell to U.K. first. So you take $33 million minus $9 million and the rest at 20%.

So that will give you about $6.5 million in sales, so we say about $8 million because you have growth. But, it's the comps I never really -- international doesn't pull comps down. International probably will grow pretty nicely but I don't know, but it's really the change of accounting what's causing. That's why we're excluding it. The comps were excellent in the quarter.

Okay. But there's no timing shift in the sense that as they sell through, the physical inventory that they don't generate licensing revenue for you all for -- there's not a timing shift as well?

Yes, there is a timing shift. I think it's like two quarters, Lynn?

Yes.

So it should start to ramp back up later?

Yes. Yes. We would probably expect that we would be probably around $1 million in second and third and about $4 million in fourth.

I'm sorry. Can you say that one more time?

About $1 million in second and third quarter and about $4 million in fourth quarter when we kind of have, the inventory run throughs.

Got it.

And that's pretty much all bottom line. So obviously that will contribute heavy through third and fourth as well because pretty much all the licensing is bottom line.

Yes. And then speaking of bottom line, can you provide any updated guidance for the year on the bottom line?

We don't -- we won't do that. We don't really want to provide specific guidance because we don't know right now what's going to -- how the retail environment would happen and what we really get, the main things without probably kind of thing is we have like almost $8 million what we shift last year from first to third, right? Which we expect right now shift to fourth and also if you're going to go to the retailers and obviously we'll try to get there.

We're saying we want to be degenerate that means putting that pretty much before Christmas. So probably if you're going to take the markdowns paid to retailers, they will go through like September so that means the third quarter. So you go into a heavy shift from third to fourth of profitability, both so international because you have the catch-up so you're increasing $3 million of bottom line [early] shift from second to third to fourth and then you have -- if you go to a few big retailers, the charge can be in several million dollars what we would take but we might not get it.

So it's hard to predict that. So I would kind of just, the revenue when we kind of saying the chance to catalog and the DRTV, they're not really bottom line related and we can't be in control of that. But when the retailer will do and if -- how successful -- more successful we are, more hits we take effectively up front, but it's kind of a decision but, it's like, I know in the public company sometimes tougher, but it's like no brainer to do that because the future is so easy to do that today when we cannot do it sometimes in the future.

But it hard to know when we get a score in retailers. We obviously believe that we should have some in the third Q, so we probably will take some cost of markdowns through the third quarter but we really today don't know what. We don't have any agreement with any retailer right now and I cannot really say.

We really kind of bless the plan actually this week on our board level, so it's hard to say when we get a first score.

Yes, okay.

But, you know --

I'm sorry to interrupt. Go ahead.

No. I mean I was saying like the numbers what we have right now and on a report on the comps and stuff in second quarter was actually stunning for all of us, we were very pleasantly surprised how the quarter ended because since January when our stock went down from $30 to $10, we kind of heard well, nobody believes that you can grow and you're going to miss the quarter and so saying well, nobody believes us anyway. Let's use it to our advantage.

Yes. And then on the subscription stuff have you all targeted a certain plan? I know you all have been waiting to push that hard until you knew which plans had the best retention and the best profit characteristics.

What is the plan and can you tell us what sort of -- is it in line with your overall ASPs in the community that you've talked about in the past?

Well, Lloyd, one thing you have to remember is during fourth quarter is the time we have the most contact with our customer lists. They call in, the fourth quarter holiday business and so it's our best opportunity to really continue to upsell the clubs, but now we have the opportunity to upsell them to our best customers which we've avoided doing in the past until we really kind of got our strategy together.

So that's why we believe we can continue to grow the subscribers, because that's our most contact with our customer.

Yes. The answer is really three parts of it. There are, the clubs what we kind of go longer and we kind of feel more comfortable that they will be there and how to approach it, then we can market those while not market others, so we can start early.

Then, we, obviously as Lynn said, we marketed our best customers, but our biggest upside's going to come which we probably will not do yet this time. But we will decide if we cannot do something in December or not is to actually put the clubs on our DVDs because we do millions or much more than that, though, of our DVDs with our customer buy to watch and as well as our catalogs.

But obviously in DVD we can put a table of contents all the community pitch, depend whatever you want to sell, but those DVDs will stay on the shelf probably on some retailers. I don't know a name, for a couple years. So we have to be prepared to hold the pricing on whatever offerings we do if we're going to put pricing on those DVDs.

So I don't think we necessarily do DVD yet as part of this 300,000 push, but I think we kind of start to have a feeling which clubs are kind of clean-up and so ready for a massive push. So that's why we're kind of saying that we actually go and make the push to get this 300 because it's such a magical number because we know that beyond that is all incremental bottom line.

So is it more the cinema clubs, more the athletic clubs, more the community online? Is there a particular one that you're upbeat about?

I think we're going to each club is a different audience. I think the spiritual cinema club I think it's ready to be moved aggressively a certain way. I think the [firm] club can be done. The online clubs we would start to do but probably not to everybody, but we'll start to introduce to everybody.

You know, for right now we actually created a program that because we didn't take in advertising, but, people say why don't take advertising? So we kind of develop the things we can take advertising, but our subscribers don't see it. So it was a new software we put in and so you can just buy, for example, that.

You don't see the ads. But we combine it with different offerings, but that will be more still in testing stage rather than to kind of pushing it wide. But we will offer some of the features of it like getting free e-mail addresses with Gaia, getting, not seeing the ads, having residence engine available to accumulate data, getting usage of the people so we can then introduce something like we won't call it a dating club, but it's like an introduction, a meeting place.

So there will be our big push because with the residence engine we will have a lot of data and, our customers, obviously, overall customers it's 40 to 55-year-old females. So I think we have very attractive offering there.

Yes. And can you just elaborate a little bit more on the breakdown in the GoodTimes library? Can you quantify that and explain what drove that and then how it might impact financials going forward?

You know, a lot of it if you -- we don't want to specify the dollars till we kind of get, our buying from our tax advisors, but it's a strategy.

Obviously, we will get some tax dollars up front and also it's, if you remember, we bought GoodTimes, we basically call all the goodwill library and so we have opportunity here to get some of that back, but we would -- till it's finalized we're not going to -- I don't want to speak to it because they'll be buy-in, but we will have it Monday.

But it will be both positive on both sides as far as earnings up front, cash up front and earnings going forward, so we're contribute to all those three. It's a strategic move.

So it doesn't reflect a reduction in the value of that library as a way to generate cash going forward?

No, no, no. Well, on the balance sheet values, but it will increase earnings going forward.

It will because you won't be amortizing as much on a non-cash basis going forward?

That's partially true there, it's complex answer to it, but when you see it, you'd like it.

Yes. Okay. And then if you could just maybe give us an update on the the wellness DVDs and the green living new product lines coming.

Wellness DVDs continuing to do well, continuing to expand, [gone], as you know, it was put into the book channel in second quarter and we're continuing to expand our offering. Also now working on natural grocery and sporting goods for some of the wellness and that should go out this quarter. Green living we're not expecting to have much more than tests until fourth quarter, but a strong push on that for 2009.

Great. Thank you, guys.

Thank you.

At this time, I would like to turn today's meeting over to Jirka Rysavy.

Thank you very much and sorry for this being a longer call than usually, but I think we have a really good result in the retail environment, so we kind of plan to take advantage of it and we will hopefully see you or talk to you on our next quarterly call. Thank you very much.

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