Gaia Inc (GAIA) 2009 Q3 法說會逐字稿

Good afternoon and welcome to the Gaiam Third Quarter 2009 Financial Results Conference Call. All lines have been placed in a listen-only mode until the question and answer session.

(Operator Instructions)

I would now like to turn today's call over to Ms. Christine Gleim. Ma'am, you may begin.

Thank you. Good afternoon, everyone, and welcome to Gaiam's third quarter 2009 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 Mr. Jirka Rysavy, chairman, Lynn Powers, president and CEO, Vilia Valentine, CFO, and Carole Buyers, vice president of corporate finance and investor relations.

And now I would like to turn the call over to the Company's Chairman, Jirka Rysavy. Go ahead, Jirka.

Thank you, Christine. I'd like to welcome you on our quarter call and I'm happy to say again that we pleased with the results.

Revenue for the third quarter, which ended September 30, increased 23% to $74.4 million from $60.3 million we reported in the same quarter of 2008. Operating income for the quarter increased $4.2 million from -- to $945,000 from a loss of $3.3 million in the third quarter of last year. However, last year third Q we actually -- the $3.3 million exclude $13.9 million impairment charge what we took charge related primarily to acquired media libraries.

During the third quarter, which was our historical lowest cash flow quarter, we generated cash flows of $1.8 million, which is $11.3 million improvement from (inaudible) of $9.5 million during the same quarter of last year. In year-to-date on our cash -- free cash flow increased to $70.2 million, which is $35.6 million improvement from the same period of last year.

Also, saving from our cost reductions we took earlier of the years clearly being realized. Our operating expenses declined by $2.3 million from the same quarter year ago even with higher revenue base. As a percentage of revenue, our selling and operating expenses improved 1,400 basis points to 42.5 million -- 42.5% from 56.5%.

In addition to growing our control spaces retailers and our DVD market share in fitness and wellness, as we always talk about, we are starting to focus on increasing our market share also in overall in non-theatrical DVDs. Over last five years we have increase our market share in non-theatrical from 0.3% to over 6% now. And our goal is to increase this US market share to over 10% in 18 months.

Our solar division is also (inaudible) profit up, profitability this quarter after acquisition of three companies in 2008. All those companies have been converted to one name and one operating system, which allowed much better cost control and allow management there to refocus on revenue growth again.

Our cash position for the quarter grew to $44.4 million and we still have over $14 million in current tax line and no debt.

The positive trends we experience in this quarter, in third quarter have continue after that and we expect to return our internal revenue growth to double digit, in line with our historical rates during the fourth quarter. And looking in 2010, that we believe that our revenue momentum, combined with our media relationship that we just signed and strong balance sheet will well position us to drive both top and bottom line. And we also will obviously focus, as I said, on growing our overall nontheatrical media market and DVDs.

And now I want to turn it to Vilia, who will talk to you about numbers, and Lynn for operational review. Vilia?

Thank you, Jirka. I am pleased to report that our third quarter 2009 results reflect quarter-over-quarter revenue growth and a return to profitability. For the third quarter of 2009 revenue was $74.4 million, a 23.5% increase from $63.3 million for the third quarter of 2008. Revenue from our solar segment increased to $23 million from $9.5 million for the third quarter last year. For more information concerning results to Real Good Solar, a separate earnings call will be held tomorrow, November 5th, at 8:30 a.m. Pacific Daylight Time.

For the third quarter of 2009, revenue from our business segment increased 24.2% to $20.5 million from $16.5 million last year, an acceleration from the second quarter where revenue increased 6.8% over the previous year's quarter. The increase in revenue in our business segment reflects our success in our store within store placements and media category management, coupled with an improvement in the retail climate.

Revenue generated by our direct to consumer segment for the third quarter of 2009 decreased 9.5% to $31 million from $34.2 million for the third quarter of 2008 after a strategic 40% reduction in catalog circulation. Lynn will elaborate further on our business segment results in just a moment.

Overall gross margin was 48.1% of revenue compared to 56.1% of revenue in the same quarter in 2008. Factors contributing to the margin decline include increased revenues from our lower margin solar business. It is important to note that this increase in revenue allowed Real Good to leverage its operating costs and return to profitability.

The other factor impacting gross margin is a continued shift in our retail product mix, which includes lower margin third party fitness media associated with our category management initiative. Excluding our solar business, gross margin was 59.8% compared to 61.5% last year.

Our selling and offering expenses decreased 7.1% to $31.6 million from $34 million in the third quarter of 2008, reflecting cost control initiatives, including reduced catalog circulation of 40% and reductions in payroll costs initiated in the first quarter. Our corporate, general and administration expenses increase modestly to $3.2 million from $3.1 million in the third quarter of 2008.

Our operating income for the third quarter 2009 increased to $945,000 from a loss of $17.3 million during the same quarter last year. Our prior year results include a $13.9 million pretax impairment charge related to acquired media libraries, website development costs and other related assets.

Our interest income for the third quarter of 2009 decreased to $86,000 from $257,000 for the same period last year, due in part to the decline in average short term interest rates. We recorded net income of $365,000 in the quarter, or $0.02 per share, compared to a net loss of $10.1 million, or $0.42 per share, in the third quarter of 2008.

As of September 30th, 2009, our balance sheet remained healthy. We ended the quarter with $44.4 million in cash and we continue to carry no debt. Additionally, the cumulative effect of our asset management strategies improved our free cash flow by $11.3 million quarter-over-quarter to $1.8 million, and generated cash from operations of $3.8 million for the third quarter of 2009.

Inventory turns improved dramatically to 5.7 times from 3.4 times in last year's third quarter. Our days sales outstanding for the third quarter of 2009 decreased to 32 days from 40 days in the third quarter of 2008. Approximately 80% of our receivables in the trade division are comprised of our top 10 customers. We are pleased with our collection efforts and our ability to minimize credit risk.

Depreciation, amortization and stock compensation expenses totaled $2.4 million for the quarter. Capital expenditures were $700,000, video production costs were $1.3 million, and investments in our corporate facility were $200,000.

We had 23.1 million shares of outstanding common stock as of September 30th, 2009. We have and we continue to focus on leveraging our infrastructure and diversifying our consumer offerings. Our ability to grow revenue and generate cash from operations attest to the strength of our balance sheet, our brand loyalty with our customers, the depth of our distribution channels, and our capacity to continue to grow market share.

Now I'll turn the call over to Lynn to provide more detail on our growth initiatives by business segment. Lynn?

Thanks, Vilia. As Jirka mentioned, we're now seeing the benefits of our current business strategies. For the past year we've remained focused on leveraging our sound financial position, capturing additional market share, increasing sales potential, expanding our role as media category manager, and enhancing existing distribution through our store within store concept, while continuing to reduce operating costs and overhead.

Our core growth strategy, balanced with our focus on free cash flow and cost saving measures, resulted in tangible improvements on our balance sheet and a return to profitability in the third quarter.

I'd now like to provide you with some more detail on the results by business segment. In the third quarter of '09, sales for the business segment increased 24% versus 2008. Overall, the environment has improved and we're encouraged by retailers' positive change in buying patterns. As we mentioned in a number of our previous conference calls, many of our largest retail partners cut their buying significantly in September and fourth quarter of 2008, resulting in low stock positions. The improvement that we've witnessed in the second quarter accelerated into the third quarter. We're seeing a number of positive trends worth mentioning.

First, retailers are less constrained in their open-to-buy orders and we don't expect to see empty shelves this holiday. Second, we're leveraging our new content and partnerships and seeing the benefits with certain key accounts. And finally, our new celebrity driven media titles are getting really good placement and very positive PR. Importantly, while our sell into retail has accelerated, our sell-through remained strong.

For example, our top customer reported sell-through approximately 8% higher than sell-in in the third quarter. This data tells us that we're not only restocking shelves, but the products are selling well at retail. It also gives us confidence for continued growth into the important holiday selling season.

Store within store and category management initiatives are key strategies in maintaining our status as the clear leader in fitness media. Despite some store closures at retail, our domestic retail distribution remains very strong at over 72,000 doors. More importantly, our store within store initiative continues to enhance the quality of our distribution, with over 11,000 doors at the end of the quarter, up from 9,000 at the end of third quarter of last year.

As further successfully implementing media category management with Target, we've secured further expansion of this strategy in sporting goods and our Act accounts. In the third quarter we rolled out media category management for the Sports Authority in 290 doors. With these recent rollouts of category management, we have now implemented this strategy in over 4,000 doors, up from 2,000 at the end of third quarter '08.

Our category management strategy has increased our mix of distribution sales and cost of securing shelf space. While this has impacted our overall gross margin, it is an essential part of our long term retail strategy and a key step in securing shelf space for media, creating a more proactive role with our retail partners and becoming the go-to company for fitness. It's also a key driver in growing the overall fitness media category 15% this year according to Nielsen's VideoScan.

We expect our release schedule in fitness, which includes Trudie Styler, Valerie Bertinelli and Bob Greene, to result in continued improvements in Gaiam's market share over the next four quarters. According to VideoScan, our controlled distribution market share in fitness, which includes both Gaiam titles and distributed product, increased to 64% in the first three quarters in 2009 compared to 56% in the same period last year.

In addition to fitness, our non-theatrical release schedule is building. We've grown our share in non-theatrical from 0.3% to over 6%, with the number six ranking in this category in five years. Since our call last quarter we've released the first of many titles to come under the Discovery brands. This relationship is a key step in continuing to expand our market share within the non-theatrical category, where we expect to leverage our large retail penetration as well as our store within store expertise to grow the category along with our share.

For the third quarter, revenue comps for the direct segment declined 9.5% on a planned reduction in catalog circulation of 40%. Much of this decrease was self-initiated as we once again reduced prospecting and optimized our business on the Web. In the direct segment we've implemented a number of strategies to help reduce costs and improve profitability. We continue to optimize circulation and improve the efficiency of prospecting in the Internet. We also continue to reduce distribution and inventory costs.

During third quarter we renegotiated better lease terms on our distribution center and we determined we will also close satellite warehouse location and consolidate into our main distribution center in the second quarter of 2010. Excluding the impairment charges taken in third quarter of 2008, the direct segment reported an improvement in operating losses of $1.6 million this quarter and is close to breakeven. While the direct segment has been the most challenging segment over the past two years, we believe in the future prospects and are committed to achieving profitability.

We have right-sized the infrastructure of the business and in the next two years we expect our investments in content, community, digital distribution and Web marketing to allow us to leverage the lower cost base. As this business transitions from one that is transaction oriented to one that is more solutions oriented, we believe it will grow again. As digital distribution becomes more prevalent on the Web, our rich content will drive even more media subscription and product sales in the future.

In summary, we believe we've turned the corner with respect to both the retail climate and our growth outlook. We will continue to focus on the following strategies and growth initiatives. Increase our media management footprint by adding specialty, sporting goods and [Rac] stores to our mix. Focus on additional space for store within store exposure, both with current retail partners as well as new store growth.

As our brand continues to perform well at retail, we expect to be able to expand in new categories and enlarge our footprint with our current partners. Leverage our new partnerships with Discovery and Reebok. We're focused on growing our market share in the nontheatrical conscious home entertainment media. We intend to launch more new releases in the fourth quarter with Discovery and well have complete access to the Discovery libraries coming in 2010.

Reebok fitness and accessories are in development and we've produced two new DVDs in-house in our studio this quarter under the Reebok label. Reebok will begin to impact sales in third quarter of 2010 when we begin shipping additional retail space in Target. We also plan to capitalize on our success in DRTV with a new infomercial airing in the first quarter of 2010.

During this past quarter we produced a Pilates infomercial starring Mari Winsor, the most recognized Pilates instructor in the world, and hosted by Marisa Tomei, academy award winning actress. We are really excited about this new opportunity for DRTV.

We also plan to maintain our diligence on cost reductions. We highlighted on previous calls that the total reduction in costs for all our cost saving initiatives is approximately $10 million on an annual basis. We are continuing to consolidate costs, such as the distribution center lease renegotiation in Q3 and the warehouse closure in 2010.

In conclusion, we believe we're seeing the benefits of our business strategies and that of a modestly better retail climate. We remain focused on our growth strategies and continued cost reductions. Our distribution footprint at retail and our strong balance sheet will afford us the opportunity to grow revenues through our new partnerships and titles. Our leaner cost structure will allow us to leverage our business model as we look ahead to 2010 and once again focus on profitable growth.

Thank you and I'd now like to open up the call for questions. Crystal?

Thank you. (Operator Instructions). Our first question comes from Mark Argento, Craig-Hallum Capital. Your line is open.

Yes, hi. Good afternoon. A couple of questions. First off, I know you guys have really looked at streamlining your inventory, especially given the downturn in particular on the direct to consumer side. You guys, your inventory right now, roughly $26 million at the end of the quarter, was down sequentially but also down pretty significantly from last year. Do you feel pretty comfortable where you are right now relative to your opportunity going into Q4, especially with your retail or the trade inventory?

We do, Mark. We work very closely with our retail partners and we've done forecasting. We are just -- we're planning our inventory better so we get more just-in-time. And then our big growth is also in media which we can replicate on a very quick basis. So we're comfortable with the inventory and with being able to service all of our accounts during fourth quarter.

And our overall SKUs are down.

And our overall SKUs are down.

Okay. And then in terms of some of the online initiatives, Jirka, could you tell us where you're at with some of those? I know that you have kind of refocused your efforts there, have really focused on trying to drive some of those businesses to profitability. Any kind of data you could provide us on subscribers or any trends that you're seeing in that business, costs, what have you?

I think we pretty close to our goal to the -- all the community will be breakeven by end of the year, I think we would then, I don't know exactly, but in half a penny or something. So I think we should be able to get there. I think from the line -- we kind of hold it pretty steady this year, so is our stated goal. As to right now for the next year you we - our focus is going to be -- so much opportunity right now, especially on the trade side with the big retailers. And so it will be still our focus.

But we have a new initiative we didn't really talk about it yet and we start working it for a while as a part of this community initiative. But will we launch it -- we'll launch shortly something what we call Gaiam TV, which is basically our beta for all digital downloading for all our media. So it's kind of big effort for us and we expect to launch it in the spring. So that's kind of a big new development there. And still we'll try to still make it not lose money.

Then lastly and I'll hop back in the queue, but you talked kind of double digits revenue growth in Q4 for the entire business. Anything you want to break out relative to solar, the core business, the core trade business? Could you give us a little bit of color there how you're looking at the different segments in Q4?

Yes. Excluding solar, it's double digit. With solar is going to be higher. Is still double digits but it's like we kind of look at the businesses separately. I think solar is kind of probably around -- I think this quarter they did, like -- I mean I think they -- I don't want to really talk much about solar but it's north -- quite north of 20. And so but when I say double digit I meant Gaiam business.

But the --

And --

The trade business and the direct or just the --

Well, the direct business, still we drop, as Lynn mentioned, catalogs about 40% circulation. And as far to next year, Lynn, you want to talk about catalog?

We're continuing to drop circulation in fourth quarter. And then for 2010 we'll plan circulation a little bit down in first quarter and then to flat for the rest of the year.

But we have so much momentum on retail and hopefully that we would have some of this initiative on the direct side helping as well, especially on the direct TV side. So we expect that our overall growth be in a double digits during next year.

Great. Nice quarter. And I'll hop back in the queue. Thanks.

Thanks, Mark.

Our next question comes from Andrew Burns, Thomas Weisel Partners.

Congratulations on the quarter. Can you hear me?

Yes.

Yes, we can. Thank you.

Oh, great. Thank you. It sounds like you made some additional cost reductions in the quarter. Are you still at that $10 million annual savings rate or do you think that's a bit higher now?

Well, I mean you saw it's pretty much you see the $10 million quarter to quarter on a quarterly basis. But we also have sales increase of over 20%. So even with that, you still see the savings. So the $10 million is definitely safe number. It's not only that you see it, but we absorbed additional 20% growth into that number. So it might be higher when we started but it's what we're showing right now on dollar to dollar basis. But if you look at as a percentage of revenues, it's 1,400 basis point, which is more than we expected.

We are also getting some additional cost reductions in mid 2010 through closing one of our satellite distribution centers and consolidating all into our main distribution center in Cincinnati.

And there are still other contracts what we can renegotiate recently which is coming in place because we had like a year contract or something what had to kind of run out. So there's probably some saving from that what's coming on the line right now and will come on the first two quarters. Like there's one -- actually two specific leases will be (inaudible - microphone inaccessible).

Okay. And can you give us an update on the FIRM? You've had a lot of success in retail channel. How many doors is that in now and what opportunities are there to expand that footprint for the FIRM?

Well, the FIRM, right now we have the FIRM Wave, which is a successful infomercial for us, which will be hitting retail for this important holiday season and fitness season. And so I don't have the exact number of doors but you'll see the doors really go up on the FIRM as we get that out to retail.

And that's going out in the fourth quarter?

Fourth quarter, yes.

Okay. And on the market share target for non-theatrical of 10% versus current just over 6%, how much of that would be Discovery? Does that get you to the 10% or what are some of the other initiatives that get you there?

No, no. Discovery alone would not get us there at all. But we have other things what we putting into place. We overall growing the market share with a bunch of our titles and so we have a several fronts what we hope to get there. But Discovery and related channels we have probably hopefully some future announcement to make. But we just want to focus overall on this category.

Okay.

And that includes some -- where we've licensed some titles from ABC Family, which have done very, very well for us.

Okay.

And it's mostly the categories are children and family.

Family entertainment.

Yes, and conscious media.

Okay, great. Thanks. One more question. Just considering the new licensing deals, how should we think about any investments that need to be made in 2010 to realize those opportunities? Is there anything maybe in terms of store fixtures? Just trying to think through outside of -- just on the operating expenses to realize that growth.

Well, certainly wherever we are able to put a store within store, as you know we make the investment for store fixtures on that and we will be doing a push certainly on the Discovery store titles to do store within store. And then there will be an investment in inventory on the Reebok licensing side.

Great. Thank you.

Our next question comes from Holly Guthrie, Boenning & Scattergood. Your line is open.

thank you. And let me add my congratulations. Good quarter. I have some questions on the timing of shipments of some of the new fitness content. The Valerie Bertinelli, the Bob Greene and the Trudie, did they ship late in Q3 or was that a Q4? And I just --

Those are all -- those are all Q4 releases, Holly.

Okay, great. And then also, you had mentioned Reebok positively impacting sales next year. I missed which quarter that would start. And will it -- if you could talk about the phase-in and over what time period should we think about the phase-in of that business?

It'll start positively impacting our revenues in third quarter, which is when we will actually take over the Reebok space in Target. And that will actually double our retail space in Target. So we take that over beginning of third quarter.

All right. And then could -- I was hoping to get a little bit more detail in the loss associated with the direct business. I think you said it was a $1.8 million loss. If you could just quantify that, make sure I have the right number. And then if you could go through the timing of your renegotiation of the rents and then the closing of the satellite office and if you have any estimates on when maybe you can pull the costs down so at the current run rate it might be break even. I don't know how much detail you want to get into on that.

The loss, the change in loss was -- went from a $1.6 million loss, excluding onetime charges, to close to a breakeven for the quarter. So that's the difference that you saw. So we're pretty close to a breakeven right now. The renegotiating on the distribution center, you'll see a little tiny bit of impact in that in fourth quarter. But the closure of the satellite warehouse will take effect at the end of June 2010.

All right, great. Thank you.

Our next question comes from Mark Argento, Craig-Hallum.

Yes, just a couple of quick questions around -- it looks like you guys are generate some good cash flow. That's what you said you were going to do this year. Bought back some stock early in the year. Still own a good piece of Real Solar.

Any ideas on what -- any thoughts around what you might want to do with Real Solar and/or the cash that you have on the balance sheet in terms of buybacks, dividends? Seems like you're -- I don't want to say you're overcapitalized but in many respects you might be overcapitalized. Any thoughts around that?

Well, we still have $2.7 million in our (inaudible) buyback and it's the question where the market is. And we kind of over last year and kind of watching the economy so we kind of (inaudible) rush to do anything for us. But there's possibly -- there's several possibilities. We have a board meeting later this month. We will talk about it.

And for the Real Good our goal was obviously to make it to profitability, which happened this year. And I think they actually pretty good situation right now because all the companies were converted to one system. So and the growth is actual accelerating. And so you have pretty much good situation. So again, we don't have to really do anything. There are several possibles where we can do but there's not something what we already made a decision.

So I think we would -- there's definitely that business can grow. There was no acquisition done in that business for the last three quarters. And so it's more a question of economy. But as I said, we have board meeting later this month. We probably make lots more of these decisions.

Great. Thank you.

At this time there are no further questions. I would now like to turn the call back to Mr. Rysavy for closing remarks.

Thank you very much. Thank you for everybody for being with us. We glad that we back on a track where we used to be with profitability and solid growth. And thank you for being with us and hopefully you be with us next quarter. Thank you very much.

Thank you for joining today's conference call. All parties may disconnect at this time.