Gaia Inc (GAIA) 2009 Q4 法說會逐字稿

Welcome to the Gaiam fourth quarter 2009 financial results conference call. All lines have been placed in a listen-only mode until the question-and-answer session. (Operator Instructions). Today's call is being recorded. If anyone has any objections you may disconnect at this time.

I would now like to turn the call over to Mr. John Mills from ICR. Sir, you may begin.

Great, thank you. Thank you, everyone, and good afternoon. 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; and Carole Buyers, Vice President of Corporate Finance and Investor Relations.

Now I would like to turn the call over to the company's Chairman, Jirka Rysavy. Please go ahead, Jirka.

Thank you, John. I'd like to welcome you on our call as usual, and I'm happy to say again that we are very pleased with our fourth quarter results. It was our best quarter ever for our revenue, operating income, as well as the EPS. Revenue for the quarter which ended December 31st, increased 17.6% to $87.6 million from $74.5 million in the same Q of 2008. Our gross margin increased 160 basis points and savings from our cost reduction measures were fully realized. Our operating expenses declined $4.3 million from the same quarter year ago, even with 18.7% of our internal revenue growth. The double-digit internal revenue growth brought us back in line with our historical internal growth rates.

As a percentage of revenue, our selling and operating expenses improved 1290 basis points to 40.4% from 53.3%. This drove our operating income for the quarter to a historical record of $6.6 million compared to a loss of $47 million in the fourth quarter of last year. However, last year included some impairment charges mostly related to goodwill and intangible assets. Our net income grew to $4 million and EPS to $0.17, which compares to a loss of $2.6 million and $0.11 if you exclude the fourth quarter of 2008 impairment charges. During the fourth quarter we generated free cash flow of $5.6 million which is $17.2 million improvement from cash use of $11.6 million during the same quarter of last year. Year to date, our free cash flow increased to $22.8 million, above our set goal of $20 million for the year. This is actually $52.8 million improvement in free cash flow from the $30 million of cash use we have in 2008.

Our cash position for the quarter grew to $48.3 million which is $16.4 million improvement from last year. Even after we repurchased 930,000 shares of our common stock. We still have no debt.

Looking forward to 2010, we believe that our revenue momentum, our new media relationship as well as strong balance sheet position us well to drive both top and bottom lines. Our main goal for 2010 will be to focus on digital media market, Lounge cam TV as our flagship to our entire digital library. And grow our market share in non theatrical media. Overall for 2010 we expect double-digit internal revenue growth which shall bring our revenue to over $300 million and continued improvement in our operating income. It is also meaningful to point out that the next $30 million of our income will be tax free.

Given our strong balance sheet and our confidence in the future we have decided that we can take advantage of the growth opportunity while covering cost of capital for our shareholders. As a result, we announced today that our board of directors declared a payment of annual cash dividend of $0.15 per share. The first annual dividend will be paid in late April to our shareholders of record on April 1, 2010.

Now I will turn it over to Carole who will give more details on numbers, and then to Lynn for operations. So Carole.

Thank you, Jirka. I am pleased to report that our record fourth quarter and fiscal year 2009 results reflect strong revenue growth and a significant improvement in profitability despite what is still a challenging economy. For the fourth quarter 2009, net revenue was $87.6 million, a 17.6% increase from $74.5 million from fourth quarter 2008. For the fourth quarter 2009 net revenue from our business segment increased 44.1% to $38.3 million, from $26.6 million for the same quarter last year, an acceleration from the third quarter of 2009 where revenue increased 24.1% over the previous year's quarter. The increase in revenue in our business segment reflects our success in store-within-store placements and media category management, coupled with some improvement in the retail climate.

Net revenue from our solar segment increased $19.1 million for the fourth quarter 2009 from $13.5 million for the fourth quarter last year. For more information concerning the results of Real Goods Solar, a separate earnings call will be held tomorrow, March 9th, at 8:30 AM Pacific daylight time. Net revenue generated by our direct to consumer segment for the fourth quarter of 2009 decreased 12.2% to $30.2 million from $34.5 million for the fourth quarter of 2008 after a strategic 38% reduction in catalog circulation. Lynn will elaborate further on our direct to consumer and business segment results in just a few moments.

Overall gross profit for the quarter was 52.3% of net revenue compared to 51.4% of net revenue for the same quarter of 2008. Our higher mix of media sales which generate greater profits contributed to the improvement. This was offset modestly by our lower profit category management initiative, continued deductions from retailers and growth in our solar business which has lower gross margins. Excluding our solar business, gross profit for the fourth quarter improved 160 basis points to 59.1% compared to 57.5% for the same quarter last year.

Our selling and operating expenses for the quarter decreased 10.9% to $35.4 million from $39.7 million in the fourth quarter of 2008 reflecting over $10 million in annualized cost savings initiated in the first quarter of this year. Our operating income for the fourth quarter 2009 increased to $6.7 million from a loss of $47.2 million during the same quarter last year. Our prior year results included a $42.3 million pretax impairment charge for solar and direct to consumer segment goodwill, media libraries and other related assets. Our interest for the fourth quarter 2009 decreased to $73,000 from $220,000 in the same period last year, due to the decline in average short-term interest rates. The interest and other expense line also includes a $1.8 million loss on the disposition of a small unprofitable direct segment business. This disposition was mostly offset by a deferred tax benefit of $1.6 million.

We recorded net income of $4 million for the quarter or $0.17 per share compared to a net loss of $30.3 million or $1.26 per share in the fourth quarter of 2008. Excluding the $42.3 million of pretax impairment charges mentioned earlier, and the gain from issuance of Real Goods Solar stock, our pro forma net income for the fourth quarter of 2008 was $2.6 million or $0.11 per share. As of December 31st, 2009, our balance sheet remained healthy. We ended the year with $48.3 million in cash and we continue to carry no debt. Additionally, the cumulative effect of our operating profit and asset management strategies improved our fourth quarter free cash flow by $17.2 million year over year to $5.6 million and generated cash from operations of $7.2 million for the fourth quarter 2009. Inventory turns improved dramatically to 6.3 from 3.9 in last year's fourth quarter. Our days outstanding for the fourth quarter 2009 increased to 40 days and 36 days in the fourth quarter 2008, reflecting an increase in trade division sales in December. Overall we are pleased with our collection efforts and our ability to minimize credit risks. Approximately 83% of our receivables in the trade division are comprised of our top ten customers.

Depreciation, amortization and stock compensation expense totaled $2.7 million for the quarter. Capital expenditures were $700,000. Video production costs were $879,000. Investments in our corporate facility were $337,000. We had 23.1 million shares of outstanding common stock as of December 31st, 2009.

We continue to focus on leveraging our infrastructure and diversifying our consumer offerings. This quarter demonstrated the operating leverage inherent in our business model. In addition, our ability to grow revenue and generate cash flow from operations attests to the strength of our balance sheet, our brand loyalty with our customers, and the depth of our distribution channels.

In closing, while we don't specifically provide earnings guidance I would like to make a few remarks regarding 2010. First, as Jirka mentioned, in 2010 we expect to grow revenue double digits which means that our revenue will reach over $300 million. Second, our effective tax rate for GAAP reporting is expected to be approximately 36.4%. However, our next $30 million of earnings will be tax-free. Finally, due to the seasonality in our business, we expect earnings to be back end loaded in 2010, the same as it was in 2009.

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

Thanks, Carole. We're seeing the benefits of our current business strategies, as is evidenced by our best quarter ever in revenues, operating margin and EPS in Q4. For the past year we've remained focused on leveraging our sound financial position, increasing sales potential, expanding our role as media category manager and enhancing existing distribution through our store-within-store concepts while continuing to reduce operating costs and overhead. Our focus on free cash flow throughout the year resulted in tangible improvements to our balance sheet. Our core growth strategies resulted in strong internal revenue growth and our cost saving measures resulted in operating leverage and a significant improvement in earnings in our important holiday season.

As we emerge from this downturn we believe we're well situated to build on our operational strengths. Our unique multi-channel business model and our strong balance sheet will enable us to adapt our strategies and make the right decision for the long term in each of our business segments. Today I would not only like to focus on the result of each segment but also highlight how we plan to grow and progress on multiple fronts, leveraging the opportunities immediately in front of us while also investing so we are prepared for what lies ahead.

First, I would like to discuss our fourth quarter business segment results. We ended the year on a very positive note. In the fourth quarter of '09 sales for the business segment increased 44.1% versus 2008. Overall, the environment has improved, and we're encouraged by retailers buying patterns and our sell-through. The improvement that began in the second quarter accelerated throughout the year and into the fourth quarter. Our revenue growth in the quarter was broad-based in nature. Growth was fairly consistent among our top 25 accounts, which on average increased 40%.

During the quarter we began to ship titles from the Discovery Channel franchise licensing deal that we finalized in early '09. We are now the only licensee for new launches of all the Discovery Channel DVDs, including all the properties of Animal Planet, TLC, Discovery Channel, HG theater, the Science Channel, ID, and the Military Channel. We ill also have access to the entire library as the rights expire with their current licensee. We believe this new relationship with Discovery will continue to increase our high margin media sales.

Our store-within-store and category management initiatives are key strategies in maintaining our status as the clear leader in fitness and wellness media. Our store-within-store initiative continues to enhance the quality of our distribution with over 11,000 doors as of the end of the quarter, up from 10,000 at the end of fourth quarter last year. In addition, our category management program is in 4,000 doors, up from 3,000 in the fourth quarter of 2008. As I have mentioned on prior calls, this retail strategy is 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 and wellness. It's also a driver in growing the overall fitness media category 38% for the quarter and 22% for the year according to Nielsen's video scan.

Our total domestic retail distribution is at approximately 70,000 doors due to the shake-out in the retail storefronts. We also expect additional door closures in the coming months from Blockbuster and Hollywood Video which may reduce our store count further. Fortunately, the key components of our growth are store-within-store and category management in our top 25 accounts. As a result, we do not believe the closure of additional doors from these retailers will have a meaningful impact on our revenues in the future.

Moving to our direct to consumer fourth quarter results. for the fourth quarter revenue for the direct segment declined 12.2% on a planned reduction in catalog circulation of 38%. 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 on the Internet. We also continue to reduce distribution and inventory costs.

Now I would like to turn our attention to future opportunities in each of our segments. In our business segment we continue to be encouraged by our opportunities. We expect double-digit revenue growth in 2010 to come primarily from this segment. We'll achieve this through the following initiatives. First, we will focus on additional space for store-within-store exposure, both with our current retail partners as well as new store growth. Despite store closures and consolidation among retailers, our brand continues to perform well at retail and we expect to be able to expand to new categories and enlarge our footprint with our current partners.

Second, we plan to leverage our new licensing partnerships with Discovery and Reebok. We're focused on growing our market share in non theatrical home entertainment media. In 2010 we intend to launch not only new release titles with Discovery but to work towards creating non-theatrical store-within-store concepts. As we've shown in fitness media, by creating a managed home for a category of media, we can help grow the category even in a down market. Reebok fitness and accessories are in the final stage of development. We produced two DVDs in-house in our studio last quarter under the Reebok label. Reebok will begin to impact sales in third quarter of 2010 when we take over the 12-foot Reebok store-within-store at Target.

We will continue to focus on content. With our studio complete and our current owned content in the final stage of being digitized, we are now focusing on utilizing our studio assets to produce lower cost low-cost content for kits, DVDs, on-line courses, and web downloads.

While the growth in 2010 will come primarily from the business segment, the growth in 2011 and beyond will also come from our direct segment. We believe in investing in its future prospects and are committed to achieving profitability in this segment. We will achieve this through the following initiatives. We'll optimize our catalogue business through additional web marketing and further cost reductions. We'll grow Gaiam Life, a related web portal that utilizes digital content to create relationships, add members and sell media and products. As a result, it's more solutions oriented versus transaction oriented. We will invest in and grow our subscription services. This is a high-margin business with great drop through. We now have the infrastructure in place and will shift our focus towards marketing to drive revenue growth. We're preparing for the transition from DVDs to digital distribution by continuing to digitize Gaiam, Discovery, and other partners' content, and launching our own platform called GaiamTV.com in the spring of 2010. In addition, we will partner with new media companies such as YouTube where Gaiam has its own exclusive fitness channel to provide leading fitness, wellness, and non-theatrical digital content for streaming, rental, and subscription.

We plan to capitalize on our success in DRTV with new infomercials that support our efforts in retail. For example, in Q1 2010, we're testing a Pilates infomercial starring Mari Windsor, the most recognized Pilates instructor in the world, and hosted by Marisa Tomei, Academy Award winning actress. Finally, we will continue to focus on costs across our organization. In 2009 we reduced annual costs by over $10 million. In Q3 of 2010 we're consolidating warehouses and expect to realize an additional $1 million of annual savings.

In conclusion, we believe we are 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 reduction. Our distribution footprint at retail and our strong balance sheet will afford us the opportunity to grow revenues throughout new partnerships and titles. Our in-house studio and post-production capabilities will allow us to efficiently produce and digitize a wide assortment of low-cost content. And 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.

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

Thank you. (Operator Instructions). And our first question comes from Mark Argento. Your line is open.

Good afternoon and congratulations on a nice quarter. Just some quick housekeeping things up-front here. Could you just walk me through, I know that the tax rate, you had a tax benefit in the quarter that offset the write-off you took on that, I think it was a direct business that you mentioned. Can you just walk through what business did you decide to exist there. And then this tax offset, going forward, I know you said the next $30 million in net income will be shielded from taxes. How will we see that show up on the income statement?

The end of the quarter, there was the rest of the cleanup of the direct businesses, and we took what was left on the balance sheet from acquisition and we have a tax benefit. We took most of it already before, but that write-off would actually trigger the tax which pretty much offset it. So was virtually neutral. P&L was like $190,000 negative. We're pretty much done with everything on that.a We think what will happen after we clean all the rest of this stuff, the small business be actually contributing. We said we'll get by to end of year to break even. I think we definitely achieve that when we definitely shut some of them off. But it's what we said last year, we will focus on free cash flow. This year will be more focused on the revenue and earnings.

Carole mentioned something about a 36% tax rate for 2010 but that the first $30 million in net income will be shielded. Do you report a full tax rate and then there's a benefit that offsets that, or how should we look for that?

On the tax, basically we have to, even we don't pay tax, we report it for GAAP purposes on income statement. So when we report earnings we would basically take the charge for taxes, but we don't pay them. So that our tax rate is 36.4% but we are zero tax payer for next $30 million. So it's just an accounting entry for the tax.

And Lynn, could you talk to what you see, the health of retail and the changes you saw in Q4 and maybe what you're seeing so far in Q1?

I think the results speak for themself a little bit on Q4. We saw retailers returned to -- as I said, our top 25 retailers averaged 40% increase. So it came from new title, it came from store-within-store, it came from category managed fitness media. And we saw really good sell-through, as well, at retail, so everything's looking really positive on that point. And we really don't ever comment on the next quarter until we're ready to report that quarter in May.

How do you feel about inventory levels and where retailers are now with the amount of product they have on the shelves?

Mark, what I I really tried to do was take a look at the two years, 2008 and 2009, put together and looked at sell-through versus sell-in. We believe now that everything is normalized and that retailers are caught up on their inventories, and now certainly the gains are coming from sell-through.

And you see that double digit sell-through as what you would expect to see this year? You guys talked to a double digit growth rate with most of the growth coming from the retail or the business business?

That's correct. Don't forget also that we're very back end loaded on all that.

Sure. Just shifting gears a little bit, in terms of the Discovery relationship, I know you've launched a handful of titles. And I was just curious, I know on the Gaiam TV initiative you guys are digitizing all your content. Do you also have the ability to do things with other people's content, like the Discovery content that you've licensed? Is there any opportunity to work that into the Gaiam TV model or some type of a digital model, as well?

We absolutely do have that right, Mark, and it's our plan to put that up on Gaiamtv.com, as well.

Yes, this digital is really big deal for us for this year because we own pretty much digital content for digital rights for our content. It's quite different than a lot of the other studios. So we are looking forward for digital taking more foothold, so we're roll ahead of the ball and really focusing this in to offer our entire library, both direct and through all the partners who are willing to play. Discovery obviously part of it. So as Lynn said, we put them on Gaiam.com. Overall, while digital will be still small percentage of the sales, we really want to spend the time, because we believe that the sooner the consumer will adapt the digital, the more advantage we have.

Do the digital rights also include -- could you sell the content via iTunes?

It varies by retailers. I think iTunes, like we can sell our content. Discovery, when we took it over, already had a relationship. So I think iTunes they can sell directly. But people like Target and the rest of it we will sell.

I'll hop back in the queue. Thank you very much.

Our next question comes from Andrew Burns with Thomas Weisel.

Hi. Just a couple of quick questions here. When you look at the business segment growth, up 44%, and you broke down some of the drivers there, how much of that was from the media category management? Was that the most significant piece?

We don't really break it down like that, Andrew. I will tell you that new media titles, came about 10 points of the 40 points. Our base business was up over 30%. So really strong revenue growth on our base business, as well as adding new media titles and new media franchises. Other people, for most of the people, the new releases are 50% to 80% of the sales.

We not really depend on new titles compared, again, to other people. For most of the people, the new releases are 50% to 80% of the sales. For us, our catalog is much more. We really depend on sell-through.

That was from the Discovery.

Okay. And can you discuss your thoughts on store-in-store placement in 2010, and maybe any channels that are particularly interesting for adding more store-in-stores?

One of our biggest focuses for this year will be to try to set up, to do what we've done in fitness category management and replicate that in the non-theatrical area. I do believe that when you create a home for the consumer you will drive growth to that category, as we have done in fitness. With DVD distribution, or DVD sales overall according to Nielsen, being down for the year, and fitness media being up 22%, it does show that when you do create that home that the consumer is buying. Our plan will be to focus really on setting up category management in the non-theatrical area.

I know you won't provide gross margin guidance, but I was wondering if you could provide some color around what you see as the opportunities and the potential headwinds for the overall gross margin for the business in 2010 and beyond.

Right now we believe that the gross margin is stabilized, and that we should continue to see the kind of gross margin that we had without Solar. We're always affected overall with the mix of the business. But the Gaiam business on its own, we believe the gross margin's stabilized, and that's in the 59% range.

If we get a nice improvement we definitely expect those increases will hold.

Great, I'll jump back in the line, thanks.

(Operator Instructions). And our next question comes from Robert Routh with Wedge Partners.

Great quarter, guys. A few quick questions. First, given what's going on in the industry now, what we've seen with the caller ID, with Image, with Miramax, MGM and Lion's Gate, an all this, the value of film library is clearly unclear. Nobody really knows what they're worth. And yet you guys have a niche market, it's a little different. I wonder if you could talk a little bit about what you see from an industry perspective and how this could help you guys maybe acquire more titles in the near term as people are really uncertain as to what things are worth and what they want to keep and what they don't. Are you seeing any opportunities like that?

Yes, definitely an interesting market. There's a lot of our competitors, mostly with weak balance sheets, where we have opportunity to get either some libraries or more of whole companies. So we start to look at what we want, and we really start to look at that we want to be very focused what we want. And as Lynn said, we're going to focus on non-theatrical market, obviously keeping our focus on our wellness and fitness. And really make sure that whatever we have has digital offerings, because we believe that the digital part of the offerings will be very critical in three years to come. So being ahead of the ball, we really try to get properties we can leverage all the rights. Overall, we didn't see dramatic change for what people would ask, but if people get in trouble, that's obviously heavily favored in our side. The strong balance sheet will probably play a good part in the strategy over next year.

Do you think it's safe to say we might see some movement on that front over the next 12 months or do you think that that window is going to be longer, shorter, or just unclear?

With any acquisitions, you cannot say anything until you have it. We did some looks on several recently, but I would probably not comment on that. But we definitely have enough dry powder to do whatever.

Great. And could you talk a little bit about your international opportunities going forward? I know a few years ago you changed into more of a licensing model which makes a lot of sense. I'm just curious, given what the Gaiam brand stands for, and as you continue to get a lot of star power behind you, like Marisa Tomei, and Sting, whether or not you're going to expand into other countries in the near term, if you see a lot of opportunities there.

Rob, we spent the last couple years really identifying the right partners, which I think we now have for probably five of the major countries that we want to be in. And we will, I think, see over the next 12 months the Gaiam branded business really grow in those areas. Again, it's a licensing business. So as you know, you only get a percent of the revenues. But we think it's the right business model for us. And certainly the star power that we've brought, particularly Trudie Styler and Sting in areas in Europe has really enhanced the Gaiam brand, and the star power that we're bringing on for 2010 will do the same.

Okay, great. Just one last question, I'm curious about the dividend that you declared, the way you came up with it makes a lot of sense. But I'm curious going forward can we expect to see that dividend be a sustainable annuity we'll see every year, or just looking at that until through your NOLs? I don't know what management is thinking as far as that goes. Also, given your buyback authorization in your balance sheet and where your shares are and where they probably should be, you're caught between a rock and a hard place in terms of buying back your stock as probably the best use of your capital, but at the same time, liquidity is something investors need, to get some of the bigger institutions and the name. I'm just curious what management plans on doing to address that longer term.

First, on the dividend, it's definitely our current intention to continue with that. You can't predict the market but it's definitely our intention to continue with that annual dividend. As far as liquidity, as we talk acquisitions, there's definitely some potential to increase liquidity that way. On the other side, we definitely have plenty of cash to do them in cash, so with our balance sheet and free cash flow I think we can go, depends what's needed. But some of the opportunity, what may be on the market can be pretty sizable, so we can talk about it when we get there.

Okay, great. Thank you very much.

I would now like to turn it back over to Mr. Jirka Rysavy for closing comments.

Thank you. Thanks everybody for being with us. I'm glad that we could report a record quarter, obviously. And we're pleased with the business and we hopefully will be with you in the next quarter. So thank you very much.

Thank you. That does conclude today's conference and you may disconnect at this time.