Gaia Inc (GAIA) 2010 Q2 法說會逐字稿

Welcome to the Gaiam Second Quarter 2010 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 Ms. Christine Gleim from ICR. Ma'am, you may begin.

Thank you, Ashley. Thank you, everyone, good afternoon. The following constitutes the Safe Harbor statements 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, Christine. I'd like to welcome you on a second Q call. And after two quarters of double-digit internal revenue growth and some signs of improved retail environment, our world consumer spending slowed in second quarter. As a result, retail has pulled back in orders across the board, which impacted our revenues despite significantly higher sell-through of our products at the retailers.

During the second quarter of 2010, our operating results improved over the quarter of last year despite a sluggish revenue and also additional costs in [Q3 consolidating] in our warehouse.

(inaudible) warehouse costs, consolidation cost, our expenses improved for about $3.6 million, or about 230 basis points, which drove our 49% improvement in our operating results. Our revenue drop was about equal to $4 million revenue decrease in our direct-response TV unit as we dialed down our TV marketing spend. Because this unit operated about breakeven, the revenue drop did not have any meaningful effect in our operating results.

Our 10% US market shares in non-theatrical DVD category, it's almost doubled for 5% at the end of the year. We also increased our fitness market share to about 43%. Size of the fitness category as reported by Neilsen VideoScan increased about 11% year-to-date compared to the same period last year.

Also, during the quarter, we increased our store-within-a-store branded presentation to 12,500 doors from 12,000 doors at the beginning of the quarter.

Also, as part of our move to digital media space, we totally redesigned our website, Gaiam.com, during the second quarter. This site will allow us to facilitate a creation of Gaiam TV, which will be a flagship for our digital library, and it is planned to be launched at the end of the third quarter.

Now on cash -- (inaudible) cash dividend of about $0.15 we paid in April, which totals $3.5 million and using about $3.2 million for new media content, which included our acquisition of Discovery Gift Catalog from its previous vendor, we ended the quarter with $43 million in cash and no debt.

We have a strong cash position looking back actively and looking to invest both on internal media development and acquisition of complementary brands content and categories. The categories we can leverage with our multichannel platform.

Starting September, we expect to start to fully realize the benefit of the Discovery and Reebok license relationship, which will allow us to expand our Target store-within-a-store by additional 12 feet. We also expect that current balance between selling and sell-through in our retailers normalize result in improved revenue trends for us.

We believe that even if the economy does not improve, we should have a good fourth quarter, which is historically the key quarter for our annual profitability.

Now I am going to ask Carole to give you some more details and numbers and Lynn the operational review. So Carole?

Thank you, Jirka. For the second quarter of 2010, net revenue was $56.4 million, a $6.7 million decrease from $60.5 million for the second quarter of 2009. Net revenue for our business segment decreased 13.8% to $17.9 million for the second quarter of 2010, and $20.8 million for the same quarter last year. The revenue decline in our business segment reflects the weakening of the consumer climate as well as the timing of orders from retailers.

Net revenue generated by our direct-to-consumer segment for the second quarter of 2010 decreased 22.2% to $21 million, and $27 million for the second quarter of 2009 as we continue to strategically reduce our catalog circulation and optimize our television media spend in the quarter.

Compared to last year's second quarter, we reduced circulation by 17%. In addition, we reduced our media spend for direct-response marketing programs by 24%. Lynn will elaborate further on our business and direct-to-consumer segments results in just a moment.

30 a.m. Pacific time.

Gross profit for the second quarter of 2010 was 51.3% of net revenue compared to 52% of net revenue for the same quarter of 2009. Excluding our solar segment, gross profit margin for the second quarter of 2010 improved to 61.4% compared to 59% for the same quarter last year. A higher margin in our direct-to-consumer segment as well as the higher mix of media sales improved gross profit margins for the quarter.

Our selling and operating expenses for the second quarter of 2010 decreased 12% to $27 million from $30.7 million for the second quarter of 2009, reflecting optimized variable cost as well as payroll and infrastructure cost control measures.

Corporate G&A expenses remained relatively flat at $3 million for the second quarter of 2010 compared to $2.9 million for the same quarter for the previous year. As a percentage of sales, total expenses declined 230 basis points to 53.3% in the second quarter from 55.6% in the same quarter last year.

In a seasonally and economically weak quarter for us, our operating loss for the second quarter of 2010 improved to $1.1 million from a loss of $2.2 million during the same quarter last year.

Our net loss improved to $0.5 million for the second quarter of 2010, or $0.02 per share compared to a net loss of $1 million, of $0.04 per share for the second quarter of 2009. For the six months ended June 30, 2010, we recorded net revenue of $118.6 million, a 1.9% increase from $116.4 million for the first half of last year. Net loss for the first half of 2010 improved to $0.8 million, or $0.03 per share compared to a net loss of $4.1 million, or $0.17 per share for the same period last year. The significant improvement in operating results in the first six months of 2010 is primarily due to an $8 million reduction in total expenses.

As of June 30th, our balance sheet remains strong. On April 30th, we paid an annual cash dividend of $3.5 million, or $0.15 per share. In addition, for the first six months of the year, while we generate $1.8 million in cash from operations, we invested $3.2 million in media content. Included in our media content is the acquisition of the licensing rights for the Discovery Channel media from its previous licensee announced in our first quarter conference call.

As a result, cash decreased $5.3 million since the end of last year, and we ended the quarter with $43 million in cash, and we continue to carry no debt.

Inventory turns for the second quarter of 2010 improved to 4.5 times from 3.8 times in last year's second quarter despite some requirements to build inventory for Reebok and Discovery at the end of the second quarter of 2010.

Our day sales outstanding for the second quarter increased to 59 days from 33 days in the second quarter of '09 reflecting higher receivables from the large retailer accounts, which are on longer pay cycles, and an increase in Real Good Solar receivables, which was driven by complex commercial projects. Approximately 80% of our receivables in the trade division are comprised of our top 10 customers.

Overall, we are pleased with our collection efforts and our ability to minimize credit risk.

Depreciation, amortization, and stock compensation expense totaled $2 million for the second quarter of 2010. Capital expenditures were $746,000, and media rights costs were $871,000.

We had 23.3 million common shares outstanding as of June 30, 2010. For 2010, even with the recent weakness in the consumer environment, we expect to resume our growth in the back half of the year. We expect a combined statutory tax rate of approximately 36%, and the current seasonality of our business makes our earnings more concentrated in the latter half of the year.

We look forward to the latter half of the year and especially our fourth quarter, given the continued growth of our Discovery title offerings and the expansion of our footprint at Target by 12 feet for Reebok products.

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

Thank you, Carole. We delivered a 49% improvement in operating results including costs associated with our warehouse consolidation despite lower revenues. As we have witnessed before in this economic climate, retailers reacted to the uncertainty surrounding consumer spending with conservative buying patterns in the second quarter. This resulted in approximately 20% lower sell-in and sell-through revenue for us with our top two customers.

Consequently, we are now in a position where our retailers are moderately understocked, and we expect to see improved sell-in revenue during the latter half of the year.

We also reduced our media spend in our direct-response division, which resulted in a $4 million decline in revenues in that division but helped maintain profitability. While we cannot control the uncertainty in the economy, we can remain focused on the manageable aspects of our business, such as growth and cost control strategies that strengthen our results over the long term.

With our unique multichannel business model, a leaner organization, our DC consolidation behind us, and a strong cash position, we are now ready to more aggressively invest in our brands, products, and content as well as complementary acquisitions.

Now I'd like to review the results for our business and direct-to-consumer segments and comment on upcoming opportunities for us during the remainder of 2010.

First, the business segment. During the second quarter, sales for the business segment decreased 14% compared to the second quarter of 2009. As I mentioned, actual retail sell-through to the consumer during the second quarter was significantly better than retail buying patterns or sell-in. In our top two accounts, which track point of sale, our sell-through during the quarter was 20% better than our sell-in to these top two accounts. This is a marked change from the first quarter of 2010 where our sell-in was more consistent with the sell-through at our retailers.

Overall, our direct accounts at retail remain steady at 67,000 doors. Our store-within-a-store branded presentation, which continues to enhance the quality of our distribution, grew to 12,500, up from 12,000 doors last quarter. Our category management program increased slightly to 4,600 doors, up from 4,500 at the end of 1st Q.

According to Nielsen's VideoScan, the non-theatrical and fitness segments are significantly out-performing the overall DVD category, which declined year-to-date. The fitness segment has grown 11% this year, while non-theatrical is even with sales in 2009.

While the fitness DVD market segment is increasing, we are also growing our market share, which increased to 43% year-to-date compared to 41% at the end of 1st Q of 2010. In addition, our non-theatrical market share is 10% year-to-date up from 5% at the end of last year.

With the recent addition of the Discovery catalog titles, we will now be the exclusive licensee for all Discovery Channel brands. In June we began to ship the first phase of Reebok orders to Target, which includes replenishment of the current product line.

With respect to future opportunities in our business segment, we expect revenue growth to return in the latter half of the year for three primary reasons. First, we believe the imbalance between sell-in and sell-through will normalize during the remainder of the year. Second, we expect higher-margin media revenue growth with the expansion of our Discovery Channel brands. And, third, Reebok fitness media and accessories will impact revenues beginning in third Q as we start to ship products to Target in preparation for its annual September reset.

The reset will be our first opportunity to implement a full-scale store-within-a-store concept accompanied by a complete rebranding of Reebok packaging, aimed at creating a destination for the Reebok consumer. After completing the September Reebok reset, Gaiam will control a total of 24 feet in Target. We expect the addition of Discovery and Reebok brands to materially affect our revenues in Q4.

Overall, while we expect growth in our business segment to return during the latter half of 2010, we do recognize the degree to which its growth is dependent upon the overall retail environment. We are working on strategic projects for the Gaiam brand including additional complementary content licensing deals such as the Travel Channel, expanding the Gaiam brand into other categories, and looking at possible content acquisitions, all of which could be leveraged through our extensive retail distribution channel.

Next, I'd like to review our direct-to-consumer segment second quarter results. For the second quarter of 2010, revenue in our direct-to-consumer segment declined 22% as compared to the second quarter of last year. On a planned reduction in catalog circulation for the quarter of 17%, reduced media spend of 24% in our direct-response business, and a non-recurring event during 2009 in our travel business. Much of this revenue decrease was strategically designed as we once again reduced prospecting, optimized our sales on the Internet, and reduced media spend to maximize profitability during uncertain economic times.

As we did in the second quarter, we will continue to reduce our overall media spend for direct response and our catalog circulation in the third quarter, which will affect revenues but not have a material effect on the bottom line. With the upcoming elections causing media rates to increase, we are taking a conservative approach to our media spend in order to protect our bottom line.

Now to discuss some further opportunities in the direct-to-consumer segment for the latter half. First, we'll continue to improve the look and feel of our new Gaiam website, which we unveiled this quarter. This includes launching Gaiam TV at the end of September and transitioning our commercial portal to Gaiam Life, a related Web portal that utilizes digital content to create relationships, add members, and sell media and products.

We are now in the process of digitizing our library of titles and are beginning to utilize our in-house studio to produce cost-effective content for our direct customers. We believe, as the Internet content becomes readily available on the family TV set, we are uniquely positioned to offer relevant and timely content to our direct consumers via download, streaming, or a subscription model. We've built the infrastructure, including the software, to scale this venture.

Second, we plan to transition from the traditional catalog model to a direct-to-consumer digital and subscription model. We will circulate fewer catalogs, become more efficient with Internet marketing, and further reduce distribution in inventory cost.

Third, we will utilize our retail packaging to highlight our digital content and market the Gaiam brand and story.

And, finally, we'll continue to invest in our direct-response platform to promote products that will grow revenues, support our retailers, and complement our brand. We have a number of innovative fitness products and content in our lineup that will positively impact our revenue beginning in the fourth quarter provided that media costs are at acceptable levels to ensure profitability.

Overall, we continue to focus on cost reductions across our organization. While we reported cost savings in excess of our anticipated $10 million on an annualized basis, we expect additional savings in the future from our warehouse consolidation, which was completed this quarter. The anticipated reduction in warehouse occupancy and overhead will generate an additional million in annual savings commencing during Q3.

In conclusion, as evident from our first-half results, we remain focused on maximizing profitability and maintaining our strong balance sheet during a volatile retail climate. While we focused our efforts on costs this past year, we will now turn our attention to growth for the Gaiam brand, expanding the categories we sell through our distribution channels, acquiring complementary companies, content, and/or brands, and investing in digital platforms and distribution.

I'd like to now open the call up for questions. Ashley?

Mark Argento, Craig-Hallum Capital.

Just quickly, in terms of the direct business, I know you've been into the process -- over the last probably year or 18 months, kind of reduced the catalog expenditures, cutting down on the costs there in terms of distribution. What are your long-term plans on the direct-to-consumer business? And how do you see that fitting in with your strategy, the digital media strategy, going forward?

Well, Mark, I think, first of all, we're positioned as a content provider to actually have a direct-to-consumer business. So as content migrates to a digital platform, we are uniquely positioned to be able to offer that directly to the consumer.

Now, we'll continue to have commerce and products as a part of our strategy, but we believe that the digital platform will be our future on the direct side. We'll also migrate to more customer acquisition through the Internet and through retail packaging versus catalog prospecting. It's a much more efficient way to do business, and certainly more cost-effective.

You'll probably see the catalog kind of phasing -- it doesn't mean it will disappear, but I think circulation will -- the catalog will be just kind of sent to our database, not used as an acquirer of new clients, which is a fundamental change. Sending catalogs to existing base, its business would make sense, but today prospecting doesn't.

Are you still looking to transition those customers to more of a subscription model with the new digital platforms? Or what do you expect to be able to -- or how can you monetize that customer base?

We talked about it for a couple of years. We kind of de-focused that for last year. We didn't really talk about it, but definitely the digital part and the subscription, it's a direction. And we kind of spent the last two years, year and a half, to kind of take cost out of that. So that subscription is pretty much breakeven. Actually, you know, for the quarter, it was less than half of a penny. So we're pretty much where we want to be. So I think we can start to grow that again.

And the launch of Gaiam TV, which is planned for the last few days in September, it will be kind of the center of all that activity.

I think you can also see the progress we've made, Mark, if you go to the website and see the difference. We are no longer just a products company. You can certainly see the opportunities for membership when you see what the website looks like now.

You can see some of the subscription club that's a first time. You can kind of go to it directly and kind of middle of the page, we have first few club. We actually started to put them together as an offering. But you will see significant changes to that over the next few months, still, as we kind of put it all together. So probably beginning of October, you're going to see the comprehensive offering online.

Okay. And then in terms of -- I know you noted in the press release and also in your prepared remarks that you're getting more active at looking at acquisitions. How do you -- what's the climate out there? Has the (inaudible) spread getting to the point where you can start getting some deals done at fairly reasonable levels? And then I have one follow-up.

The acquisition market out there is there for a while. Companies started to get in trouble, they get in a block. There was still kind of expectation that they can realize the multiples and stuff what was on trailing basis. So I think now people kind of start to get in situation that they get more realistic. Because, you know, our stock traded down, we always not willing to pay what we used to. But I think the environment is kind of settling, with economy being back to kind of the sluggishness of people expected kind of uptick for last couple of quarters. So we expect, actually, some deals going through over the next couple of quarters.

Then, Lynn, in terms of Reebok, I know you're getting 12 more feet at Target. Will that predominantly be all hard goods, or will there be some media mixed in there? And then where are you? What are the prospects in terms of getting that Reebok brand into some other decent-size accounts?

There will be some media, and, of course, then, there's also hard good with media, which is also what we do in Gaiam. So we'll have a couple of titles that we'll launch under the Reebok brand, a couple of DVDs. And then we'll have DVDs within the hard goods. And we are certainly working on the Reebok brand for first quarter with several of the sporting goods chains right now. I don't have anything that I can announce that's for sure, but I would think that we'll have something for January.

Andrew Burns, Stifel Nicolaus.

Just a quick question in terms of the Reebok/Target rollout. Can you give us any guidance in terms of how that's going to look on the P&L in terms of gross margin and SG&A? Is that going to hit at sort of full margin potential or is there a ramp, over time? Or investments to be made there during the rollout? Any color there would be helpful, thank you.

Well, it's a hard goods kind of margin. Like I said, there will be a few media titles, so it would be more of a hard goods margin on it. Certainly, there were some investment class that will be in cogs over the first six months to a year because of [mold] charges, et cetera. So you'll see the margins a little bit grow, over time. And most all the other costs will just go right through our current infrastructure. So other than freight, co-op and royalties, it will just go through our current infrastructure.

Great. And could you give any color around the Travel Channel licensing deal recently announced in terms of magnitude there and the velocity of titles?

We just think it's a nice complementary brand for us as we try to improve our market share in non-theatrical. It's very complementary with the Discovery brand, and it gives us additional content when we try to go in and pitch a non-theatrical kind of branded store-within-a-store.

(Operator Instructions) Dan Wimsatt, AAD Capital.

I've got three unrelated questions. The first are for you, Lynn and Carol, and the last for Jirka. Question one -- sorry for my ignorance, but the sell-in versus sell-through that you talked about -- can you remind us, is there any seasonality in that relationship at all? And the related question is, is this something that you would expect, going forward? Is this going to be more the norm than the exception?

Well, Dan, we experienced this back in 2008, as well, when there was some uncertainty as to what was going on with consumer spending. And what happens is the retailers pull back on orders and try to sell the inventory on the shelves. And, in many cases, during those days, we experience some fairly large out-of-stocks as the retailers just really try to move through their inventory.

We don't know what to anticipate with this, whether it will all be made up between third and fourth quarter; whether they will continue to be conservative in their buying, and how much of this is affected by their own private label that they have to bring in. So last time we saw it catch up over the next three quarters, but we'll see what happens with it this time.

To be specific, you know, what we kind of saw, we had September '08 in fourth quarter, it was kind of down. First quarter still wasn't good, then the second quarter '09, you have a big jump. So assuming there is some indication, we expect that most of the catch up will be fourth or first quarter.

Is your supply chain sufficient such if the bounce-back doesn't happen, is this the new norm? Is it going to run at leaner on inventories? Is that okay for us?

You mean if the retailer just decides to run lean on inventory?

Yes.

Sure. Then we would have this one-time hit, and we would continue then to be normalized sell-through and sell-in for the balance of the year.

Right. But you're prepared on the supply chain -- ?

Yes, we are.

Okay. Second question, please -- category management. Lynn, you talked about up the 100 doors in the quarter -- how is that going for your expectations and just remind us where this business is headed in profitability, please?

Sure. Well, I think what you can see by what Nielsen VideoScan results is that the fitness category actually grew almost 11% year-to-date. And that's because we're doing category management whereas overall DVDs declined during that same period. So not only are we able to help grow the category by doing it, but we are also able to grow our market share by being this category captain. So --

That category, the 43% does not include the category management.

No, it doesn't include the other products that we bring in. It's just the Gaiam share is 43%.

Our control management overall is, like, 70 somewhere -- 70%.

But where does this grow to? Where would you hope this is at just round numbers -- the end of next year, what would be a success for you?

I would certainly like to have category management in most of the sporting goods chains, and we believe it can transition to a digital category management for all retailers, which we believe is the future. And, obviously, that would be your highest-margin business as we evolve to digital.

It's actually main pushes (inaudible) as soon as we launch this digital platform on fourth Q we would try to push because we have so big market shares that we definitely have a leverage to pull it. And we try to be consolidator and category management on the digital space. That's really our main goal more than getting extra 5% or 10% in retailer, which we want, too, and to keep growing but in a more like couple of points a quarter. But our goal is really leverage this to the digital space. Because in digital space we own digital rights for pretty much all our meaningful titles, and that's kind of the difference than a lot of our competitors. And so we try to using that strength because profitability over the other one is much more as a percentage. The question how quickly the digital space will get adopted, that's a different question.

Makes sense. Last question, Jirka, for you, and thanks for the time. I guess we'll wait until tomorrow morning to hear more about real goods. Just looking ahead as a shareholder, do you think -- is this -- obviously, you've had this discussion several times. It doesn't look like this is a direct complement to your existing business. I would imagine at some point in time, you're either going to make a larger investment, or you're going to the best. Can you give us any sense, since this really is your baby, which way you are leaning? And the pros and cons for that investment?

I can say you are right. You know, it's really the question how the market develops right now. The solar is actually doing really well. The internal growth there, pretty, over last year, is around 40%. And the profitability is ahead of the expectation. So it's a good business right now.

It's obvious we get a lot of question about visibility of this through Gaiam and how is it -- should we dividend the stock to our shareholders? And so there's a lot of options, and we definitely looking at it, and we need to decide how the market is. But in this relatively sluggish retail environment, [lean tech and energy] are actually doing very well. So I think it's kind of decisions as we go.

I would like to turn the call back over to Jirka Rysavy.

Okay, well, I'd like to thank everybody to being with us and, hopefully, be with us next quarter. So thank you very much and see you next quarter.