Gaia Inc (GAIA) 2010 Q3 法說會逐字稿

Welcome to the Gaiam third quarter 2010 financial results conference call. All lines are 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 Christine Gleim from ICR.

Thank you. Good afternoon everyone and thank you for joining us today. The following constitutes the Safe Harbor statements of the Private Securities Litigation Reform Act of 1995, except for historic 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, 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.

Thank you. I would like to welcome everybody to our third quarter call. The revenue for third quarter which ended September 30 was about $72.3 million, which was a 2.8% decrease from the same period last year. Similar to what happened in the second quarter, we circulated fewer prospecting catalogs, and dialed down our marketing spend on TV for our direct response unit. Since the unit currently operates at breakeven, the revenue drop did not have any meaningful effect on our income.

Net income improved to $0.9 million, or $0.04 per share, from $0.4 million, or $0.02 per share in the same quarter of last year. For the nine months, operating income improved $6.8 million, and net income increased by $3.8 million to $59,000, or $0.00 per share, compared to a net loss of $3.7 million, or $0.16 per share during the nine months of last year. During this quarter we increase our store within a store branded presentation to 14,500 doors, up from 12,500 in the beginning of the quarter, and 12,000 doors in the previous quarter, or 11,000 a year ago. So it is a very dramatic increase recently.

Also our US market share category in the non-theatrical DVD category is up 9%, which is significantly up from 5% last year. We increased our fitness market share to 42% from 34%, and DVD Fitness category as a whole increased 10.5% compared to the same period of last year, as reported in Nielsen's VideoScan. We ended the quarter with approximately $41 million in cash, and no debt. Even after paying a cash dividend of $0.15 per share, which was about $3.5 million during the year, and using almost $5 million for our new media content acquisition, including the acquisition of Discovery catalog. Our cash obviously remained pretty strong. We plan to use some of it to further invest in acquisition the content, as well as internal content development, and for other aspects of our digital media strategy.

We own digital and internal rights to almost our entire library, which is quite unique in today's media landscape, and we do intend to aggressively pursue this advantage. We recently hired a seasoned VP of Digital Sales, and also surf launched our Gaiam TV, which is our flagship site for our digital media. Now the recent launch was to our customer advisory council. As a part of our strategy, digital strategy, we also redesigned in July our overall website Gaiam.com, which we talked to last time, which will support a broad launch of Gaiam TV platform, which will include mobile devices, which we plan to do in spring 2011.

Looking forward, we start to see benefit from our last 12 months effort, and expect that our fourth quarter may well be our historically best ever, in terms of both operating income and EPS. How we are giving the last year 44% revenue comps in our business segment during the fourth quarter, which was probably driven by inventory fill-ins by our large retailers, as well as our still planning to continue our decrease in TV marketing spend through the recent election period which just ended. We still kind of expect revenue fourth quarter to be relatively flat, as it was the rest of the year. However I believe that this 32% recent expansion of our store within a store during the 12 months in all of our games and media categories and market share basis, and our big advantage with our digital media transition because we own all of the digital rights.

And also which is interesting and encouraging, improvements in our catalog business for the last few weeks, we definitely are starting to see some positive trends. And we believe that they are all good drivers for revenue growth in 2011. And I will turn the call over to Carole to give you more detail in the operations.

Thank you, Jirka. For the third quarter of 2010 net revenue was $72.3 million a 2.8% decrease from $74.4 million in the third quarter of 2009. Net revenue from our business segment increased 2.5% to $21 million for the third quarter of 2010, from $20.5 million for the same quarter last year. Net revenue generated by our direct to consumer segment for the third quarter of 2010 decreased 13.8% to $26.7 million, from $31 million for the third quarter of 2009, as we continue to strategically reduce our catalog circulation, and optimize our television media spend in order to maximize profitability.

Compared to last year's third quarter we reduced circulation by approximately 16%. In addition we reduced our media spend for direct response marketing programs by 17%. Lynn will elaborate further on our business and direct to consumer segment results in just a moment. Net revenue for our solar segment increased to $24.6 million for the third quarter of 2010, from $23 million for the third quarter last year. For more information concerning the results of Real Goods Solar, a separate earnings call will be held tomorrow November 4th at 8.30 AM Pacific Time. Gross profit for the third quarter of 2010 was 45.9% of net revenue, compared to 48.1% of net revenue for the same quarter of 2009. An increase in mix of solar revenues impacted gross margin year-over-year. Excluding our solar segment, gross profit margin for the third quarter of 2010 was 56.5%.

A lower mix of direct response television sales in our direct to consumer segment, as well as a higher mix of product sales in our business segment reduced gross profit margins for the quarter. Our selling and operating expenses for the third quarter of 2010 decreased 7.8% to $29.2 million, from $31.6 million for the third quarter of 2009, reflecting optimized variable costs as well as payroll and infrastructure cost control measures. Corporate G&A expenses decreased to $2.9 million for third quarter 2010 compared to $3.2 million for the same quarter of the previous year. As a percentage of net revenue, total expenses declined 240 basis points to 44.4% for the third quarter from 46.8% for the same quarter last year.

Operating income improved to $1.1 million for the quarter from $0.9 million for the same quarter of the previous year. Our interest and other income improved to $1.1 million from $0.1 million for the same quarter last quarter. Interest and other income includes a $1 million revaluation gain on an equity investment. Our net income improved to $0.9 million for the third quarter of 2010, or $0.04 per share, from net income of $0.4 million, or $0.02 per share for the third quarter of 2009. For the nine months ended September 30, 2010, we recorded net revenue of $190.9 million, flat from $190.8 million for the first nine months of last year. Net income improved to $59,000, or $0.00 per share compared to a net loss of $3.7 million, or $0.16 per share for the nine months period last year.

The significant improvement in operating results in the first nine months of 2010, is primarily due to cost control measures with annualized savings of over $10 million. As of September 30, 2010 our balance sheet remains strong. On April 30 we paid an annual cash dividend of $3.5 million, or $0.15 per share. For the first nine months of the year, we generated $2 million in cash from operations, and invested $1.9 million in capital expenditures. In addition, we invested $4.9 million in media content, including the acquisition of the licensing rights for the Discovery Channel library from its previous licensee, as announced on our first quarter conference call. As a result, cash decreased $7.5 million since the end of last year, and ended the quarter with $40.8 million in cash, and we continue to carry no debt. Inventory turns for the quarter of 2010 remain steady at 5.6 times from 5.7 times for last year's third quarter, despite some requirements to build inventory for Reebok and Discovery at the end of the third quarter of 2010.

Day sales outstanding for the third quarter of 2010 increased to 45 days from 32 days in the third quarter of 2009, reflecting higher receivables from large retailer accounts which are on longer pay cycles, and an increase in Real Goods Solar receivables. Approximately 83% of our receivables in trade are comprised of our top ten customers. Overall we continue to be pleased with our collection efforts and our ability to minimize credit risk. Depreciation, amortization, and stock compensation expense totaled $2.3 million for the third quarter of 2010, capital expenditures were $700,000, and media rights were $1.7 million. We had 23.3 million outstanding common shares as of September 30, 2010. Overall we are pleased with the operating improvement for the first nine months of 2010, and we look forward to sharing our fourth quarter and 2010 results. Our fourth quarter has the potential to be our historical best, in terms of operating profit and EPS, despite our expectations for flat revenue.

Two important comments on our expectation for flat revenue. Last year's fourth quarter included a difficult comparison in our business segment of 44% comp growth, as we were impedimented by a large inventory sell by our key retailers. In addition, we expect to continue to decrease TV marketing spend in our direct response segment to the election, and reduce our catalog circulation in the fourth quarter. For 2011 we expect our revenue growth to resume. This growth will be driven by our additional stores and store placements we gained in 2010, incremental sales with our Discovery and Reebok licenses, and resumption in growth in our direct segment. Now I will turn the call over to Lynn to provide more detail on our performance and growth initiatives by business segment.

Thanks, Carole. First let me say that I am pleased with our progress in this economically challenging year. During the past nine months we took the necessary steps to position the Company for the near term and for the future. We cut infrastructure and direct marketing costs, repositioned our catalog business, primed our direct response pipeline, began shipping products under the Reebok license, and invested in our library and digital future. We maintained our strong balance sheet and improved our year-to-date operating income by $6.8 million. We are well positioned to have our best fourth quarter in terms of profitability.

I will now go into some detail relating to the quarter and our outlook for the future. Similar to the second quarter we made a strategic decision to reduce marketing spend in our direct to consumer segment, specifically with our catalog and direct response TV businesses during the third quarter. This decision combined with revenue growth from our solar and business segments resulted in 13% improvement in operating income during the third quarter of 2010, as compared with the same quarter last year. As consumers pull back on spending, we continue to make marketing decisions for near term profitability in each of our segments without sacrificing our long-term strategies.

In the fourth quarter we will leverage the opportunities for our brands, products and content, and anticipate further growth opportunities in Q1. With our unique multi channel business model, a leaner organization, and a strong cash position, we can explore external growth opportunities through complimentary acquisitions, and aggressively invest internally in our brands, products and content.

Now I would like to discuss the results for our business and direct to consumer segments, as well as focus on upcoming opportunities for 2011. First I will provide you with more detail on the results of our business segment. During the third quarter, sales for the business segment increased 2.5% compared to the same quarter for 2009. If you take into consideration last year's third quarter growth of 24%, it is commendable that our business segment was able to not only sustain such sales levels, but even moderately grow revenue. Overall this quarter sell-in was more consistent with sell-through, although retailers continued to maintain lean inventories, and remained moderately understocked.

Overall our door count and retail distribution remain solid. As previously discussed due to store closures at Blockbuster and Hollywood Video, our total doors in the US declined to 65,000. However, our stores within a store grew to 14,500 doors, up from 12,500 doors in the second quarter of 2010, and 11,000 doors in the third quarter of 2009, driven mostly by new store-within-stores at Best Buy and the Reebok brand at Target. This quarter Best Buy rolled out Gaiam's Fitness store-within-store presentations to 600 doors. Our category management program remained at 4,600 doors up from 4,000 doors in the third quarter of 2009. Our real focus has been, and will continue to be the growth of our store-within-a-store strategy, as it is the best branding and return on investment for us. Recently Gaiam has been awarded the role of category captain for all fitness equipment in Target Sporting Goods department effective immediately.

This expands on Gaiam's previous responsibilities that included category management of all fitness DVDs at Target, and clearly reflects Gaiam's growing strategic significance across the entire fitness category. Concerning the DVD market, the segments in which we compete, specifically non-theatrical and fitness, are continuing to outperform the overall category with growth in the fitness category up 10% year-to-date. This compares to the overall DVD category which is down 10% year-to-date, according to Neilsen's VideoScan. We increased our fitness DVD market share again this quarter, growing to 42%, compared to 35% the end of 2009. In addition, our non-theatrical market share was up to 9% year-to-date, up from 5% at the end of 2009.

I have two additional announcements to share from our third quarter. First we welcome Eric Lemasters as our business segment's Vice President of Digital Business Development. Eric comes with seven years of digital experience at Koch and E1, and will be responsible for expanding the Company's digital distribution division, by securing agreements with digital partners across current and future platforms. Eric will develop and implement the strategy to monetize our thousands of hours of proprietary content. Second, we are truly excited to announce that Gaiam has entered into an agreement with the Oprah Winfrey Network, for a Gaiam branded daily half-hour wellness show. This is an excellent branding opportunity for Gaiam, and we expect our first show to air in January 2011.

Now I would like to turn our attention to opportunities in the business segment for 2011. The 10% growth in the Fitness DVD category this year, continues to encourage us that this segment will be the last to migrate to digital, given its unique content and location at retail in the Sporting Goods department. We assume a slight degradation in DVD sales going forward, but expect our business segment to grow for a number of regions. First, Gaiam now manages a total of 24 feet in Target. While over the next few quarters, Target is still working through inventory from its previous Reebok licensee, we expect to fulfill all new Reebok orders during the fourth quarter.

The September 2010 reset was a full scale store-within-a-store presentation, accompanied by a complete repackaging of Reebok products aimed at creating a destination for the Reebok consumer. In addition, we will roll-out the Reebok line to other mass market retailers, as well as leverage Reebok success with EasyTone, and launch a new complimentary accessory line for specialty retailers in 2011. We are also expanding our licensing relationship with Oregon Scientific, to include not only the fitness category, but also the wellness category in 2011. Gaiam content is an integral part of the wellness product line offering, that includes heart rate monitors, aromatherapy, and back care.

We also have some exciting new personalities and brands that will become a part of the Gaiam portfolio in 2011, including the Biggest Loser host and star Jillian Michaels, who currently has the number one on VideoScan. We will continue to expand our store-within-a-store concept, as we recently did with Best Buy, and finally we are positioned with personnel and infrastructure to support our store-within-a-store strategy for digital, with all our current retailers as well as with strictly digital distribution channels. We will utilize our current retail platform to introduce the customer to our digital offerings.

Next I would like to review our direct to consumer segment third quarter results. For the third quarter of 2010, revenue in direct to consumer segment declined 13.8% as compared to the third quarter of last year. On a planned reduction and catalog circulation for the quarter of 16%, and reduced media spend in our direct response TV business. This revenue decrease was strategically designed, as we once again reduced prospecting, and optimized media spend to maximize profitability during high volume media times, such as this election year.

We will continue to optimize our overall media spend for direct response marketing and reduced catalog circulation during the fourth quarter of 2010, which will affect revenues but not have a material effect on operating income. However as Jirka said, we recently have seen significant improvements with our holiday catalog revenue per book, as a result of some strategy changes made earlier in the year. We believe these changes will allow us to begin to grow that business again in 2011.

Now I would like to turn our attention to the opportunities in the direct to consumer segment. 2011 will be an important year for the direct to consumer segment, having been very conservative in this sector with marketing and circulation costs, we will focus on growing this business in a number of ways. First, we plan to increase our proprietary offerings in our direct business. As an example, our apparel category which has been one of the strongest selling categories in 2010, and the direct channels is an excellent incubator to develop new products that can eventually be sold at retail. In addition this strategy should have a positive impact on our gross profit, because proprietary products, especially soft goods, are one of our highest margin categories outside of media. By improving our margins, we can once again increase our circulation.

Gaiam TV will be fully launched during the first half of 2011, having test launched the platform at the beginning of October to our Gaiam Council. The goal of Gaiam TV is to utilize digital content to create relationships, add subscription members, and sell media to our existing customers. As I mentioned earlier, we will use our retail platform to introduce customers to our digital assets. In addition we will invest in our direct response TV platform with products that will help grow revenues and complement our brand. We have a number of innovative fitness products and content that capitalize on intense fitness training, which is popular in direct response marketing today, which began to positively impact our revenues beginning in the first half of 2011.

And finally, we are looking at possible content acquisitions in both the fitness and non-theatrical categories to complement our existing library, bolster our offerings at retail, and even more importantly, for our digital direct platform. Overall we continue to focus on cost reductions across our organization, as evidenced in the current quarter run rate. We have realized cost savings in excess of $10 million on an annualized basis, and we continue to focus on efficiencies within the organization.

While we expect fourth quarter revenues to be in line with the growth of our first three quarters of 2010, as we continue with our strategic reductions in marketing spend, we also expect our fourth quarter operating income to outperform previous fourth quarters. We are excited about the media format transition from DVD to digital, because unlike many studios we own our content, maintain the digital rights, and have the ability through our in-house studio and post-production facility, to produce and distribute digital content at very low incremental costs.

We continue to believe we are uniquely positioned with a business model that markets both media and products through multiple distribution channels. This positioning will allow us to further develop our mission of making a positive change for consumers health and well being. While this year we focused our efforts on costs, in 2011 we will turn our attention to growth for the Gaiam brand, by expanding the categories we sell through our distribution channels, increasing circulation and marketing spend, acquiring complimentary companies, ,contents and brands, and investing in digital platforms and distribution.

In conclusion, as is evident from our $6.8 million improvement in operating profit so far this year, we remain focused on maximizing profitability and maintaining our strong balance sheet, in light of a volatile retail climate. As demonstrated by our results, we believe our focus on maintaining leadership in our respective markets and controlling costs, will allow us to mitigate the negative effects of the current economy. With the turnaround in our catalog, the addition of over 2,000 new store-within-a-stores and our unique positioning for the evolution to digital, we are well-positioned for growth in 2011. Thank you. And Sarah, I would now like to open the call up for questions.

Thank you. (Operator Instructions). One moment while we wait for questions to queue up. Our first question from Mark Argento from Craig-Hallum, your line is open.

Good afternoon everybody. You guys clearly have a lot of stuff going on. Lynn, you outlined a bunch of different initiatives. Maybe you could prioritize a few. It sounds like the Oprah opportunity seems like a good opportunity. Maybe talk a little bit about that, and do you see opportunities to generate incremental revenue? What kind of economic model there. And then Jirka, maybe you could touch a little bit on the opportunities you see out there in the marketplace. You have got this great distribution platform. A really good mind to share with your retail partners, the opportunity to bring more content to them. What are you seeing out there, and do you think 2011 is an M&A year for you?

I will start, Mark. In prioritizing with the growth that is going to come in 2011, first when you add 2,000 stores-within-stores, that is a huge opportunity for growth for us, and I was particularly pleased to see Best Buy jump on board with 600 new doors. That is probably one of our biggest opportunities. And then for me to see the catalog revenue per book really get back up there to an area where we can now start prospecting again, and improving margins with more proprietary product, I think that is again another huge opportunity for us right now. So very excited about those. And also the investment in our digital future which, of course, I think Jirka can talk about a little bit more. This year we really tried to say, we are focused on profitability and cut back a little bit on our marketing spend, but by doing so, we have come up with a lot of ways now where we can grow over the next year, and spend our money wisely in investing in our future, in our digital future.

Okay. Continuing on the digital, digital is still relatively small, it is about 3% to 4% right now of the market. Obviously we tried to push that direction because we have all of the advantages in it. So we are spending, when we, on our new Gaiam TV platform, when we kind of make it out there. It is all of the comments we are getting are very, very positive, so where do we build. But in the spring we kind of started to put it on the mobile platform. Soon it will available everywhere. But it is still if you look at it, the transition into digital, the DVD media category still grew over 10% year-over-year, because of the friendliness of use of the DVD players, rather than the digital players, so I don't think it will have a huge revenue impact until next year, but definitely start to talk about it more. Because we focus a lot of effort on it. But from revenue I didn't think next year would be the year when this switch will happen, at least in our guess. We definitely prepare for it, but don't expect that consumer adoption will be that quick. That will be in 2011, will be meaningful to us.

There is a great opportunity on digital content right now, because it is kind of mish-mash, nobody knows how to value it, there are a lot of people under distress, and as kind of look out for accusations, you kind of ask the questions. There are several people in the kind of $30 million to $100 million range, but a lot of the content doesn't exactly fit. And we are finding out that doing it as we did, it was like the Discovery catalog where we can go and buy relatively cheap. Because if you try to buy the Company, people still expect the multiple that was in place a couple of years ago, which we are clearly not willing to pay, but if you just buy a specific group of titles, people are willing to recognize, because they can price those titles, and it is obvious what they are worth. So I think that is kind of more our direction to start to buy that content by blocks, or start to develop more titles, and build this digital media library.

Okay. And then Lynn, in terms of the Oprah deal, what are your expectations there? Is that more, less of a revenue opportunity and more of a brand-builder, or basically an opportunity to get the Gaiam name out in front of a lot of people?

It is absolutely a brand-builder. I don't think there is any better personality that we can associate the Gaiam brand with than Oprah Winfrey. So we are looking forward to that.

We basically look at a couple of years again and say, what are the best names we can do, we did consumer, customer research, and basically two brands came up with were Discovery and Oprah Winfrey. That was our focus, but you are probably going to us, the Gaiam TV and the Gaiam digital platform get out there, and because the amount of content that we have, we might have some other opportunity like that in specific partnerships, and then we can push it through different venues. But I think it is still kind of a year away.

Last question, it looks like the solar business performed well. Any thoughts around, strategically does that business, do you at some point divest it, what are your thoughts there? It seems to be having a little bit of a renaissance of sorts and from a competitive perspective, it looks like some of the competitors have moved out of the area, especially with that recent deal regarding Akeena, or Westinghouse Solar now. Any thoughts on your future plans for that business?

The business actually started to do pretty well, including the profitability is definitely having good growth. And as you said, some competitors kind of threw the hat in, so we kind of took over the business of the competitors, without really paying for it, so it creates a good base and a good run, but strategically I have to say there is really no synergy from Gaiam's point of view there. So it is the questions to look at the right timing and strategies, but that business definitely is doing very well, and both on the growth and the profitability side. So we continue to watch it, and will let you know if there is any development.

Great. Thank you.

Thanks, Mark.

(Operator Instructions). And we are currently showing no further questions, and I would like to turn it over to Mr. Rysavy for closing remarks. Jirka Rysavy: We would like to thank everybody for being with us, and hopefully see you next quarter. Thank you very much.

That concludes today's conference. Thank you all for participating. You may disconnect at this time.