Gaia Inc (GAIA) 2011 Q2 法說會逐字稿

Welcome to the Gaiam second quarter 2011 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 like to turn over the call to John Mills you may begin.

Thank you. Good afternoon, everyone and thank you for joining our call today. The following constitutes the Safe Harbor Statement of the Private Securities Litigation Reform Act of 1995. Except for historic information contained herein, the matters discussed on this call are forward-looking statements that involve risk 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 SECs reports.

The Company doesn't undertake any obligation to update forward-looking statements. On the call today representing Gaiam Mr. Jirka Rysavy, Chairman, Ms. Lynn Powers, CEO and Mr. Steve Thomas CFO. Now I'd like to turn the call over to the Company's Chairman Mr. Jirka Rysavy. Go ahead, Jirka.

Thank you, John. Welcome on our quarter call. The end of the second quarter June 30, was an important milestone for us. Completing the repositioning of our direct response television and we also position our Gaiam TV, which is our new digital subscription business, to be able to launch within a month.

Gaiam returned to a direct relationship with Wal-Mart for entertainment department and also added visual [RM VUDU]. Gaiam also has been selected as one of the 2 consolidation partners for the Target entertainment section. That, which does make Gaiam the only independent media company is subletted to bring content directly to both of these major retailers.

Gaiam subsidiary, Real Good Solar announced a transformant acquisition expending to its reach to about 7 eastern states. The acquisition -- this acquisition will not alter Real Goods base to be a national player but will also help Gaiam to execute it's plans to de-consolidate the subsidiary by the end of the year. Related to this acquisition Gaiam recognized the balance sheet gain of $2.6 million, which is recording additional paid in capital and also included in its consolidated results for the second quarter about $2 million of Real Good sold of merger deal expenses. The end of the second quarter also marked the completion of the year long transition of our direct consumer segment. And, also its negative revenue comparables. We expect to grow this segment in the second part of the year.

However there were significant expenses associated with the positioning of our business. Events at the Company major retailers, investment in visual subscription and the sole segment merger, deal expenses which were recorded in the second quarter. Even though we accomplished several of our key goals and completed a major solar acquisition the reported results for the quarter were still disappointing. Revenue for second quarter decreased $5.7 million to $50.7 million this decrease mostly due to the final quarter of previously disclosed plan to lower our direct response TV advertising and shows accounting for about $5.3 million or $5.7 of the revenue decline and also involved were distortion and stock level in early part of the quarter at our largest retailer, retail customer as we discussed in our last call. Excluding the $2 million loss when we consolidated from Real Good acquisition our operating loss was $5.2 million, all compared to $1.1 million same quarter last year. On the other hand our cash flow results were better than expected.

Cash flow from operations for the quarter increased to $5.9 million which is $6.2 million improvement from $0.3 million used by operations in same quarter last year. This truncation will help our cash position by end of the quarter to increase by $4.4 million to $35.5 million from $31.1 million at the end of the quarter. And also added $2.2 million cash at Alteris, which was acquired at the end of the quarter at $37.7 million. We also pretty pleased with the progress we've been making in our digital sales infrastructure. In the second Q, we expanded our digital network with VUDU, [Wooky] and [Gravatars].

Adding them to our growing digital network, which already includes companies like Hulu, Roxio, Amazon, YouTube, iTunes and Netflix. At our solar division, (inaudible) so the merger consideration by Real Goods for its acquisition of Alteris lent Gaiam 10 million existing shares a Real Goods representation of approximately 38% of outstanding shares and 64% of voting rights of Real Goods. Because of voting control Gaiam will continue to consider the Real Goods Solar in it's financial reporting until conversion of Real Goods class B shares into class A. Upon this conversion, which we expect to do by December 30, of this year or before, will be -- we will de-consolidate this segment and start to account for Real Goods Solar on the equity method. And now I will turn it over to Steve who will give you more detail on some of these numbers and Lynn will give you operation off.

Thank you, Jirka. For the second quarter of 2011 net revenue was $50.7 million compared to $56.4 million for the second quarter of 2010. As discussed in our previous earnings call, second quarter included a planned reduction in director response media spend, which resulted in a revenue decrease of $5.3 million from the same period in the prior year. Net revenue from our business segment of $14.5 million for the second quarter of 2011 was a $3.3 million decrease from the $17.9 million recorded for the same quarter last year.

Due to lower than normal in stock levels at our largest retail customer, continued difficulties with our third-party distribution vendor for Wal-Mart and the Borders bankruptcy. That revenue generated by our direct to consumer segment for the quarter decreased $4.8 million to $16.2 million from $21 million for the second quarter of 2010. Excluding the lower direct response revenues of $5.3 million the remaining direct businesses have positive comps for the quarter.

Lynn will discuss more about our business and direct to consumer segment results in just a moment. Net revenue from our solar segment increased to $20 million from the second quarter 2011 for the second quarter of 2011 from $17.5 million for the second quarter last year. For more information about the results of Real Goods Solar a separate earnings call will be held Tuesday, August 9 at 9.30 AM, mountain time. Gross profit for the second quarter 2011 was 44.6% of net revenue compared to 51.3% for the same quarter of 2010. The $5.3 million decrease in direct response television revenues, which typically carry a 75% gross profit, coupled with increased solar sales that carry a 27% gross profit, impacted our overall gross margin.

Excluding our solar segment gross profit as a percentage of net revenue was 56.8% during the second quarter of 2011. Selling and operating expenses for the second quarter 2011 decreased to $24.9 million from $27 million for the second quarter of 2010. Reflecting reduced media spend for the direct response television business, optimized variable costs, as well as infrastructure cost control measures. Corporate G&A expenses declined from $3 million in the second quarter of 2010 to $2.9 million in 2011. Including $2 million in cost from the acquisition of Alteris Renewables by our solar subsidiary, total expenses were 58.7% of revenue for the second quarter of 2011.

Excluding these acquisition costs, total expenses decreased $2.2 million but were 54.7% of revenue for the second quarter of 2011. Up from 53.2% in the prior-year as a result of the decrease in revenue for the quarter. Loss from operations was $7.2 million for the quarter compared to $1.1 million for the same quarter of the previous year. Our net loss was $4.1 million or $0.18 per share for the second quarter of 2011 compared to $0.5 million or $0.02 per share for the second quarter of 2010. For the six-month period ending June 30, 2011 we generated cash from operations of $5.9 million compared to $1.8 million for the same period last year.

For the quarter, our cash increased $4.4 million to $35.5 million from March 31, of $31.1 million. Including the $2.2 million of cash at Alteris, we ended the quarter with a consolidated total of $37.7 million. As of June 30, 2011 our balance sheet remains strong with a current ratio of approximately 2.5. Excluding the solar segment, the ratio was 4.6. Inventory returns for the second quarter 2011 decreased to 3.4 times from 4.5 times in the second quarter of 2010. Our day sales outstanding for the second quarter 2011 remained nearly constant at 60 days compared to 59 in the second quarter 2010.

Approximately 85% of our receivables in the trade division are comprised of our top 10 customers. Depreciation, amortization and stock compensation expenses totaled $1.7 million for the second quarter of 2011 compared to $2 million for the same quarter last year. Capital expenditures were $800,000 and media rights costs were $500,000. We had 23.3 million common shares outstanding as of June 30, 2011. Now I'll turn the call over to Lynn to provide more detail on our performance and growth initiatives by reporting segments.

Thanks, Steve. The second quarter finalized our previously discussed repositioning as we work to bring several short-term, tactical trade initiatives to a conclusion, while continuing to advance our long-term strategies, which are designed to build our brand and drive sustained revenue growth in the future. These long-term strategies include continuing to invest in our digital infrastructure, including subscription services. Creating new categories of proprietary offerings in our direct business to drive improved gross margins. Launching a new apparel strategy in our catalog and e-commerce business, developing a retail store strategy.

Redesigning our director response strategy aimed at complimenting our brand and enhancing synergies with the trade business. And identifying potential acquisitions targeted at fulfilling our customer niche and adding product offerings without an incremental increase in infrastructure. Now I would like to provide you with a brief recap of our performance by division while highlighting some of the short-term milestones we've achieved. Revenue in the business segment was $14.5 million for the second quarter compared to $17.9 million last year. Reflecting a difficult retail climate and carryover impact from several challenging one-time issues we encountered during the first half of the year.

We took immediate action to implement several tactical initiatives to address these challenges in the second quarter and I'm happy to report that we've addressed each of them effectively. First, the severe inventory shortage we encountered with our largest customer in February continue to persist well into May, despite diligent work with retail management to influence accelerated purchasing. The 60% in stock rates we expect that the peak of this period were not completely rectified until late May, at which point substantial second quarter sales were lost. The turnover in key personnel at our largest customer has been addressed and our category captain and inventory management team continue to monitor in stock closely to avoid a relapse although we are still not quite up to specifications and historical norms. Second, we reinstated a direct to store relationship in entertainment with Wal-Mart in July after discontinuing the third party fulfillment program.

The program, initially tested in Q4 2010 had a negative impact on in-store stock levels, sales and returns in the second quarter in addition to a measurable decline in key fulfillment metrics. With impeccable record in this area, prior to the test, our argument to return to direct relationship was immediately effective. We spent considerable effort to expedite this process and are once again direct with Wal-Mart in the entertainment department as we have been in other departments. Because of this our sales performance at Wal-Mart was adversely affected through the end of second quarter and into July. In addition to the revenue loss, we experienced significant increased third party distribution costs, which adversely affected our profitability.

Third, we maintained our conservative credit and sales strategy as it related to Borders following its Chapter 11 filing in February, which negatively affected our revenue but did not result in high bad debt exposure. In recent news, that all remaining stores are to be liquidated this summer will affect comps in the latter half of the year by approximately $750,000. Having taken the necessary steps to address these issues in the short-term, I'd like to turn our attention to some of the recent achievements in the business segment. Despite the challenges we faced, we are faced with at retail, Gaiam's strong reputation, broad distribution rates and sound financial position continue to pay off. In July, we were selected by Target to be an exclusive distributor of independent media content into the entertainment department.

Gaiam selection as 1 of the 2 exclusive partners is further evidence of our expanding relationship with Target. We believe our successful role as category captain in sporting goods department was a key factor in this decision. Gaiam will begin distribution of content from a possibility of over 14 independent studios to Target on October 1. We are working with many of these studious on a broader aggregation strategy which will ensure Gaiam plays a meaningful role in transformation of the media market at retail. This agreement with Target makes Gaiam the only independent studio to currently have a direct relationship with both Target and Wal-Mart.

We believe it also positions us as a strong operating and financial partner for all independent content producers and expect to broaden this role to digital aggregation and licensor as well. We were also recently awarded a 2-year exclusive agreement to be the sole branded yoga provider for the Sports Authority. Traditionally specializing in private label brands, this new program will bring a higher end, branded stores and store presence to TSA customers. The phase roll-out is slated to begin in September and continue into fourth quarter and will include as much as 8 feet of branded stores and store space and a stand-alone fixture in certain premiere TSA stores. All 460 stores will be equipped with a minimum of 4 feet of branded stores and store merchandising.

The product assortment will include Gaiam branded Yoga, Pilates and wellness products and accessories and will be complimented by our SPRI brand of accessories for the serious fitness enthusiast. We expect this addition to maintain our current stores, in store count as it offsets the loss of approximately 450 stores this year with the Borders bankruptcy. Our partnership with Jillian Michaels, which began the second quarter with the launch of her latest program continues to evolve. With 5 of the top 10 fitness titles on video scan, Jillian continues to build on her position as the number 1 fitness personality in America. Our market share continues to be a strength as we ended the quarter number 1 in fitness media market share according to Nielsen's video scan.

Gaiam continues to be among the top 10 studios in non-theatrical, ranking ahead of such studios as Sony, Liberties Anchor Bay with Indy, and 20th Century Fox among others. We expect our new consolidator roll with Target to continue to allow us to gain market share in non-theatrical. Our retail distribution continues to reach over 62,000 domestic doors 14,400 stores and store presentations and 5600 media category management locations. Though consumer spending has been felt throughout the retail sector in the first half of the year, our distribution remains very healthy as does the near-term outlook with rollouts like the Sports Authority initiative slated for the second half. In the past year, we've also kicked off a test of new placement at Sears stores as well as an expansion of our stores and store space at all [Myers] stores.

Next, I'd like to review our direct to consumer segment second quarter results. For the second quarter of 2011 revenue and our direct to consumer segment declined 23% as compared to the second quarter of last year. On a planned reduction in media spend of 24% in our direct response business. Much of this revenue decreased with strategically designed based on reduced media spend to maximize profitability as we reposition that business.

At the end of the second quarter we opened our test flagship retail store in Boulder, Colorado. Initial results are promising and we're continue to further develop this concept, including our performance clothing line anticipated to arrive in September. Now, I'd like to talk about the future opportunities in the direct to consumer segment for the latter half of the year. First, as discussed on previous calls, we reposition our infomercial business to focus on brand and retail strategies. This repositioning is now working. As the firm expressed ranks in the top 10 overall infomercial's.

Based on this success we're also seeing a halo effect in our firm DVDs that are out at retail. This will also create a long-term halo effect for the brand and help not only our direct business but continue to drive retail sales. Second, we continue to execute our strategy to move our product selection from third parties to proprietary products, which will improve our margins. This includes a strategy to launch our organic apparel lines in the third quarter in our catalog e-commerce and retail store channels. Finally, we're really excited about the possibilities for our subscription based digital content offering called Gaiam TV, which I will discuss more in just a moment.

Lastly, I'd like to provide you with some additional details concerning our digital strategy. We have invested in the 360 degree digital strategy, which targets all digital distribution channels and positions Gaiam uniquely in each. The lack of consensus among consumers concerning the preferred delivery system mandates an investment strategy that addresses all channels of delivery. We believe our strategy is designed to cover all bases. First and foremost as I just mentioned we are on the verge of launching our Gaiam TV platform, which will allow us to leverage our subscriber base direct to consumer relationship and own to content library to grow our digital reach.

We have recently acquired digital rights for hundreds of hours of low cost content and to date have over 1500 exclusive titles. Customers will be able to browse and stream our extensive edutainment content as well as create customized fitness and Yoga play lists based on level of expertise, interest and desired time commitment. Much of this content will be made available exclusively to Gaiam TV members. Our launch strategy involves multiple consumer access points including internet URL, iPad and iPhone apps and application widget preloaded on Samsung internet enabled TVs and access through Verizon files. Second, as we've discussed on past calls, we made a substantial investment in our digital delivery capabilities and have implemented a high end delivery system that allows us to main digital files at a mezzanine level and publish them at the touch of a button to our partners regardless of the required formats as a result of the investments we have made in our publishing platform we're expanding our digital networks including Amazon VOD, VUDU, Samsung, Hulu and others.

We have also completed 12 Gaiam apps and our first 3 e-books are in development to release an additional 20 apps and 50 e-books in the latter half of the year. Third, our strength at retail and in the consolidator category manager role is a key part of our strategy to expand our presence with other third-party partners. In addition to roll at retail with both category management and DVD consolidation, we expect to launch a digital content consolidator strategy for independence, which leverage our digital infrastructure retail relationships and ranked ownership. We're paying particular attention to those retailers that have made significant investments in digital delivery platforms such as Amazon.com and Wal-Mart where we now have direct digital agreement in place.

The success of our online stores and store strategy at Amazon.com is over 25% comps for the first half of the year with an influential factor in enabling us to establish a direct digital relationship with Amazon VOD. This comprehensive strategy reflects the work of our dedicated digital management team which brings a wealth of industry and technical experience to the table. We have a team of industry veterans focused entirely on building the relationships with both independent and retail digital partners. Our investment in backend digital infrastructure ensures that we are capable of delivering content timely and in formats compatible with all platforms and channels. But these resources, investment and the fact that we own all rights to our media library and have a loyal direct customer base, we are uniquely positioned for growth in the rapidly changing digital market.

In conclusion, we remain committed to the long-term strategies we've discussed here and on our last conference call. We now have the Alteris merger behind us and will de-consolidate the solar division at the end of the year. We believe firmly that a strong commitment is required in order to set the stage for long-term growth. In summary, these steps include a repositioning our direct response business to be aligned with our brand and trade strategy, becoming an aggregator and category manager of independent media by being awarded the roll at Target and taking back our direct relationship with Wal-Mart. Migrating our library and sales strategy to digital and investing in platform agnostic systems.

Launching our direct to consumer digital subscription business with low cost content and customized fitness and Yoga channels, which now have over 1500 exclusive titles. And developing a retail store strategy. We also believe that the fundamentals of our strategy, a sound financial position and resulting earnings potential are not reflected in the current market valuation of the Company, as we are currently trading below tangible asset value. It is our intention and belief that we are well positioned to achieve our goals while furthering the mission of the Company to make positive change in the health and well-being of our customers. Thank you and now I'd like to open the call up for questions.

Operator?

Thank you. We will now begin the Question-And-Answer session.

(Operator Instructions)

Our first question comes from Mark with Craig-Hallum Capital.

Good afternoon.

Hi, Mark.

Hello. Could we talk a little bit about the Walmart relationship? I know you said it sounds like you're going direct again. Could you let us know -- I know when you -- you bought Good Times and that gave you the direct relationship with Walmart -- when did that change or how did you not get to be direct and now you're being direct again?

I will start and let Lynn finish it. We were actually direct, since then we made the acquisition of Good Times with Walmart all the time. We're talking about entertainment section. Being really big in entertainment but it's growing area as we cannot consolidate these other players. We, actually get a direct status with as well, but maybe I'll get Lynn to take it from here.

Walmart requested that we try a third-party distribution partner that they recommended.

For entertainment?

For entertainment. And that happened in fourth quarter and our metrics plummeted. Our -- the in stocks were terrible and so we showed them the performance and they of course immediately said, well, we'd rather have you back as a direct relationship, which took place in July this year.

This is -- we were always direct with all the other departments. But it was something that Target tried to bring certain parts of entertainment together as they changing the department. Obviously Walmart asked for, it's hard to not comply, so we can say we'll try but we didn't believe it was going to go well and it didn't and we glad to be back but it was costly for us.

And Walmart did request that of many of there independent partners.

So you were direct on your fitness products but on the entertainment product, non-fitness you had to use a third-party?

Correct. They made that request of many partners. But we are now back direct in that division as well.

And hopefully this prove them that it doesn't work to take certain people it works but for us because we have a good reputation a good performance there -- being direct is better for them as well and definitely better for us.

Could you touch a little bit on Target and how you're working within Target?

On the consolidator role, Mark?

Yes.

Yes, Target is looking to consolidate all of the independent studios under 2 consolidator's. All of the independents went in and pitched to take over that role and Gaiam was selected. I believe we were selected because we have shown, in fitness, that as a category captain and category manager for fitness media we do an excellent job. So, beginning October 1, we will be 1 of the 2 consolidating over 14 independent studios into the entertainment section.

Great and then shifting gears back to the Target -- the fitness category management. I know when you guys took over that category and took that role as category manager, 1 of the positives was that you got to control the category. 1 of the potential negatives were that you have to invite in more titles so you would dilute yourself out a little bit in terms of SKUs. Where are you sitting today in terms of total number of SKUs on the shelf, roughly speaking? Of your own product versus say a year ago? How much dilution do think you ended up -- impacting you as taking that category manager role?

You know I don't think in the past year, Mark, we've seen much dilution. Gaiam is performing well at retail at Target and I don't think that we've seen year on year that much dilution in that area.

I think Mark, it actually goes up since we controlling, obviously we can kind of manage the shelves such a way that we don't have any losses in titles. What we talked about was actually makes an impact, because we bring our competitors into the main players, our market share, might took probably some decline when we did that, but not because we expanded over market it doesn't mean we actually decline our titles or our sales. But bringing competitors to our stronghold we probably impact our market shares because we increased the size of the market. Because we have such a strong position, we probably today control 70% of the market. So it's like obviously, if you bring outside titles you grow the category but you lose a little bit market share but I think overall titles that were actually selling grew.

Do have the stat or do you know your market share was say over the last 12 weeks? Or the Q2 period? Relative to the broader market? I guess my, I'm trying to figure out, are fitness video -- overall fitness video sales down significantly year-over-year? Or is it really an out of stock situation? Any kind of data points there that might be helpful?

Lynn is looking if we have something recent.

I can shift gears. Maybe just quickly over to, the solar business, let's talk a little bit about the -- sounds like you're going to de-consolidate and you're going to convert over to class A shares?

Yes, we talk about this for a while at least when we talk to you, most of our shareholders really strongly are recommending that we try to de-consolidated the division because the difference in margin, when we kind of add Gaiam kind of between, probably average high 50s and solar division like mid to high 20s, primarily 20s. So it's better if you don't consolidate it, obviously. That kind of -- we couldn't accomplish it without the major acquisition, which we just did.

Its not that we did because of -- reason we look for acquisition any way for the East Coast for solar division but now we can be consolidate and that's why we say we plan to do probably by end of year. So by converting our super rolling shares to regulars, which would basically give us about 38% stake in the company, so we would de-count for act methods means we would take our share of profits there but not consolidated the revenues through the Gaiam side. So that's kind of the current plan. Were pretty happy that was accomplished, we look for a long time for the acquisition.

And we finally find out Company was strategically important and the price was good enough to be able to take the Company, because the Company was losing money, like a pretty a lot of solar companies are. But we kind of have a track record that we bought 4 companies in solar and 2 couple quarters to go through losses but now this was 8 consecutive profitable quarter for the solar. And we just hire a very strong CEO there. So we feel like we can step forward to make these acquisitions.

Look at a bunch of acquisitions before and that kind of making us Real Good Solar be -- have a base to be a national player. So it's going to begin to look at more investment in Real Good Solar as participation as an investment. And there is virtually at this point no overlapping management or anything else. So it's an total independent company. And so, I'm not sure answered all the question, was kind of long answer.

Yes.

But, I was trying to get Lynn to chance to look. But we don't have anything here with us right now so we will call you after the call.

Sure. I guess what I'm trying to focus on is, is this conversion from traditional DVD, fitness DVDs to more of this online digital distribution, is this already starting to happen a little bit in terms of total unit volumes? DVD sales starting to wane. Ultimately, hopefully start to see a pick-up on the digital side. I'm just trying to get -- at some point in time there is this transition that starts to happen and I'm just trying to figure out if we're maybe in the midst of that right now or not?

Well, it's definitely started actually a little bit, while ago with entertainment site. And that's why you see so many changes of entertainment business. And since we didn't play entertainment, we actually -- gas you kind of saw in Target, we are kind of gaining ground but we didn't really have much sales, but overall it definitely going to have that shift. That has started definitely, we don't see that much of it on DVD yet.

And we'll probably have some delay there to help us but it's definitely, since big retails looking at DVD that way, that's going to be a main player over next few years. Especially on the revenue side. Because even if you keep the same number of sales, the revenue to average revenue per DVDs average price is probably like $14.95 but the digital is maybe more like $12. So that's kind of 1 thing you're going to see anyway in the change in sales.

From the P&L point of view, typical let's say if you sell -- price per DVDs are $15 we might get $6 for it from retailers. And it cost us $1.50 before royalties and stuff. So making maybe net on everything $3, $3.50 a DVD. If you do the same online, since we direct with all the players we try to obviously, since we control so much of the market, our deal is very attractive.

From $12 we probably keep about 70%. And so from dollars, we actually might receive same or maybe even a little more. But let's say the same on the price that we have, but the delivery cost, cost of goods sold might be $0.25 or $0.30 and there are no returns. And returns for big retailers might be 30%.

So for profitability, let's say that you only half of the sales, half of the sales will be recovered on the digital side, whatever reason, you still have pretty much similar profitability. But it will definitely impact revenues. The adoption on consumer is still relatively slow on the digital side. Even though it's growing high the percentage the base is so low, that the digital saves -- that material is over parts of revenue. But I think it will change start to change in the coming year.

Very helpful. Thank you.

Next question comes from Jim with Stifel.

Thanks, Jim Duffy with Stifel. Hello everyone.

Hi, Jim.

Hello.

Couple of questions for you. Jirka, in that break-down of profitability and conversion between the more traditional model and direct. What about the SG&A component? Was that included in your analysis of profitability?

Yes. I didn't go to detail, but I didn't take you down to the bottom line. Except the last statement that effectively if you could take -- if you affect everything, you can probably have half of the sales, units let's say, go from 10 million to 5 million and maybe even below 5 million you still have the same profitability.

And the main -- there's G&A main factor SG&A that you have -- you get roughly high same selling price, you would actually receive even if this prices being lower. You have much lower cost of goods sold. But the SG&A factor is stocking and receiving the shipments from the returns. And dealing with all the consequences and obviously the over house [spartan] that so the SG&A is dramatically lower.

So the profitability is much, much better in digital sales. But what I think what I'm kind of saying that you much have like sales because in retail, we have some more spontaneous buying, you walk in the store and you pick DVDs what you buy otherwise. I think in digital it will be a different role. You have to account for that part. That's I'm talking a different number of units.

But it's kind of my assumption. There's not that much where people can see at. And there's still today, especially on a fitness, the DVD player is still much more friendlier to consumers who exercise daily in front of the television, than invest an additional streaming or downloading. So that's more functionally of the beast what happened with the fitness what's very different in entertainment. But I think fundamentally on digital, your SG&A has to be way different to be able to play successful in the market.

Okay, that is helpful perspective, thanks. And then, I'm just struggling to think about the mix direction of the business. The run rate expectations for direct to consumer seems like DRTV has found a bottom, is that true in your opinion?

Yes.

And how about the catalog business, Lynn?

Yes, were pretty much comping last year in catalog e-commerce there's a shift obviously between the catalog business and how much business is done online. It just depends on catalog drops, where it lands in the quarter. But we expect back half to be -- to comp, have positive comps there.

Yes, the catalog the kind of finish this transition will we do with DRTV, we finished this catalog earlier. So we actually already did have some positive comps right now. Because we started transition earlier. But it was also longer transition, because the DRTV we could control and was more strategic and balancing PNL balancing because we want to focus on the brand.

This catalog was a little different. There was much more play of the consumer kind of situation, what happened after 2008, which we had to deal with. And that's why we kind of started there a little so it took almost like 2 years. This year is the first time we see positive comps in catalog and e-commerce after like 2.5 years.

I see. Okay. And then, Gaiam TV I would expect a modest contribution from that at the outset? What's the marketing strategy behind the launch? And what's the cost associated with that?

Well, for the additional marketing strategy for the launch, we will go to the Gaiam direct customers who would already have a propensity for the type of media that would be on Gaiam TV. So, that will be our first and least expensive customer acquisition strategy. Than our second strategy will be to use our retail platform and offer free trials through our retail platform.

Throughout retailers.

Retailers, yes. On our Yoga mat successor.

And DVDs.

Oh, I see. So embedded within the packaging?

Correct.

Okay.

And again that certainly --

Do you expect your retailers will have issue with that? I guess they don't have to know about it.

No, we not really competing with them. It's the part of the DVD. There's no way were taking any business from retailers actually opposite we are offering extra value for what we are kind of putting out there. So there's definitely no -- there shouldn't be any issues anywhere.

It's like having, it's a subscription business. See her not taking that stuff out, actually we will introduce the prices with things what actually helps the retailers. So I don't think it will be any issues there. I think from the cost that you ask, it's $10 a month subscription and $100 a year. Or $100 a year.

And it's obviously -- we don't need many subscribers to break even. Because we already have 7 different of subscription clubs. So it's all shared resource. This business can probably become profitable, you'll see the launching costs, but since launching cost is mostly internal, we expect this 10,000 to 20,000 subscribers will probably break even the business.

Okay. And then Steve, I have a question on the inventory. Looking at the core business run rate, roughly the same as the 2Q level in '06 yet the inventories are 50% or so higher. Going forward, should we continue to expect growing inventory demand to support the same rate of business?

Well, first before Steve gets there, so you understand, main issue that we acquire Alteris a few days before the end of quarter. $6 million of inventory was added 2 days before the quarter area in sales. I think that SKU. Inventory turns didn't really change that much.

And one --

So it won't be until they report that we will have the full split out of the balance sheet?

That's right. And will be consolidated anyway. And we'll start to -- as soon as we plan to the consolidated, we'll try to give you this number so we can kind of work on it. But that's kind of the main number, I think it's $5.7 million, $5.8 million. We put in the press release you can see that. In the last part of the press release, separate balance sheet of Alteris.

Okay.

So, you kind of see what we actually added so you can subtract it. Because basically there is very little of sales like $1 million for the quarter that we get from them.

Got you, Okay.

There was $5.4 million of inventory at the end of the quarter for Alteris alone.

Oh, I see it here in the press release now. Okay. Thanks I will leave it at that. Thank you very much.

There are no further questions I'll turn it back over to you.

Thank you very much. So thank you for being with us. Obviously wasn't the quarter that what we kind of like to see. But we did a lot of progress and we hope to position it well for the future. And we can withstand the market like what happened today on Wall Street. So thank you very much and hopefully talk to you next quarter.

This concludes today's conference. Please disconnect at this time.