Gaia Inc (GAIA) 2011 Q3 法說會逐字稿

Welcome to the Gaiam third quarter 2011 financial results conference call. (Operator Instructions) Today's call is being recorded. If anyone has any objections you may disconnect at this time.

I would like to now turn the call over to Mr. 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 the 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 SEC's reports. The Company does not undertake any obligation to update forward-looking statements.

On the call today representing Gaiam are Mr. Jirka Rysavy, Chairman, Ms. Lynn Powers, CEO, and Mr. Steve Thomas, CFO.

And now it's my pleasure to turn the call over to Jirka. Go ahead?

Thank you, John. Welcome, everybody, to our quarterly call.

Revenue for third quarter ending September 30 increased to $73.3 million from $72.3 million during the same quarter of last year. Gross margin in the quarter decreased to 43.5% from 45.9%. The decrease was due to acquisition in our lower margin Solar segment. Excluding the Solar segment gross margin improved 110 basis points to 57.6% from 56.5%.

We are disappointed with longer than expected tail of negative impacts into our third quarter. Including acquisition transaction cost from the Solar segment the consolidated operating loss was $1.6 million compared to $1.1 million income of last year. The $2 million of pre-acquisition loss run rate of our Solar subsidiary acquisition, Alteris, was reduced to about $500,000 during the quarter, and our Solar Division expects to report a profit from this acquisition during the fourth quarter.

During the third quarter we released the first program of our acquisition, Direct Television Response business. We launched our digital subscription business, Gaiam TV, and continued to expand our direct digital relationship.

We completed the transaction back to a direct relationship with Wal-Mart in our entertainment business, media business. And we began shipping on the entertainment media aggregator role with Target. This makes Gaiam the only independent distribution company with ability to bring media directly to Target, Wal-Mart, and to any meaningful digital retailer.

In September we launched Gaiam TV, and we are nearing completion of a user response and usability study as we continue to add new titles to the offering. We are pleased with the preliminary results of the study and expect to start promoting this site later in the quarter. We also plan to add Gaiam TV application preloaded on Samsung internet enabled televisions, as well as access through Verizon FiOS by end of the year.

Since mid-August Gaiam repurchased approximately 628,000 shares in open market, and that brings the total number of shares repurchased by the Company since repurchase started to approximately 5.43 million or 23.9% of our 22.7 million shares which are currently outstanding.

Gaiam ended the quarter with $27.5 million of cash compared to $28.8 million at the beginning of the year. The working capital ratio at the end of the quarter was 2.4. Excluding the Solar segment the working capital ratio is 4.2.

We believe that all changes are now behind us, and we are expecting to return to historical internal revenue growth in the mid teens in 2012.

And now I will turn it over to Steve, and he will give you more details on numbers, and then Lynn for operations.

Thank you, Jirka.

For the third quarter of 2011 net revenue was $73.3 million compared to $72.3 million for the third quarter of 2010. Net revenue from our Business segment of $19.5 million for the third quarter of 2011 was a $1.5 million decrease from the $21 million recorded for the same quarter last year, due primarily to a reduction in sales as a result of the Borders bankruptcy, fewer as seen on TV products in the channel as we repositioned the Direct Response TV business, and termination of a fulfillment relationship with a third party.

Net revenue generated by our Direct to Consumer segment for the third quarter of 2011 decreased $4.5 million to $22.2 million, from $26.7 million for the third quarter of 2010, and was mainly due to lower revenues associated with the repositioning of the Direct Response business and a planned shift of catalog circulation from third quarter to fourth 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 $31.6 million for the third quarter of 2011 from $24.6 million for the third quarter last year as a result of the acquisition of Alteris Renewables. For more information about the results of Real Goods Solar a separate earnings call will be held Thursday, November 3rd at nine-thirty a.m. Mountain Time.

Gross profit for the third quarter of 2011 was 43.5% of net revenue compared to 45.9% for the same quarter of 2010. The $7 million increase in Solar sales that carry a 25% gross margin impacted our overall gross margin. Excluding our Solar segment gross profit as a percent of net revenue improved to 57.6% during the third quarter of 2011 compared to 56.5% for the same quarter last year due to improved margins in our Direct Response Television business.

Selling and operating expenses for the third quarter of 2011 increased to $29.9 million from $29.2 million for the third quarter of 2010. The increase was primarily due to the expansion of the Solar segment's operations through the acquisition of Alteris, additional digital infrastructure investments, and an inefficient third-party fulfillment program that was converted back to a direct relationship during the quarter. These increases were partially offset by strategically planned reduced catalog circulation and Direct Response Television advertising.

Corporate G&A expenses increased to $3.3 million for the third quarter of 2011 from $2.9 million for 2010, mainly as a result of the Solar segment's accounting consolidation of the Alteris infrastructure.

Including $0.4 million of transactional cost related to the Solar segment's acquisition of Alteris and the Solar segment losses for the quarter the consolidated loss from operations was $1.6 million compared to income from operations of $1.1 million for the same quarter the previous year.

Excluding Solar the operating loss in Q3 of 2011 was $1 million compared to $0.1 million in 2010. The losses in 2011 include increased spending on the digital business and increased distribution related costs from unwinding our terminated fulfillment arrangement. Our net loss was $1.2 million or $0.05 per share for the third quarter of 2011 compared to net income of $0.9 million or $0.04 per share for the third quarter of 2010.

Inventory turns for the third quarter of 2011 increased to 4.3 times from 5.6 times in the third quarter of 2010 due to the increase in inventory to support the Alteris business and additional inventory required to fulfill our new media aggregator business.

Our days sales outstanding for the third quarter of 2011 remained nearly constant at 43 days compared to 45 days in the third quarter of 2010. Approximately 84% of our receivables in the Trade Division are comprised of our top 10 customers.

Depreciation, amortization, and stock compensation expenses totaled $2 million for the third quarter of 2011 compared to $2.4 million for the same quarter last year.

Capital expenditures were $800,000 and media rights costs were [$300].

Since mid-August we have repurchased approximately 628,000 shares of our Class A common stock at a total cost of $2.3 million, bringing the total number of shares repurchased by us to approximately 5.43 million or 23.9% of the 22.7 million shares currently outstanding.

We ended the quarter with cash of $27.5 million. As of September 30, 2011 our balance sheet remains strong with the current ratio of approximately 2.4. Excluding the Solar segment the working capital ratio was 4.2.

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

Thanks, Steve.

Since our last call, we continued to advance our long-term growth strategies and acted on opportunities to reinvest in the business. As stated earlier, we repurchased over 628,000 shares of common stock since mid-August. This brings total stock repurchases under this initiative to 5.4 million shares or 23.9% of the 22.7 million outstanding shares.

We aim to capitalize on this reinvestment through the implementation of the following long-term strategic initiatives. We've begun steps to leverage our position as the only independent studio to currently have a direct relationship with Target and Wal-Mart, as well as all meaningful digital retailers. This began with the launch of our role as aggregator for Target Independent Media in late September and will expand to other retailers as discussions with independent studios continue.

Following up on a successful third quarter test we plan to expand the rollout of our apparel strategy in the [eCommerce] and Catalog Division. We launched the first Firm Express in the third quarter, representing the first of many direct response releases under a repositioned model designed to capitalize on our broad retail distribution network.

We continue to invest in new growth initiatives, including further build out of our digital content delivery capability through the launch of Gaiam TV, new third-party digital relationships, and continued investment in backend technical infrastructure.

These initiatives, along with our retail store test, represent the core of our strategic direction as a Company, and we believe are the necessary steps for driving long-term top line growth and shareholder return. I will expand on each of these strategies as I discuss operating results for each of our business units, beginning with the Business segment.

Revenue in the Business segment for the third quarter was $19.5 million compared with $21 million last year. The third quarter represents the end of a difficult nine-month period in the Trade Division, during which we participated in the third-party fulfillment program for Wal-Mart Media. The poor performance of this program virtually affected both revenue and profitability through July. As mentioned in our previous call, we began the transition back to a direct relationship with Wal-Mart's Entertainment Media Department in August, and expect improved performance to be realized beginning in the fourth quarter. This move, when combined with our already direct sporting goods business at Wal-Mart, means that we now directly control all our fulfillment into Wal-Mart.

We completed the first shipment under our new role as aggregator for Target Independent Entertainment Media in late September. By rolling up the distribution for 14 of the independent studios we can provide enhanced efficiencies for Target and further leverage our strong strategic partnership.

Our financial stability, superior operational expertise, multichannel distribution, and best-in-class reputation for third-party reporting uniquely positions Gaiam to become the leading aggregator of independent entertainment media in the retail and digital markets. Discussions are already underway with several of the independent studios to expand this model to other retailers and major digital players.

Despite a lackluster retail environment our distribution foothold remains strong. We continue to make progress in penetrating nontraditional doors. This has helped to defray the affects of consolidation in the industry, such as the closure of Borders earlier in the year.

In the third quarter we launched a two-year exclusive agreement to be the sole branded Yoga provider for the Sports Authority. Following a phased rollout that began in September this relationship will ultimately result in a minimum of four feet of branded stores and store merchandising in all 460 Sports Authority stores.

Success stories, like the one at Sports Authority, is the reason our retail distribution continues to reach over 62,000 domestic doors, over 14,000 [store] presentations and 6,000 media category management locations.

Our market share remains strong, as we're the number one studio in the fitness genre and number six in the nontheatrical category. For the third quarter our fitness media market share was approximately 47% according to Nielsen video scan. The share is up from 38% in second quarter, which is driven by our new direct response strategy and our relationship with Jillian Michaels.

As I've done on previous quarters I would like to provide you with a brief update on product initiatives in our Trade Division. As part of the annual Target reset in September we introduced the Gaiam Restore product line into the fitness accessory mix. The Restore line was developed to provide an option for consumers in need of at-home rehabilitation and rejuvenation related fitness accessories. This new assortment includes several products that have quickly established themselves as top performing items in the Target assortment. We are already planning an expansion of this line to take advantage of the positive results.

We also launched the Gaiam Sol Yoga product line during third quarter. Gaiam Soul is a premium line designed by Yogis for Yogis, with attention to responsibly sourced materials, mindful design, and quality construction. We believe this line is a firm statement by Gaiam staking our claim as the number one Yoga brand in price point and professional level quality at retail.

Next, I'd like to review our Direct to Consumer segment's third quarter results and near-term outlook. For the third quarter of 2011 revenue in our Direct to Consumer segment declined to $22.2 million from $26.7 million in the third quarter of last year, reflecting lower revenues associated with the repositioning of the Direct Response business and a planned shift of catalog circulation from third to fourth quarter.

The repositioning of Direct Response is designed to create new grand position programs between product and content that can be funneled through our retail distribution channels to drive incremental backend contribution. We launched from Express during the third quarter, the first release under this new strategy, and early results are very positive.

In addition to its ranking as the number three fitness infomercial in third quarter, we're seeing fourth quarter orders for the [Asion] TV product out of retail, providing validation of the effectiveness of our repositioning strategy. We will continue to optimize media spend in the fourth quarter to project Direct Response profitability as new programs come online and fill the pipeline.

I'm very excited to announce today that we finalized an agreement to produce a Direct Response program with Jillian Michaels in the first quarter of 2012. Jillian's recognition in the market is undeniable, as five of her DVDs currently rank in the top 10 of all fitness titles according to Nielsen video scan. As I discussed on our first quarter call, we value our strategic relationship with Jillian and feel that there are many opportunities to explore with her that are well aligned with the long-term goals of Gaiam.

Turning our attention to dot com and catalog business, we conducted our first apparel strategy test during the third quarter. Initial results for the apparel test are very positive. Product gross margin increased 190 basis points due to the increased margin in the apparel line. Additionally, revenue per book for the fall catalog exceeded plan by almost 30%. The strategic emphasis on apparel and the broader base of consumers associated with it paid dividends in our customer prospecting effort as this initiative generated a profit which will allow us to expand our prospecting effort in the future. We expect the higher margins and eco friendly benefits from our apparel initiative will help drive holiday sales.

We have several opportunities to look forward to in the Direct to Consumer segment. First, we continue to execute our strategy to improve margins by shifting the overall sales mix towards a larger share of proprietary products. The successful launch of our proprietary apparel lines are the first step. We will continue to broaden that assortment with an emphasis on consumable offerings. Second, we continue to refine our retail strategy and assortment and our flagship retail store. And, third, we will launch our Direct Response weight loss program with Jillian Michaels in early 2012.

Before concluding today, I would also like to elaborate on our new business investments and strategies. First, in September we launched the Gaiam TV platform, which allows us to leverage our subscriber base, Direct to Consumer relationships, and owned content library to grow our digital reach.

The Gaiam TV experience allows subscribers 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. Consumers may access Gaiam TV through multiple consumer access points, including the internet, URL, iPad, and iPhone apps, and will expand to Samsung internet enabled TVs and through Verizon FiOS by Christmas. We're very excited about the possibilities for Gaiam TV, and will begin marketing this concept to new consumers during fourth quarter.

Second, as we've discussed on past calls, we've made substantial investments in our own digital delivery capability, and have implemented a high-end delivery system that allows us to maintain digital files at a mezzanine level and publish them to our partners at the touch of a button regardless of the required format.

As a result of the investment we have made in our publishing platform we've already signed 20 direct digital deals, including among others Amazon DOD, VUDU, Samsung, Hulu, and most recently iTunes. We've also completed 13 Gaiam apps, and our first 19 eBooks available for Kindle, NOOK, iPad, and iPhone, and are in development to release an additional 39 apps and 34 eBooks before the end of the year.

We're excited about our accelerating expansion of digital offerings and expect this to continue to gain momentum in the fourth quarter. With our high market share, our digital infrastructure, and our owned content we're well positioned to recapitalize on our library and new digital format, and maintain our market leadership in low cost content in the digital age.

In conclusion, we remain committed to the long-term strategies that we've discussed today. We believe firmly that a strong commitment is required in order to set the stage for long-term growth. In summary, these steps include continued emphasis on filling the Direct Response pipeline with content and products aligned with our brand and trade strategy, like the Jillian Michaels release and a natural skincare program slated for 2012. Becoming an aggregator and category manager of independent media, by being awarded the role at Target and expanding that role to other retailers, including digital distribution channels. Migrating our library and sales strategy to digital, and investing in platform agnostic systems, expanding our Direct to Consumer digital subscription business with low cost content and customized fitness and Yoga channels, continued testing, refinement, and scaling of our retail store strategy, and expanding our proprietary branded products with an emphasis on apparel.

We believe that the fundamentals of our strategy, sound financial position, and resulting earnings potential are not reflected in the current market valuation for the Company. We expect the strategies outlined in this conference call will allow Gaiam to return to our comp sales in the teens in 2012. It is our intention and belief that we're well positioned to achieve our goals while furthering the mission of the Company to make positive change in the health and wellbeing of our customers.

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

(Operator Instructions)

And our first question comes from Mark Argento with Craig-Hallum Capital. Your line is open, sir.

Yes, hi. Good afternoon.

Hi, Mark.

Maybe just first on Gaiam TV, you talked a little bit about the strategy to drive subscribers. I know it sounds like you have a lot of different distribution partners, but there's a lot of content out there. Maybe talk about how you're going to try to drive people to your content? Maybe the customer acquisition model, and any kind of early trends you're seeing there?

Well, first of all, Mark, we'll use our assets to drive subscribers. We'll use our customer panel first, then our customer lists, as well as it being an added bonus on most of the products and DVDs that are in our retail platform. So if you buy a Gaiam DVD there'll be a digital --

Well, there's a preview -- we don't sell any advertising space in our DVDs, so if you buy a DVD in the start you have a Gaiam TV preview.

-- yes, preview.

I see.

That's the way we'll start, and then after that we will do affiliate programs with many of our partners.

All right, and so have you at this point gone into your customer database and proactively started to market that or is it going to be more of a graduated process?

It's going to be a graduated process. As Jirka said, we've just finished the usability study. We have really good results from that study, but now we're implementing some of the suggestions, and once we finalize that then we'll start marketing to our customer panel first and, like I said, then to our full customer list, as well as in outgoing boxes during the holiday season.

We almost bought almost about a thousand titles, so it's also getting implemented in the site right now.

And the economic model there, I mean given the fact you own the vast majority of this content I'd assume the margin ex customer acquisition cost should be very high, maybe you could walk us through how we should think about the economics?

Well, right now the margins are obviously very high because we mostly own the content, and there's typically a royalty which is kind of based on, so you can think about royalty probably in average about 10% or 8% to 10%. And it might be lower in some cases and, but on average. And then we kind of look at the early marketing cost goes to our channels, so it might be lower but kind of long-term marketing probably about 35%. So those are the primarily the costs, there's not that much operating cost when you start to ramp-up but you need to get to about 30,000, 40,000 subscribers.

And right now you're active, well, you'd consider your active customer database, is that still over a million customers or where are you with your customer database?

Well, we have, you know, there's -- the customer direct would buy from us, and there are customers through the site, so the people who buy the products, it's kind of hard to determine the numbers. We know how many DVD would sell, it's hard to say how much was a repeat customers. But I think between those two it's going to be a 10 million plus between the direct and --

Business segment.

-- Business segment.

Okay, all right, that's helpful. Maybe shifting gears a little, talk about the trade business, Lynn, and I know you threw-out -- it looks like you took a little share in the quarter, but could you talk about overall maybe unit volumes industry-wide? I know it seems like media DVDs continues to -- the segment continues to decline as more and more movement is online. But what are you seeing in terms of kind of unit sales trends and what kind of expectations do you have there over the next 12 months?

Well, as you know, according to Nielsen sales declined in DVD are at about 10% year-to-date, although media sales according to Bloomberg actually came back slightly in the last quarter. What we're seeing is, yes, fitness is also declining, but where it's declining is in more of the TV related products, Dancing With The Stars, Biggest Loser, so it was more of a fad that was out there that drove the sales up last year. So we're seeing a decline on those type sales, but we're not seeing much of a decline on Gaiam branded sales.

Yes, we have -- we definitely will shift right now as the business is shifting. More our sales in the trade are non-media related, they are more tangible products than media, and they will probably (inaudible) through this DVD transition change. Profitability, it's obviously better on digital, dramatically, at least so far, but we'll see how that works. But we do expect pretty good top line growth and good comps for the next year in our Trade Division based on the changes, what we implemented this year.

Okay, and then maybe, last, if you could touch on where you are with the Solar business? I know that the acquisition or merger has not closed yet. It looks like that's supposed to close this month. Maybe talk a little bit more about the plan there for deconsolidating or the shares, any updates there?

Yes, Solar, the acquisition should close in November, and we would have then have a Gaiam Board meeting where we plan to make a decision to convert our B shares to A shares, which will effectively deconsolidate the business, but that's a decision we need to make but that's our plan, as we kind of said previously.

The acquisition, itself, is we bought a company what it was -- I mean Solar, it was real good company but it was in trouble and was losing well over $2 million a quarter. And the loss for this quarter was about down to half a million, and they expect to do about a million dollar profit in the fourth quarter.

And, but there's still a few things open so we need to kind of see how the acquisition is done, however, for accounting purposes we deconsolidate that since end of the second quarter so all the numbers are in. And so but there's not really a change in the plans. But probably also we expect to have, when I said good mid-teens growth, comp growth in 2012 for Gaiam, I think Solar on the top of that will do additional 20% plus but we didn't include it in our numbers (inaudible) in the mid 15 -- I mean a mid-teens guidance it does not include Solar, but Solar will be higher than that.

So is there -- are you still planning on converting the B to A, and will you -- once the deal is closed will you still have to consolidate the numbers on your P&L, like you're doing now, or because you'll be diluted down below 50% you shouldn't have to do that?

It will be consolidated still for fourth quarter for sure, and if we would make decision to convert the B to A that will happen at December 31st and that in that case would not be [deconsolidated] in 2012, but that's a decision what Board has to make after the acquisition and closing and we have all the data.

Right.

But our plan is announced, it is to deconsolidate at the end of the year.

All right. and then in terms of profitability levels, you know, and a lot of different moving pieces here, but when you look at kind of Q4, which has historically been your big profit generating quarter, should we expect to be able or expect you to be able to get to a similar level of profitability we've seen in prior years or is there something structural different now that we need to take into consideration, maybe help us think about that?

Well, we expect the revenue we definitely, but so far what we can see right now we would have positive comps. And on the bottom line it's still a little depends because there's still some expenses will be consolidated through the acquisitions. And it's, you know, with the Gaiam TV launch based on the study right now, we're putting together the plan which all is going to hit in December, so I don't want to kind of say exactly where it is. But appears, definitely, it will be our strong quarter as it always is, and I don't think it will continue every year. But I don't want to kind of -- because of those two big things it's kind of hard to say where the bottom line will end up, but will definitely be a good quarter as compared to the year.

I believe that all the negative changes, we kind of hope the third quarter order will be better than that, there's still more [tail] in July would hit us and the Solar costs is always there, but we believe right now it's all behind us so I think we should be back on track. But then, and again, (inaudible) say that we hit the same number with all the costs, but we kind of need to decide how much we want to spend on digital launch and what will come from Solar.

Thank you.

And the next question comes from Robert Routh with Phoenix Partners Group. Your line is open.

Hello, hello?

Hi.

All right. Sorry about that. Quick questions. Obviously, you guys are going through a big transition, and it's a little difficult giving the capitalization for people to get kind of behind the numbers and see where things really are. I was wondering if you could comment a little bit on, well, first one of the easy questions, you know, the flagship store, how that's doing, how that model has worked, and whether that's something you think you might expand or not going forward?

Then, obviously, because you do still consolidate RSOL and it's difficult, if you were to back out their results and all the related charges tied to financing and deals, you know, Gaiam from an income statement perspective would -- how much better would the numbers look to give us a sense as to how to look at things going forward once you do deconsolidate in 2012? Sort of if you could give us a little guidance there?

Well, on the retail front we are continuing to refine the store. It's doing pretty well for a single store. We're looking at additional formats, additional product mix, and trying to get our assortment there to be close to 100% proprietary so we can really look at the margins.

I expect that we'll be able to talk in first quarter about what our expansion plans might be, but we certainly believe in the concept, think it should be a real part of our branding strategy and our Direct to Consumer strategy. So we're excited about it, but still tweaking it.

Okay, fair enough. And it's not that expensive, correct? It's a very low cost bet for you guys at this point?

Correct.

Yes, I mean it's like it's currently about breaking even plus, right?

Yes.

So it's, yes, P&L wise will be positive one way or the other. Actually, the store, but on the other question is to take the real goods out, I thought we kind of provided that. If you take it from the -- I think Steve said that on the bottom line if you take all the real goods and charges out that we did -- we lost about a million dollars compared to about $100,000 previous, so about $900,000 down compare year-to-year on the pretax, right? Pretax line.

On the GP the gross margin I, you know, the margin if you take the real goods out was quarter-to-quarter up about 110 basis points to 57.6 from 56.5. And going to next year I think we said that as a guidance that for Gaiam only it's kind of an internal growth in mid-teens, for Solar about 20 to 25 on the top line. And we expect that pretty much from the units of Gaiam if you kind of break it so the Trade business, as mentioned should have decent comps. The DRTV will also grow because the switch, what we did this year, so growth will be pretty nice there. We also expect to obviously grow within Gaiam TV, since it starts at zero. We expect some growth in eCommerce, maybe even an acquisition there. I think from only units where we don't expect revenue growth would be our (inaudible) travel because they have a big contract this year so they might be slightly down in revenue but improved profitability in 2012.

Okay, fair enough, fair enough. Definitely simplify things. Another question is obviously -- I'm sure you guys hear this a lot, it's, you know, given the tangible book value and the book value of the Company and where it is now and, obviously, you guys buy a lot of stock at $3.67 a share, and the stock is a little bit much higher than that. When or would it just make sense to take this Company private and then continue to do everything you're doing and then IPO it in five years at five times where it's trading now? I mean you'd think at some point that might make some sense given interest rate is so low, you guys have a real business, and see where some other things are trading. It just -- I'm just curious as Management it must be frustrating. Is there a level or does that never make sense to you guys to even consider given your cash and book value and what the market seems to think you're worth?

We definitely have some of those discussions at Board level, and we'll probably continue to have them. It's -- but I don't want to comment on any -- we have those discussion over the last three years, so.

Sure.

But it's not in the cards, but it's not what's our immediate plan.

Sure, sure. Okay, and another question, back to kind of before. You gave us some way to look at revenue for Gaiam and Real Goods next year in terms of top line. Should we be looking for free cash flow or earnings next year if everything goes as planned or is it still too unclear to even project or is -- how much visibility do you have into that, not in terms of degree of magnitude, just do you think the Company will have GAAP earnings or free cash flow or it won't or you just don't know yet? It would just help for modeling purposes.

Oh, yes, definitely we would have all of that. I mean we will have dramatic increase, improvement from this year on all those lines, and we would have all positive -- be quite positive in all the lines. Actually, you should look like more previous years than this year, you know, with all the changes but we definitely are planning to have pretty, you know, solid pretax earnings (inaudible).

Great. That was coming through, as well. I was just curious when you back out the other if things go as planned and the economy doesn't sour it would look like that would be the case, I just wanted to be sure I wasn't missing anything there.

Oh, no, no, definitely, we definitely plan to -- I mean we believe that all the changes -- we have a lot of things, what happened this year, and so far we don't see anything like that even -- I mean who knows what will happen in the overall economy but if it stays relatively stable I think we would go back to the mid-teen growth and our P&L will improve pretty nicely.

And we've made the investments in the infrastructure that we need in order to support that.

Yes, and we also since the -- everything is difficult also kind of spend some of the money on the launches this year, so hopefully we don't have to do that much except marketing for Gaiam TV next year and some retail openings, yes.

Great. And that leads to the next question I have which is given that you've built the infrastructure, you own the brands, you're looking for things but it's got to be priced right and fit with what you do, is it safe to say that most of that spend in terms of building what you needed to build to launch Gaiam TV and everything else has been spent and run through the P&L so that going forward we could see a material decrease? I mean your CapEx, I mean you guys expense most of this as incurred, or how should we look at those kind of expenses going into 2012 and '13?

Yes, I don't think there's any big plan, you know, CapEx is as we know, if we do some acquisition obviously that's not a CapEx but that would be a capital spend which I would say if we don't do it even before will be then. And also our inventories are up higher, probably they're going to be some positive cash flow from reusing inventories because we -- if I mean obviously some of them depends how we reduce Real Goods, but we bought Alteris to have decent amount of inventories, $7 million plus. And we also kind of have with inventory changes, you know, we get caught with some higher inventories which we sell out.

Okay, great. So you don't have any -- so most of the money has been spent, the big money that had to be spent to build that, what you've built to launch Gaiam TV and so we can look at it, it's kind of there, it's just maintenance going forward and marketing?

Yes, it'll be -- there'll be a marketing spend going forward on that, but the technology we've already spent on that.

Great, great. Okay, and just one last question. Obviously, given the Borders situation, that hurt, who knew, hurt a lot, but given recent changes, especially at Barnes & Noble, which Liberty just made a big investment and they're right in your backyard, and they're changing all the stores in themselves, who knows whether it will come back or not -- is there an opportunity there for Gaiam to expand given the products you have and the health and wellness stuff? It seems like it could fit, and I'm just curious is that an area where you could expand the relationship given the nature of the real niche based products that you have and with Borders gone, what's happening at most Barnes & Noble stores, is there an opportunity there or you don't see anything?

I definitely think, in fact, we've discussed with Barnes & Noble expansion. I think they were distracted over the last couple quarters with what they had going on, but we think there's an expansion into some of this new -- like the Gaiam Restore line that we talked about that's successful at Target, which is more a rejuvenation line. We also believe there's a lot of expansion on the digital side through the NOOK, you know, taking our content and creating either apps or eBooks and expanding that way through. They're both, Amazon and Barnes & Noble, and we're having great success with Amazon right now because we are able to do things like that.

Great. And that's kind of what I was thinking. And I apologize but one last question. I noticed you here launching -- if I hear you correctly a skincare line in 2012? I'm curious, given the annuity nature of that kind of business which makes it great, you know, kind of the Starbucks model, do you see a lot of other opportunities if going forward for Gaiam given the strength of your brand with quality partners to create annuity type products rather than get a purchase once every four to five years? It just seems like your brand fits well with that with certain product categories, skincare being one of them, but I can think of a bunch. I just didn't know if the Company is exploring or thinking about any of those?

We absolutely are, Rob. In fact, the first one because we felt it was probably the easiest was our apparel expansion. And with the success that we've seen in that on eco friendly apparel through our eCommerce and catalog we believe the next one would be skincare and that skincare will launch through our Direct Response Television unit, and then can seed as a continuity business for us, as well as feed into retail.

So we agree with you, the brand is really strong. We did a brand positioning study several years ago, asking our consumer for permission on the elasticity of the brand. And as long as it fits within our brand parameters of being eco friendly and, or healthy they gave us permission to really expand into all sorts of other categories. So we agree with you, there's lots of opportunity there.

Great. And you'd only do that in a low risk manner, I believe, right? That'd be safe to say --

That's correct.

-- you're not manufacturing the stuff yourself? Okay, there were solid partners. Great, well --

Solid partners, always.

Perfect. Well, great. well, thank you for taking my questions, and get ready for the future.

Good to catch-up. Thanks, Rob.

The next question comes from [Molly Aruchi] with Stifel Nicholaus. Your line is open.

Hi, this is [Molly]. I'm in for Jim Duffy. Sorry, he's out traveling for business today. Just have a few questions for you. Could I first get you to clarify, you had talked about 30,000 to 40,000 subscribers as far as Gaiam TV, is that the potential or is that what you have right now?

No, we didn't -- the TV doesn't really have any meaningful subscribers. We'll start to market it end of the -- I mean later this quarter.

Okay.

And that's roughly what we estimated is current run rate, marketing to people, where we would need to roughly be to break-even.

Oh, okay.

For the Division, but that's still going to probably change when we kind of clean-up all the -- do all the changes what we get from the study right now. So we will make the number more accurate, but this was just estimate of how many subscribers we need to break-even.

Break-even, and can you give any guidance on what you expect, hope, and want that number to be for end of 2012?

We can say what we hope, it's hard to say what we expect, and we don't really have any subscribers. I think we would try to give you that number next quarter when we kind of have something launched and we can see kind of the run -- the pace of run rate.

Okay.

And increasing the subscribers. Now it's really premature to -- we can say what we hope, but it's a pretty big number so I'd rather wait till we have some data.

When we get some real numbers.

Right, and do you think that you'll be able to report on that next quarter or maybe the beginning of next year?

We will start to talk about it next quarter.

Next quarter, okay. And just shifting gears a little bit, you had talked last quarter about in Target they were keeping in stock levels well below normal, are you seeing a normalization of those inventories, any meaningful program wins this quarter?

Well, they're certainly better than they were last quarter, but still about seven out of the 12 weeks they were below average in in stock, so we're still experiencing some issues there, but they're much better now than they were certainly in second quarter.

And do you anticipate that to be better in the fourth quarter or coming --

Absolutely, you know, whenever you do a new launch like we did in September of this year, which is whenever we reset there's certain new products that you're forecasting. And the good news is some of those products performed better than we expected, such as the Restore line, so we're still catching up with inventories on that.

Okay, and then with regard to the shift in catalog spend, did you -- can you give us any clarity on the incremental impact to SG&A, as well as to revenues in the fourth quarter?

I mean what we did is we took our first holiday drop last year happened in September and we moved that drop to October. So that's why you saw a little bit of a decrease in revenue in third quarter, which we assumed to pick-up in fourth but we're still going to run at the same kind of percent catalog expense as we've run in the past. There won't be any change in that.

Okay, and then finally with regard to your apparel line can you give any guidance on the size potential I guess, is that? It sounds like you're seeing some pretty good success, what are you expecting going into 2012?

You know, I can't give you any kind of guesstimate on the size. I can just say that it was very well received by our consumer. We're able to improve our margin, as I said, in the whole Division by 190 basis points, so we're excited about the possibilities. We will keep it in the Direct to Consumer Division right now, but we also see opportunities to perhaps take that out to our retail partners, our high-end retail partners, as well. So we haven't done any forecasting on that. That's not in our numbers, but we think the -- we're very excited about the apparel going forward.

I was going to ask that, do you think -- are you in discussions with Target or --

Oh, no, and that's not where it would start. If we go out in apparel it would be more on a small boutique, whether it's Yoga Studios and, or somebody like a [Dick's]. we would not take it into mass in the beginning.

Okay. Okay, great. Thank you so much.

Thank you.

And I am showing no further questions in the queue.

Thank you. We would like to thank everybody for today's call, and I'll hopefully see you -- hear you next time. Thank you very much.

Bye.

This concludes today's conference call. You may disconnect at this time.

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