Gaia Inc (GAIA) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Gaiam, Incorporated, Third Quarter 2012 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Monday, November 5, 2012. I would now like to turn the conference over to Mr. Norberto Aja, Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone, and thank you for participating in Gaiam's 2012 third quarter conference call. Joining me today on the call are Gaiam's Chairman, Jirka Rysavy; Gaiam's CEO, Lynn Powers; and Steve Thomas, Gaiam's CFO.

Before we get started, however, I would like to take a minute to read over the Safe Harbor language. 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 and involve risks and uncertainties including but not limited to general business conditions, integration of acquisitions, the timely development of new business, the impact of competition, and other risk details from time to time as described in the SEC reports. The Company does not undertake any obligation to update forward-looking statements.

With that, I would now like to turn the call over Gaiam's Chairman, Jirka Rysavy. Please go ahead.

Thank you, Norberto, and good afternoon, everyone. Revenue for the third quarter, which ended September 30th, increased 3% to $43 million compared to $41.8 million in the same period of the last year. Revenue for business segment increased about $7.5 million, or 38% to $27.1 million and this internal growth rate of 15.2%.

Revenue on our direct-to-consumer segment declined $6.3 million, primarily due to our pullback in advertisement spending in our direct response television business because of the challenges of securing air time at a reasonable cost due to Olympics and presidential campaign.

EBITDA for the quarter increased $1.7 million.

For nine months, revenue increased 23% to $135.8 million. This and internal growth of 13% and the benefit of acquisition of Vivendi Entertainment. Gross profit rose $17 million, or 27%, and gross margin improved by 180 basis points to 58.3% while operating expenses decreased 290 basis points. This drove a $4.5 million improvement in operating income, $8.7 million improvement in EBITDA, and $19.8 million improvement in operating cash flow. The $8.7 million improvement in EBITDA excluded $1.7 million acquisition costs from Vivendi.

Gaiam has no dollar investment and virtually no tax basis in our holding of about 10 million shares of Real Goods Solar since Real Goods did its IPO in 2008. Because of Real Goods' noncash impairment charges of primarily goodwill and deferred taxes in this third quarter, Gaiam recognition of our portion of the loss also reduced our GAAP carrying value to zero and therefore Gaiam will not be required to flow any future losses through its income statement.

Excluding this noncash equity investment -- excluding this loss from the equity investment, Gaiam reported about $0.01 a share loss in the quarter compared to a loss of $0.04 in the same quarter last year. Including the loss from the Gaiam investment in Real Goods, our net loss was about $11.2 million or $0.49 per share.

Our subscription net of Gaiam TV as anticipated during our last call reached a mark of 5,000 exclusive titles for streaming, meaning that you cannot get any of these title (inaudible) on Amazon Prime or anywhere else.

So marketing spend has been kept pretty modest during the past few months, can increase later this month as planned. The conversion rates from free trial to subscription are still well above our expectation, and are running about 70%.

The $19.8 million improvement in operating cash flow in the first nine months did put $19 million on our balance sheet, about offsetting our trade units borrowing for the Vivendi acquisition, which, on September 30th was about $20.9 million outstanding against the credit line in the unit.

We continue to expect that Vivendi Entertainment acquisition to contribute approximately $25 million in revenue representing about $200 million in billing, and they equal $25 million on gross profit over the first 12 months after the deal was closed.

In summary, we are pleased with our performance year-to-date, and our new Hallmark Channel and Henson Company licenses further securing Gaiam's position as the second-largest non-theatrical distributor in the US just behind Warner and with over 60,000 retail doors, our digital platforms and 15,000 store-within-stores.

And, with that, I will turn it over to Steve who will give you details over the financials. Steve?

Thank you, Jirka. I will spend a few minutes reviewing the financial results in greater detail and offering some additional perspective on our performance in the quarter beginning with the income statement.

As a reminder, all the comparisons discussed are as if Real Goods Solar was deconsolidated from Gaiam as of the beginning of the prior year.

Overall, 2012 third quarter net revenue was $43 million compared to $41.7 million for the third quarter of 2011, representing a 3% increase. Net revenue from our business segment, which is comprised of sales to retailers increased 38.6% to $27.1 million compared to the year-ago period, as we continue to drive further growth in our aggregator role with some of the largest US-based retailers and showcase one-of-a-kind media content and wellness products both from third parties as well as under the Gaiam brand.

And, of course, Gaiam Vivendi Entertainment is already playing a vital role in the success of this business by providing us with a growing library of desirable content and digital relationships.

As for our direct-to-consumer segment, this segment saw revenue decline by 28.4%, or $6.3 million as our direct response TV business experienced a $5.4 million, or 50% decline in revenue due to our planned holdback of key programming and content in light of significantly higher costs associated with securing television time during the Summer Olympics and, more recently, with presidential and local campaigns monopolizing nearly all affordable airtime.

We will begin to support this business with the same quality and quantity of content as we have in the past and fully expect it to return to its historical trends. In addition, we expect a growing contribution from our e-commerce sales due to the recent completion of the redesign of our website as well as an expanding Gaiam TV subscription base given the increased visibility this segment will enjoy now that it has transitioned out of the beta stage.

Gross profit was flat at $24.1 million for the third quarter of 2012 and 2011. Gross margin decreased to 56% from 57.6% during the same quarter last year due to sales mix given the decrease in typically higher-margin DRTV sales.

As I mentioned, and as Lynn will elaborate upon in a moment, we should see improved gross margins as we ramp up our programming and media spend for DRTV next year.

Moving down the income statement, total operating expenses decreased in the quarter to $24.2 million from $25.1 million in Q3 of 2011 and, as a percentage of revenues, operating expenses were 56.4% in the third quarter of 2012 versus 60% during the same period last year. This 360 basis-point improvement was despite the fact that we incurred approximately $1 million in noncash amortization expense during the third quarter of 2012 related to our acquisition of Vivendi Entertainment earlier this year.

As Jirka noted earlier, our investments to further develop the subscription business and our digital delivery strategies are now moving to the implementation phase to attract consumer attention and thus increase revenue. Such investments impacted the income statement by approximately $3.8 million over the last three quarters.

Including $1 million of new amortization expense following the Vivendi Entertainment acquisition, depreciation, amortization, and stock compensation expenses totaled $2.4 million for the third quarter of 2012 compared to $2 million in the year-ago period.

Capital expenditures were $0.7 million, and media rights costs were $0.1 million compared to Q3 of 2011 when CapEx was $0.7 million and media rights were $0.3 million.

Operating loss for the third quarter of 2012 totaled $0.2 million compared to an operating loss of $1 million during the same quarter of last year. Our core business continues to be healthy, and excluding the operating losses from our investment in the subscription business, our operating loss for the third quarter of 2012 would have changed to an operating income of $1.1 million compared to an operating loss of approximately $0.5 million for 2011 excluding the investment in subscriptions.

Including a noncash equity investment loss of $15.9 million, net loss for the quarter was $11.2 million compared to a loss of $1.1 million in Q3 of 2011.

As a reminder, we converted our Real Goods Solar Class B shares to Class A shares on December of 2011, reducing our ownership to approximately 38%. For 2012 comparison reporting purposes, Real Goods Solar results are deconsolidated and shown as an equity investment line in our financials as if Real Goods Solar had been deconsolidated as of the beginning of 2011.

Before I move to the balance sheet, I wanted to draw your attention to our year-to-date performance. For the first nine months of 2012 our revenue rose 23.5%. Internal growth was 13%; cash flow from operations increased $19.8 million; and EBITDA improved to $5.3 million versus a loss of $3.4 million in the first nine months of 2011. These results reflect both the positive impact the Vivendi Entertainment acquisition is having as well as the health of our business as a whole.

Moving to the balance sheet, we ended the third quarter with $19.1 million in cash versus $14.5 million on December 31st of 2011. This leaves our current ratio at approximately 1.6, a metric that underscores the health of our balance sheet and our continued ability to fund our current operations as well as permit investment in value-creating initiatives.

Inventory turns for the third quarter of 2012 are 2.2 times compared to 2.6 in the third quarter of 2011.

Regarding our credit facility, at September 30 we had $20.9 million outstanding under the three-year, $35 million asset-based facility. This new facility with PNC Bank provides us with the working capital and financial flexibility to continue pursuing our strategies for increasing shareholder value at very competitive rates.

With regard to Gaiam Vivendi Entertainment, we are at or above our expectations at this point with regard to its performance and contribution to our overall business. The last of the financial systems have been migrated and integrated, and the business is operating seamlessly with the rest of our trade operations.

Before turning the call over to Lynn, I wanted to reiterate that our business fundamentals, including our primary revenue streams remain healthy. We continue to prudently manage our balance sheet. Our investment areas, e-commerce, and digital media, represent important growth prospects for us, and we will continue to focus on balancing our long-term growth with near-term execution to create the best possible outcome for our shareholders.

With that, I will now turn the call over to Lynn, who will provide more detail on the overall status of the industry and our growth initiatives. Lynn?

Thanks, Steve. Reaffirming Jirka's and Steve's comments, I am also pleased with our third quarter and year-to-date results and remain very confident that our performance in the fourth quarter will drive us to achieve our prior goals in regards to revenue and earnings.

As we focus on our top three priorities -- expanding the Gaiam brand, evolving and increasing our distribution and licensing business, and growing our digital subscription services, I remain optimistic and excited for the months ahead.

Let me begin by reviewing our business segment, a segment that continues to perform very well for us with internal revenue growth of over 15% compared to the third quarter of 2011. Year-to-date the business segment has internal growth over 30% with growth, including acquisition, over 50%.

I am particularly pleased with the results of the integration between Gaiam and Vivendi Entertainment and how we're leveraging the additional sales volume of approximately 20 million units or $200 million in gross revenues and expected annualized net revenue and gross margin of approximately $25 million.

There are significant economies of scale and operational efficiencies through reduction of third-party distribution costs and the elimination of redundant overhead. Just as important as the financial synergies, our larger scale is affording us a greater ability to win important new content distribution deals, becoming the largest independent distributor of non-theatrical content in the US.

To that end, I can think of no better example than the two most recent agreements we've secured. The first, with Hallmark Channel, provides us with a highly visible and unique content library including new first-run movies that we're confident we can leverage across multiple partners and via multiple platforms. The Hallmark brand will resonate well with Gaiam's core values and core customers.

The second agreement is with the Jim Henson Company. If there is one content library for children that we had to choose, this would be it. Be it Fraggle Rock or Doozer, the agreement with the Jim Henson Company is something that all of us at Gaiam are very proud and excited about.

As I mentioned during our prior call, I am also very pleased with the recent renewal of our licensing agreement with Discovery, which includes all the Discovery Channel brands including TLC, Discovery, and Animal Planet. I am also excited about our new agreement where we distribute the highlights and collector stories for the Olympic Games -- a first for digital purchase and rental on iTunes, Amazon, XBox, Sony Playstation, Vudu, and Google Play.

So, as you can see, we're creating value from the integration beyond operational leverage by better positioning ourselves to win new business. These operational efficiencies and new business wins will help offset any top-line DVD headwind and become a crucial, competitive differentiator that will help further Gaiam Vivendi Entertainment remain as the strong -- the largest independent and the second-largest overall media distributor in the US for non-theatrical content in the physical and the digital world.

We also continue to expand our media category management role that we started in 2009. We now have about 5,400 doors in the US under management including being one of only two independent aggregators for media and the sole aggregator for fitness media and the second-largest mass retailer in the US.

In terms of market share, according to Nielsen's Video Scan, Gaiam remains at the top of the charts in fitness with 45.2% market share, up from 37.6% last year and double our nearest competitor.

Additionally, as of the end of the third quarter, Gaiam Vivendi Entertainment is the number-two distributor in non-theatrical content with 14.1% market share, up from Gaiam's 6.2% last year, leaving only Warner Studios ahead of us. Gaiam without Vivendi grew to over 8% share.

We also have some encouraging news from IHS Screen Digest, indicating that after several years' decline, total revenue from home entertainment content is projected to rise 8% in 2012 with the expansion of Blu-Ray and digital offsetting DVD decline.

With regards to our efforts to continue to grow our business segment, we're seeing strong consumer demand across Gaiam-branded accessories. Our top 25 retailers are up over 25% in the aggregate year-to-date with some retailers reaching as high as 50%. Sell through also continues to compare well.

With regards to our fitness products, we continue to see great success from both our Restore line of at-home rehabilitative and restorative accessories as well as with our Gaiam Sol Premium yoga line.

Our Spry Professionals line of workout accessories, which has already expanded to 500 Sears locations is fast becoming a recognized brand for the male lifestyle enthusiast audience and just recently launched into the Sports Authority with several new products, including some restorative products designed for men.

Our Gaiam Restore line continues to do well with two of the top SKUs at our largest customer and is among the best-performing at other store locations. We also continue to focus much of our efforts in our store-within-store concept, which is now in place over 15,000 doors. We expect to utilize this strategy across our new categories such as the Gaiam Restore Wellness and the Spry brand as well as for our Studio partners.

Turing now to the direct-to-consumer segment, we brought down the media spend in our direct response business in order to remain profitable when media costs skyrocketed during the Olympics and the political campaigns. We experienced high media rates as well as being preempted during the quarter, reducing our revenues over $5 million from Q3 2011.

We still remain excited about the prospects for direct response once we get through the political and holiday season. We plan to follow up on the success of the Firm Express with new fitness content that will allow for continued growth from this business including a new line of Richard Simmons content. We are also very excited about continuing our successful award-winning DRTV program featuring Jillian Michaels that will relaunch in early 2013 with new footage to coincide with Jillian's return to the hit television show, "The Biggest Loser."

On the e-commerce front, in October we migrated our website to a more flexible platform and completed the shift towards proprietary branded products and apparel. Gaiam's online customer will now have a greater assortment and an overall more engaging shopping experience. We expect to expand our offering to include video, interactivity, and mobile devices in the coming months. These initiatives should begin to yield results in the fourth quarter of the year as we enter the holiday shopping season.

Regarding Gaiam TV, as Jirka mentioned, the business is out of the beta stage and has entered the marketing phase with an increased marketing spend around the holidays. We have a library of 5,000 exclusive for streaming digital titles across fitness, health and wellness, and personal development, which, together with our in-house capabilities to create compelling content with low incremental cost should make Gaiam TV a very appealing offering to consumers interested in learning more about these areas and bringing the world of fitness, health, wellness, and personal development closer to them through their TVs, computers, mobile devices and tablets.

As we invest in this business through technology and content, it has a negative impact on operating income, including the loss of $1.3 million for the quarter and $3.8 million year-to-date compared to a loss of $500,000 and $1 million in Q3 and first nine months of 2011, respectively.

We believe this exciting new initiative will begin to contribute to our financial results as soon as we hit breakeven on the subscriber base by the end of next year.

In closing, Q3 was a good quarter, however, our focus remains on the future and on reaching our full potential. We now have the financial resources, infrastructure and right people to make that happen. That's why I feel so confident in what we're doing and our focus on expanding our product assortment and improving the customer experience at every touchpoint from our catalog to our website to our store-within-store presentation. We have the ability to develop our Gaiam brand halo across more product lines and channels, to be an aggregator that packages and markets content across all distribution channels, including digital and non-traditional retail and to leverage the unique proposition of Gaiam TV so it becomes a key part of how we build our brand in the digital world.

We look forward to being active in our investor outreach over the coming months and hope to see many of you throughout the balance of the year. Thank you for your continued interest in Gaiam and your participation today.

With that, I'd like to turn the call back to the operator and take an opportunity to answer some questions. Operator?

Thank you. (Operator Instructions) George Kelly, Craig-Hallum Capital Group.

A couple of questions for you. First, what are your plans for the Solar stock now? Do you have any sort of goals? How do you think about what to do with it?

As we said, we have no basis, no GAAP basis, but it's really a question of the right opportunity to capitalize the stock now.

Okay. Secondly, on organic growth for the fourth quarter, is it fair -- the direct-to-consumer business, clearly, there will be an impact in the first month of the quarter. How should we think about organic growth for the fourth quarter, in total, in that segment?

On the direct-to-consumer side, we'll see high media costs through fourth quarter. We'll move from the political campaigns into heavy holiday advertising, which does not work that well for DRTV. So you'll see a continued slowdown in that particular category during the fourth quarter. However, we plan to come back very strong and really look forward to launching the recut Jillian Michaels for "New Year New You" starting in January as she goes back on the "The Biggest Loser." But we do expect the continue to see strong comps on the business segment side.

Okay, great. And then the TV segment, can you break out any of the numbers that you had before? I think you may have given conversion with 70%, but what is the number of subs?

Yes, okay, so the conversion, it's actually -- you know, it's still running because, as I said, we kind of expected 30 was running 70. It's still running 70, actually increased somewhat. So that's actually surprising and very promising. The number of subs, we probably -- you know, as we said last time, we will start to run advertising kind of slow and as soon as we hit this benchmark, which we mentioned last time, 5,000 exclusive titles for streaming, which we just hit, then we'll start to market by Thanksgiving, like, kind of, the regular campaign. We are kind of looking for a different way to launch it. It will happen between -- over next 30 to 45 days.

And I expected that right now before we start a campaign, we'll be about, right now, 20,000 subscribers. And the biggest impact right now is our gross profit on the sub right now because most of this stuff is fixed until we reach higher numbers. It's running maybe 65% by end of the next year, when we expect to hit a breakeven, will run about 90%. So that's kind of the bottom line as far as the impact.

So speaking at about contribution, you know, and Steve said it cost us right now $1.3 million a quarter, and we expect about an equal number in the fourth and first, because as we're increasing revenue and increasing advertising spend. So probably same kind of negative contribution for the fourth and first, and then it will start to improve about $400,000 or $500,000 a quarter to reach a slight contribution by end of the year on a monthly basis.

(Operator Instructions) Mark Argento, Lake Street Partners.

Let's talk a little bit more about the Gaiam TV launch. Can you talk a little bit about your launch strategy? Is it going to be mostly all online marketing? Do you have any partners that you're going to roll this out with? Any thoughts around how you'll really start to build that sub-base?

It's pretty much mostly online. The biggest contributors right now is the search engine goes free unpaid, and we very successfully launched second generation of (inaudible) and [Raku] and so we're doing a launch with Raku, which, you know, proportionately, actually, a lot of people watching it on that. And our third part -- we just signed as a new host, a guy named George Noory. He is host on coast-to-coast, which is second-highest radio station. You may listen -- he had daily show for four hours, it was about 3 million listeners. And so he would do, actually, kind of TV show on our -- I think it will start in December. And [of his] promotion on his radio station, and we have a couple of others like that, you know, what's coming online.

So that's pretty much kind of what a first, you know, between now and Christmas and then we see what the response is to really tweak it. But it's -- the part with really helping that our retention almost doubled since beginning of the year, potential new customers. So that's, obviously, a very good trend, which kind of helped us to break even.

I remember a number of years ago, you guys bought a company called -- I think it was Spiritual Cinema Circle. Is that still up and running and are you going to do any kind of tie-in between the two entities?

Yes, it will be pretty much all the subscription -- it's merged into a unit -- or will be by next few months as we totally incorporate it and we pretty much going to have one different offering -- I mean -- you can buy all of them together, or you can do it separately, but it's all subscription units, so it's like -- you can look at it as we call it, trade division. So it's subscription unit, which is -- you know, incorporate all those parts.

Thank you, that's helpful. And then shifting gears over to the retail side, the business side. Lynn, it sounds like it's pretty good traction. Are you -- is sell through at the rates that you're seeing growth at? Are you replenishing lower inventories? What are you kind of seeing at the point of sale right now in terms of volume?

Well, certainly, Mark, in the first couple of quarters of the year, we did see a little bit of replenishing out of stocks, which I think you were very familiar with seeing at retail. But right now we're seeing really strong sell throughs in the accounts where we get sell through. So it's keeping pace with our sell in.

Okay, and then when you guys think about the Direct TV business, I know it's a tough one because it's fairly lumpy, depending upon when you have new products rolling out. Do you guys look at that business as a natural extension from a distribution perspective to your general product set? Or would it make sense, over time, to maybe migrate more of that online and do less on TV, take some of the volatility out of the numbers? And I guess the question is are you getting the right return given the amount of volatility that you see in that business?

A couple of things, Mark. As you know, we use that channel, really, as our marketing channel. It creates demand for a product or a category of merchandise. And we just have to always be cautious on the media spend side. It isn't so much that it's lumpy based on our offerings, but it can be lumpy based on the cost of media spend.

And we were very cautious this quarter as the media spend went up to pull back. And, yes, it might be lumpy from a revenue standpoint, but we're protecting the overall bottom line by pulling back because we do use it to launch, like I said, brands or categories like we've used with The Firm, which we launched via DRTV, then we take it out to retail, and we also then have online communities and online sales.

So I think that we're going to continue to use it in that manner, since we can maintain the profitability. You may just see some contractions in revenue when the media -- the cost of media goes up. And it certainly does, at election times and the holiday time. So you'll see that usually is our lowest time of the year for revenue for that division, but it didn't hurt our profitability.

Okay, and just shifting back, I think you had mentioned, Lynn, in regards to the Gaiam TV offering that you expect to get that to break even by the end of fiscal 2013. Do you guys have a total sub number that you're targeting to get there? How do you guys kind of model that out?

Yes, it's exactly -- it's about -- based on as we see it today and seen how it really depends the retention and some factors, but right now we kind of see it -- it's about 90,000 subs.

There are no further questions at this time.

So we would like thank everybody for being with us and, hopefully, see you next quarter, which that will be, like, in March, probably -- early March. Thank you very much.

Good bye.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.