Gaia Inc (GAIA) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Gaiam 2013 First Quarter Conference Call. (Operator Instructions). As a reminder, this conference is being recorded Tuesday, May 7, 2013.

I would now like to turn the conference over to Norberto Aja, Investor Relations. Please, go ahead, sir.

Good afternoon, everyone. Thank you for participating in Gaiam's 2013 first 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. Following some prepared remarks, we will open the call for your questions.

Before we get started, however, I would like to take a minute to read the safe harbor language. The following constitute the safe harbor statement of the Private Securities Litigation Reform Act of 1995. Except for historic information contained herein, the matters discussed in this call today 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 impacts of competition, and other risk details from time to time, as described in the SEC reports.

The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the Company's filings with the Securities and Exchange Commission, including the Company's reports on Form 10-K and 10-Q. Gaiam assumes no obligation to publicly update or revise any forward-looking statements.

Today's call includes non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release, as well as on the Company's Website.

With that, I would now like to take -- to turn to introduce Gaiam's Chairman, Jirka Rysavy. Please, go ahead.

Good afternoon, everyone.

The revenue for the quarter ending March 31 increased 19.6% to $56.6 million from $49.3 million in the same quarter of 2012. The internal revenue growth was 6.6%.

Gross profit increased by $5.1 million, and operating income grew by $1.5 million. The net loss improved to $300,000, or $0.01 per share, from a loss of $1.2 million, or $0.05 per share, in same quarter last year.

Cash flow from operation increased $7 million to $6.2 million from a cash use of $800,000 of same quarter last year.

We ended the quarter with $7 million in cash, and our borrowing decreased to $8 million.

The integration of Vivendi Entertainment is complete, and we are pleased with the operating results.

The overall home entertainment grew 5% during the quarter -- I mean as a industry, as reported by Digital Entertainment Group, with the digital sell-through rising about 51% over the first quarter of 2012. Vivendi beat the market by achieving about 61% increase in digital sales for all continuing and new studios.

According to Nielsen VideoScan, Gaiam Vivendi's non-theatrical market share grew to 13.7% from 12.8% in the same period last year.

Gaiam has now about 5,000 branded yoga fitness store within a store and has improved its US video market shares to 39.4% from 36.6% at the end of the same quarter of last year.

Our video subscription business and platform distributing media over internet and, of course, mobile devices keeps progressing nicely. The conversion from a free trial to a subscription continues to be well above our expectation and running still approximately about 70%.

Revenues for the last months for the unit was about $400,000. We had about 5,200 exclusive video available for digital streaming.

With our marketing team now in place, our marketing campaign is starting pretty much now, as we speak.

The operating loss for the quarter for the subscription unit was about $1.8 million.

And now I would like to turn the call over to Steve to give you some color financials.

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

First quarter 2013 net revenue rose 19.6% to $56.6 million, compared to $47.3 million for the first quarter of 2012. Our overall consolidated internal growth rate was 6.6%, or $3.1 million, for the quarter, reflecting the strength and health not just of our media distribution business but of Gaiam's original content, digital distribution, store within store, and aggregator businesses as well.

Organically, our business segment revenues grew 21%, and total net revenue from the segment, which is comprised of sales to retailers, increased 44.7% to $37.3 million as we continued to expand our distribution footprint and our media, fitness, and wellness SKUs across some of the largest, US-based retailers.

As was the case in Q4, Gaiam Vivendi Entertainment continues to play a vital role in the success of our business division, providing us with a growing library of sought-after content and digital relationships that have helped us to consistently grow the business over the last several quarters.

In our direct to consumer segment, revenue declined by 10.3% from $21.6 million to $19.4 million as our direct response TV business faced comparison with the strong results from the first quarter of 2012, when we first brought to market the very popular Jillian Michaels "Body Revolution" series of fitness videos. However, we did see growth across most of the other parts of our direct to consumer segment. Excluding DR TV, the segment had revenue growth of 13.5%, even after a 15% decrease in our catalog circulation.

Gross profit for the 2013 first quarter increased 18.8% to $32.2 million, or 56.9% of net revenue, compared to gross profit of $27.1 million, or 57.3% of net revenue, in the first quarter of 2012. The decrease in gross margin primarily reflects lower net revenues across the higher-margin direct response TV marketing business, which was partially offset by the 100% margin net fee revenue of Gaiam Vivendi.

Moving down the income statement, operating expenses were $32.1 million, or 56.6% of net revenue, in the 2013 first quarter period, compared to $28.4 million, or 60% of net revenue, in the first quarter of 2012. Also included in our operating expenses for the first quarter is $0.4 million of noncash amortization expense related to the Gaiam Vivendi Entertainment acquisition, a cost we did not incur in the prior-year period.

Operating income for the first quarter of 2013 was $0.2 million, compared to a $1.3-million loss in the first quarter of 2012.

We made several large investments during the quarter. We invested approximately $1.8 million in the Gaiam TV subscription business this quarter, as well as other strategic initiatives, including a branding study that will help us position the Company to take advantage of new growth opportunities in the future. The strategic investments totaled approximately $1 million in the quarter and are expected to taper off to around $300,000 in Q2, when completed.

Moving to the bottom line, we reported a net loss for the 2013 first quarter of $0.3 million, or $0.01 per diluted share, compared to a net loss of $1.2 million, or $0.05 per diluted share, for the first quarter of 2012.

Looking at the balance sheet, we ended the first quarter with $7.1 million in cash, and our borrowings under our credit facility decreased from $16.2 million at December 31 of 2012 to $8.3 million at the end of the quarter. This leaves our current ratio at approximately 1.9, a metric that continues to reflect the health of our balance sheet and our ability to fund our day-to-day operations.

Inventory turns for the first quarter of 2013 were 3.3 times.

Taking a brief look at our cash flow statement, we're pleased to report a $7-million improvement in cash from operations, as we went from cash used in operations of $0.8 million to cash provided by operations of $6.2 million.

For the first quarter, capital expenditures were $0.7 million and were comprised of $0.4 million of property additions and $0.3 million of media assets.

Depreciation and amortization was approximately $2 million for the quarter.

In summary, we continue to prudently manage our balance sheet and investments around important growth prospects, such as e-commerce and digital media. Our first quarter results reflect both the benefits the Gaiam Vivendi Entertainment acquisition is providing to our business, as well as the overall strength in the Gaiam brand, the positive impact of our recent marketing and branding initiatives around e-commerce and catalog, and the continued investment we are making in our digital content distribution business, Gaiam TV.

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

Overall, our performance for the first quarter continued to be strong, with internal revenue growth of 6.6% and total revenue growth, including the Vivendi Entertainment acquisition of 19.6%, both as compared to the first quarter of 2012.

As Steve mentioned, our results for the first quarter of 2013 included approximately 21% year-over-year internal revenue growth for the business segment, as well as solid revenue improvements in the core direct business, both of which helped offset a challenging year-over-year comparison in our direct response television business.

Much of our quarterly success is the result of the great job our team did in efficiently and diligently integrating Vivendi Entertainment's distribution business into ours and very quickly being able to identify and leverage opportunities. The result was to create additional sales volume and drive operational efficiencies that have helped us not only to meet but to exceed our revenue and gross margin target. The reduction of third-party distribution costs, the elimination of redundant overhead, and other operational synergies have had material impact on the business.

However, the more important and valuable results of the integration of the two businesses is that GVE is now able to further our position as the largest independent distributor of non-theatrical media content in the US and is a much more scalable and robust business that provides us with a greater ability to win content distribution deals and solidify our leading market position.

This is reflected in the fact that, over the past 6 to 12 months alone, GVE has closed renew agreements with Crown Media to distribute the highly visible and unique Hallmark Channel library; the Jim Henson Company for great children's content, including Fraggle Rock and Doozers; World Wrestling Entertainment for an additional three years; and National Geographic and Discovery for multiyear agreements. We also renewed our deal with Televisa, the leading content programmer for the rapidly expanding Latino market.

We continue to pursue licensing deals and recently signed an agreement for the children's title "Sammy's Adventure 2," a promising franchise that drove $2.8 million in gross DVD sales during the first quarter. We're in the midst of other discussions and negotiations for additional content provider agreements.

The response from our studios to our new organization has been positive, and it's clear that they see our ability to help them generate the most value from their content. This is evident in that our top ten studio partners, who account for more than 75% of our total revenues, saw a sales increase of more than 10% over the first quarter of 2012.

We also continue to further expand our media category management role, with over 6,000 doors under our management in the US, including being one of only two independent aggregators for media and the sole aggregator for fitness media with the second-largest mass retailer in the US.

In terms of market share, we're the largest independent distributor of non-theatrical content and the only independent distributor with direct relationships with Target, Walmart, and all meaningful digital media providers. During the first quarter, we were second in market share in non-theatrical content, only behind Warner.

In terms of the overall home entertainment market, 2013 started off on a good note. Digital Entertainment Group recently reported that home entertainment spending rose 5% in the first quarter on the back of strong Blu-ray disk and digital sales with electronic sell-through rising more than 51% over first quarter 2012 due to the broader availability of titles and increased access to digital content. In comparison, GVE beat the market by achieving a 61% increase in digital sales for continuing and new studios.

While we're pleased with the growth and profitability of the entertainment portion of the Gaiam trade business, we're also extremely excited about the growth opportunities for our branded fitness and wellness business. We continue to drive this growth with a focus on adding and expanding our store within store opportunities. We now have a presence in over 15,000 doors. We expect this number to continue to grow as we expand the distribution reach of our current product offering, as well as launch innovative, new products and categories in both the fitness and the wellness market.

A recent example of our growth potential is our SPRI professional fitness equipment product line. Historically, SPRI has been offered only in the professional gym market. We recently launched the brand into retail with placement into 450 Sears stores and 460 Sports Authority stores. We believe SPRI by Gaiam has the opportunity to be the leading authority in professional fitness equipment. We will continue to solidify this position with new products and equipment designed for the cross fit and active recovery markets. We're in the midst of discussions to expand the brand's placement at other retail doors and look forward to continued growth.

We also continue to see strong consumer acceptance for our Gaiam Restore line of at-home rehabilitative and restorative accessories, as well as our Gaiam Soul line of premium yoga products. Gaiam Restore doubled in sales in Q1 as compared to last year. We are planning to launch additional wellness products under the Restrore brand in Q3 this year. And, at our current pace, we will have the opportunity to expand our offering to a 4-foot section in 2014. Supporting this growth, we expect our largest retail partner to place a 4-foot section of rehabilitation products from the combination of our Gaiam Restore and SPRI active recovery brands in their September 2013 resets.

In summary, our fitness business has demonstrated the power of our brands and our broad capabilities as a partner with our retail customers. In fact, our revenue from our top 25 accounts in fitness media and equipment grew by over 30% in first quarter as compared with first quarter 2012. We believe we will continue with the double-digit gains throughout the year.

Turning now to our direct to consumer segment, the first quarter of 2013 saw sales decline by 10.3% to $19.4 million, compared to the prior-year period. The main driver behind the decline was the tough comp versus Q1 of 2012 in DR TV. First quarter of 2012 saw a 58% comp in DR TV with the launch of Jillian Michaels "Body Revolution." This year, we experienced more normalized level of revenues that resulted in a 30% comp decline. The Jillian infomercial product is now at retail and continues to perform well, but DR TV sales have declined as part of the normal sales cycle of moving the product from DR TV to our retail channel.

We made several large investments in the quarter. As we discussed on the last conference call, we engaged [Ideal], a highly regarded brand positioning company, to help us position the Gaiam brand for long-term sustainable growth. We received their report the first quarter and are extremely excited about the possibilities as we look ahead in our business planning. We also invested in infrastructure, our e-commerce platform, and, of course, in our digital initiative Gaiam TV.

These investments negatively affected the results by approximately $1.8 million as compared to first quarter of 2012. We believe these investments will pay off in 2014 as we position our direct and digital business to better serve the growing need for health and wellness products, information, and content.

As we mentioned during the last call, Andrew Davison joined us in Q1 in the role of President of the Gaiam Brands. Andrew will continue to lead our efforts to formulate the Ideal research into executable Gaiam brand strategies across all aspects of our business.

I'm pleased to report that the balance of the direct to consumer business without DR TV had revenue comps of 13.5%, even after reducing our catalog circulation by 15%. This speaks to the strength of our brands, customer database, and the potential of leveraging our new strategies.

For the end of last year, we initiated a repositioning of our online presence to make it a more flexible, interactive, and scalable e-commerce platform. Although work is not fully complete, this investment has yielded results in improved traffic numbers, conversion, and time onsite. The investment has also provided Gaiam with the best-in-class tools and functionalities that have helped us to improve our online customer experience, better support interactive content, further enhance product pages, and greatly improve testing and data analytics. Going forward, we will invest in additional core technology efforts around CRM and loyalty and the enhancement of our mobile and tablet efforts.

I would also like to mention the positive impact our partnership with "Good Morning America" is having. For the past few months, we have had several featured products on the show. It's provided incremental revenue, new customer acquisition, and has been a nice tailwind to help drive revenue and retail sales.

Regarding Gaiam TV, as Jirka mentioned, the business was taken out of beta stage approximately six months ago and is now in the middle of a branding phase with an increased marketing spend to help introduce the service and bring added visibility. We now have a library of 5,200 exclusive titles for digital streaming across fitness, health and wellness, and personal development, which, together with our in-house capability, makes Gaiam TV a very appealing offering. Going forward, we expect the losses incurred for our investment in Gaiam TV to stay at their current levels until the end of fourth quarter.

As media consumption evolves away from traditional television viewing, platforms like Gaiam TV are uniquely positioned to meet consumer demands by curating and creating content that can be accessed just about anywhere and at any time. Gaiam TV currently streams on all PC and Mac platforms, across the iPhone and iPad, and over the set-top availability via Roku and Apple, as well as services such as Verizon FiOS.

We're also encouraged by the results on this front; in particular, Netflix, whose recent growth has been driven by its streaming service, which, similar to Gaiam TV, allows users to stream titles to their TVs, PCs, and mobile devices. Incremental content will be a key catalyst for Gaiam TV as it continues to bid on content, as well as create original content. Currently, we produce five original-content shows weekly for Gaiam TV on topics such as fitness, nutrition, relationships, and personal development, all of which serve to further differentiate Gaiam TV from other streaming media platforms.

In addition, expansion into international markets remains a big opportunity. Because of our large, owned library, we have virtually unlimited international expansion potential. Unlike Netflix or Amazon, who are reliant on restrictive content licensing agreements, we are already seeing global uptake for our service with customers in over 100 countries.

In summary, I'm pleased to report that we've accomplished all of our key initiatives that we set out to complete by this time last year and that our results reflect that, including integrating the business of Vivendi Entertainment, signing and renewing more and larger distribution agreements, leveraging our digital infrastructure, repositioning the Gaiam brand and expanding our categories, investing in a new e-commerce platform, seeking broader placement of Gaiam-branded products, moving Gaiam TV out of beta testing phase, returning to double-digit revenue growth, and improving our operating results and cash flow.

As Jirka and Steve shared earlier, we're continuing to deliver on our strategic priorities. We believe in the strength of our brands and are committed to investing today for our future.

This concludes our prepared remarks. And now I'd like to turn the call back to the operator for questions.

(Operator Instructions). Mark Argento, Lake Street Capital Markets.

In your prepared remarks, you had mentioned some of the store in a store numbers. And you also had mentioned that it looks like, with one of your larger customers, you're going to be rolling out the Restore line. Is that going to be kind of a store in a store format presentation, or will that be in line?

Well, it will be a store within store for rehabilitative products, and it will be both Gaiam Restore and SPRI active recovery. So it will be four feet of rehabilitation products, which is the first time we've really had that kind of a store within a store presence anywhere. And we see lots of opportunity to expand that to other retailers.

Will that be located in a similar aisle to where you are right now in sporting goods, or is that going to be in a different part of the store?

No. It will be in the same aisle.

Got you. Okay. And some of the market growth numbers for the video category -- you guys rattled through them. It sounded generally positive. But what was the growth that you're seeing the DVD market overall in non-theatrical? I tried to scribble it down, but I missed that number.

The report Lynn quoted from Digital Entertainment was a 5% up year to year first quarter 2013 from 2012.

All right. And, then, overall, when you think about the digital strategy, how are you guys going to advertise or promote yourself? I know, at one point in time, you thought about potentially putting some advertising in the packaging of the DVD to try to get some online penetration or some digital penetration. What are your thoughts about -- ? How do you, basically, migrate your customer from the DVD format over?

We did put it in the DVDs and the products. Lynn can talk about it a little more. But we started with projects -- it's a project that we started maybe a year ago. And so it's kind of been in most of the products. But, you know, it's really where we're talking -- the migration is the videos, obviously. While we put now some of the disks and stuff in other products, obviously, those products still has to be bought in the store. We just tried to kind of bring that customer to our direct relationship from just being a relationship in some other stores.

Mark, we have a couple of initiatives. We actually have a button on the menu of the DVD that talks about Gaiam TV. We have some free downloads. And then we, obviously, have some of our free channels, like on YouTube and Hulu, that can also migrate consumers from watching something that's free to being a subscriber.

Got you. And, then, in terms of the tie-in to Gaiam TV, will most all your -- ? Will a lot of the content -- ? Can you pay for it in a subscription format on Gaiam TV, or will there still be different content on Gaiam TV than, say, you could walk into the store and buy?

It's very -- while there is maybe overlap from what you can buy in the stores with what you can get on Gaiam TV from a Gaiam site--

Just as an example, Mark, you probably have somewhere between 48 and 60 facings for all of fitness in a typical retailer. On Gaiam TV, you have over 500 titles. So you can see that someone who's really into fitness would much -- is much better off subscribing to the service so that they can get the maximum amount of titles at one price.

Yes. And, for right now, it's a subscription is the streaming. We're going to introduce also a few subscriber -- you can download and keep it on your computer as long as you are subscribers, which is very different features than, for example, Netflix has. They don't -- none of the current streamers have that feature because they don't have the rights for the videos to do that.

But it's still different for somebody who's actually buying and downloading video to (inaudible). This is still a rental. So, while you have access to it, it depends what's the use for it-- most of the people owning the right to subscribe -- it's more than adequate because why do you really need it. But, obviously, [when they] buy, they buy. But we believe that either you buy digitally or you stream it digitally long term-- however, that process is much slower than people anticipate. And you'll see that actually -- you know, the overall markets start to grow after declining a few years, which is a good sign for us.

Shifting gears to some of the financials, a question on -- do you know where the net operating loss, or the NOL, stands currently?

And, then, I know you guys bought your building a number of years ago at the right time. Real estate markets definitely having a renaissance of sorts. Any thought about doing a sale leaseback and unlocking some of the capital there, maybe to buy back stock or deploy in other ways?

So, the first question I think Steve might know more. But I would say it's about $47 million what we have of NOLs, which is pretty much -- over $40 million is not restricted. That is about $5 million, what is our restriction for about two years.

And, on the sales leaseback, yes. We are discussing pretty formally. If you look at how the market is, how to do it best, we kind of pretty much finished subleasing the space. And so it's a time where we'd probably look at transactions something like that in the relatively near future.

Which is the best? There are several ways to do it. We didn't really decide exactly how. But there is -- the building is in the books. We have probably about a little over $19 million in it.

Got you. And, then, any thoughts on stock? Stock's been performing a little bit better here lately. Any thoughts about use of capital? I know you have a little bit of debt. But it looks like you're paying back the Vivendi -- the debt, at least, you took on for Vivendi. But, going forward, share buyback, reinvest in the business? What are you thinking in terms of use of capital?

I think we actually do have discussion on this on the board right now very frequently. So I would not want to really say 'til we make a final decision.

But, needless to say, you guys are actively looking at some alternatives.

We definitely are.

We kind of look at, right now, pretty much evaluating all the pieces and how they best fit from the -- like we talk about, building. Is the question -- do we own the building? We never historically owned a building. But, because we have a lot of cash, we're going to get, like 0.1%. So it was the time to buy it. But, now, we have debt declined dramatically because, really, when we bought Vivendi, we borrowed like $32 million total was the debt. Right -- between the universal and stuff. And it's down to $8 million.

So it's like -- it's a good time to look at stuff as the business kind of performs better and we have good cash flow. But you already saw that the cash flow when we borrowed was our priority because, before, if you have all of (inaudible) cash on hand, the cash flow is typically not that pressing. You kind of borrow because the value of the cash of debt. But I don't want to really talk specific 'til we make some decisions.

Fair enough. And, then, a last question, for Lynn. It looks like you guys did the brand study. And I know it sounds like it's still -- some of it's come back. Any kind of high-level takeaways? I know you guys, I guess, have a pretty good brand. Any thoughts around some different ways to enhance the value?

Well, it's definitely all about building and positioning the Gaiam brand for the sustainable growth. And, certainly, our heritage is around yoga, fitness, and wellness and, you know, really making it accessible to everybody. And we'll have a lot more to share probably on the second quarter call about the study and what our future plans are with it. But a lot of exciting information and opportunities. And, like Jirka said, we're evaluating all of them now. We'll just have a lot more to be able to talk about coming soon.

Great. Congrats on a good quarter. Thank you.

Hey, Mark, just to answer your question, we've got $42 million in NOLs, and $39 million are available right now.

Thanks, Steve.

(Operator Instructions). [George Kelly], Craig-Hallum Capital Group.

I just wanted to follow up on one of Mark's questions on the building. I'm wondering what year you bought that building. And, when you acquired it, how much did you spend on it?

We acquired it about two and a half years ago or two years ago.

Probably about three or three and a half.

Yes. And I said we have slightly over $19 million in it with everything what we put in. We have to put some tenant improvements because we have three tenants. So we kind of did some TI and stuff. So our total cost -- everything what's in it is about a little over $19 million.

Okay.

And it's 13 acres with a 150,000-square-feet building -- AAA building.

Okay. And, then, Lynn, you talked about the direct -- the DR business -- that comps are tough. When do those start to ease?

Third quarter.

It looks like -- third quarter?

Third quarter. It will be third quarter. We launched Jillian in January of last year, and I think everybody knows Jillian is the preeminent brand in fitness. So we had 58% comps in first quarter; over 30% in second. So, we'll expect, by third quarter, we'll be back on to having more reasonable comps.

Okay. Next, on the -- a couple questions on the TV business. Did I hear you right that it was a $1.8-million loss in the quarter, and you expect $1.8 million of losses through -- in each quarter through the fourth quarter?

It was $1.8 million. I would expect slightly bigger in the second Q and less in the third Q. It will decline from the third Q. But second Q, because the marketing right now will be probably slightly more. I would kind of say somewhere about -- it's kind of hard to say but, probably, extra $400,000.

Okay. And previous guidance was for breakeven by the fourth quarter. But it sounds like maybe you've changed that. Just wondering why. What's happened differently versus previous expectations?

We didn't say first quarter. We said breakeven by December. And it's kind of -- Yes. It's still our goal. We started marketing about months later, so it might move a month. But the goal was to do it by December. So December/January. We're still kind of thinking and, now, probably count January versus moving to marketing for a month. But it's still the same.

Okay. And, then, just lastly, the expansion with the 4-foot additional section can you talk -- I may have missed that on your prepared remarks. But can you go through those details again? And, is that 4-foot all incremental space?

It's not 100% incremental space because, currently, we do have some Restore products out there. But it is some incremental space; probably, 2 feet because we have probably about 2 feet now. But it will be a 4-foot section of rehabilitative products, and it will be a combination of Gaiam Restore and SPRI active recovery.

Okay.

We see this as a really growing trend. And the fact that it's being put in mass retail just shows you what kind of opportunities we have, certainly, in our other channels of distribution as well.

Sure. Okay. All right. Thank you.

Mr. Rysavy, there are no further questions at this time. I'll now turn the call back to you.

Okay. So I'd like to thank everybody for being with us and, hopefully, talking again next quarter. Thank you very much.

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.