Gaia Inc (GAIA) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Gaiam Incorporated Second Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, the call is being recorded Wednesday, August 7, 2013.

I would now like to turn the conference over to Norberto Aja. Please proceed.

Thank you, Operator, and good afternoon, everyone. Thank you for participating in Gaiam's 2013 Second 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 getting started, however, I would like to take a minute to read 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 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 businesses, the impact 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, August 7, 2013, 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 on today's press release as well as on the Company's Website.

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

Thank you, Norberto, and good afternoon, everyone. Revenue for second quarter, which ended June 30, was $44.5 million, which, excluding our DRTV business, the revenue for the quarter increased $4 million, or 11%, all internal growth.

Turning to consumer segment, revenue increased $3.3 million, or 37.8%, and business segment revenue grew $0.8 million, or 2.6%. DRTV revenue in the quarter had significantly negative comparison, reporting $3.3 million, compared to $8.3 million at second quarter 2012, which strongly benefited from the very successful launch of Jillian Michael's fitness program. Launch of a new infomercial this year will be in the fourth quarter.

During the second quarter, we monetized approximately 6 million shares from our Real Goods Solar ownership for a gain of $16 million. We founded Real Good Solar as our sole subsidiary in 1999 and called the unit Gaiam Energy Tech until its IPO in 2008. Following the stock sale, I resigned personally as the Real Good Solar Chairman to focus on Gaiam.

Gaiam used a portion of its NOL to offset all taxes from the gains and also still continue to own approximately 4.1 million shares of Real Good Solar.

Including the sale of the portion of our founder's stake in Real Good Solar, net income for the quarter was $7.9 million, or $0.35 a share, compared to a net loss of $2.1 million, or $0.09 a share, in the second quarter of 2012.

For the six months, revenue increased 9.1%, to $101.2 million, with internal revenue growth of 2.3%. Excluding DRTV, revenue increased 23.2%, with internal revenue growth of 14.7%.

Net income for the first six months was $7.6 million, or $0.33 per share, compared to a net loss of $3.3 million, or $0.14 per share, in the first six months of 2012.

As of June 30, Gaiam had $17.5 million in cash, compared to $9.9 million in December 31 of 2012. (Inaudible) draw on our $35 million credit line decreasing $4.3 million down to $12 million, the Company's current ratio improved to 2.1.

According to Nielsen Video Scan, Gaiam Vivendi or DV, how we call it, our (inaudible) market share grew about 180 basis points to 14.2%, up from 12.4% in the same period of last year, and it's also [500] basis point growth from 13.7 that we have in the first quarter of this year.

This unit also recently [enrolled] several new high-profile accounts. The overall US home entertainment market actually grew 2% in the first half of this year, as reported by Digital Entertainment Group, which is a nice change from previous declines.

Our video subscription business platform distributing media over Internet and mobile devices keeps progressing nicely. The conversion rate from the free trial to subscription continues to be well above our expectation and it's still improving, running over 70%.

Revenue for the last month was about $450,000, which was driven by about 5,300 exclusive video available for streaming. The operating loss for the unit for the quarter was about $1.8 million.

With the sale of the portion of our Real Good Solar stock, we are beginning to unlock some gains in our assets that should significantly help and improve both our income statement and balance sheet in coming quarters.

And with that, I'd like to turn it over to Steve to do a little more color on the financials.

Thank you, Jirka. 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.

Consolidated second quarter 2013 net revenue was $44.5 million, compared to $45.5 million in the prior-year period. Our Direct Response Television marketing arm, DRTV, had a $4.9 million year-over-year decline due to the very successful Jillian Michaels Body Revolution fitness program launch last year. Revenues in other business units partially offset the DRTV decline.

Consolidated Q2 net revenue, excluding DRTV, grew $4 million, or 10.8%. Net revenue for our business segment increased $0.8 million, or 2.6%, to $29.3 million.

Q2 net revenue growth for the direct consumer segment, excluding DRTV, was $3.3 million, or 37.8%.

Moving down the income statement, gross profit for the second quarter was $23.6 million, or 53.1% of net revenue, compared to $28 million, or 61.6% of net revenue, in Q2 of 2012. The decrease in gross margin primarily reflects the nearly 60% decline in the higher-margin DRTV revenue combined with increased sales of lower-margin fitness and wellness accessories.

For the second quarter, operating expenses, including selling and operating and G&A expenses declined $2.5 million, or 8.2%, to $27.5 million, representing 61.8% of net revenue. That compares to $30 million, or 65.9% of net revenue, in Q2 of 2012. Again, the overall decrease came primarily from a reduction in DRTV-related television media purchases in the quarter.

This led to an operating loss for the three months ended June 30, 2013, of $3.9 million, compared to an operating loss of $2 million in Q2 of 2012. The increased operating loss is primarily attributable to a negative earnings comparison for the Company's DRTV business and investments in Gaiam TV, as well as other unusual expenses like the branding study with IDEO. These businesses are expected to improve in the fourth quarter of 2013.

As we reported in June, the Company sold approximately 6 million shares of Real Good Solar common stock, resulting in a gain and net proceeds of $16.4 million, leading to net income for the 2013 second quarter of $7.9 million, or $0.35 per diluted share, compared to a net loss of $2.1 million, or $0.09 per share, in Q2 of 2012. With the recent sale of Real Good Solar common stock, we now own approximately 4.1 million shares, which we will look to strategically monetize as opportunities arise.

Looking at our results on a year-to-date basis, net revenue was up 9.1% to $101.2 million versus the first half of 2012, with our business segment up 22.6% and DRTV dragging down our direct-to-consumer segment revenues with a decline of 10% compared to the first half of 2012.

Excluding DRTV, net revenue for our direct-to-consumer segment increased $4.6 million, or 24.9%.

Operating loss for the six-month period ended June 30, 2013, increased $0.5 million to $3.7 million from $3.3 million for the same period last year. The increase in operating loss is primarily due to negative earnings comparisons in the Company's DRTV and Gaiam TV businesses of $3.7 million and $1.4 million, respectively, and unusual expenses like a brand research and positioning study, partially offset by the improvements in the Company's other core businesses.

The company's direct-to-consumer segment operating results are expected to improve in the fourth quarter of 2013 after the DRTV business launches its new Firm branded infomercial, which should bring total-year results in line with the Company's expectations.

Net income for the first six months was $7.6 million, compared to a loss of $3.3 million for the first half of 2012, leading to EPS of $0.33 for the first half of 2013 compared to a loss of $0.14 per share in the year-ago period.

Moving to the balance sheet, we ended the second quarter with $17.5 million in cash and our borrowings under our credit facility decreased from $16.2 million at December 31, 2012, to $12 million at the end of the quarter. This improved our current ratio to approximately 2.1, a metric that continues to reflect the health of our balance sheet and our ability to fund our growth.

[Realized] inventory turns for the second quarter of 2013 were 2.8 times. Our inventory increased in the quarter as we get ready for re-sets with our major customers in Q3.

Taking a brief look at our cash flow statement, we will report a $2 million use of cash in operations for the first six months of 2013. Recall that at the end of Q1 in the prior year, we'd just acquired the Vivendi entertainment operations and were able to utilize the acquired working capital to reduce the acquisition-related note in Q2 by $18.7 million. Our net cash flow from operations was a use of $1.3 million for the first half of 2012 without the cash flow from the acquired working capital.

For the second quarter, capital expenditures were $1.3 million and were comprised of $0.8 million of property additions and $0.5 million of media assets.

Depreciation and amortization was approximately $1.7 million for the quarter.

In summary, we're pleased with our ability to strengthen our financial position by monetizing a portion of our investment in Real Goods, and with over $17 million in cash at quarter-end, Gaiam now has a stronger balance sheet and the financial flexibility to invest in and support core business growth.

As you know, our business is very seasonal, with a significant portion of our revenues and profitability earned in the second half of the year. We continue to forecast the remainder of the year will be consistent with our previous expectations.

With that, I will now turn the call over to Lynn, who will provided some added detail on the status of the industry and our business. Lynn?

Thanks, Steve. As Steve pointed out, our overall performance for the second quarter demonstrated solid progress and strong growth for most of our core businesses. However, coming off our successful Jillian Michaels infomercial last year, our direct response television marketing, or DRTV, business net revenue declined $4.9 million for the quarter, causing top-line revenue to be slightly lower for second Q compared to last year, which does not tell the complete picture for the quarter. We expect the DRTV decline to reverse in Q4.

First, I'd like to discuss our two reporting segments' performances and then review our key initiatives and go-forward strategy. Looking at our business segment, we continued to achieve strong sales in this segment, with second quarter net revenue comps at 3% for the quarter and 11% year to date.

Total sales growth for this segment was 23% year to date, including the Vivendi Entertainment acquisition that took place at the end of Q1 2012. This segment has two main genres, or categories -- entertainment and fitness. Starting with our entertainment unit, which we call GVE, we improved our market share position to No. 2 in nontheatrical during the first half of 2013 with over 14% market share, second only to Warner.

In terms of the overall home entertainment market, 2013 started off on a good note. Through the first six months of the year, spending on home entertainment of $8.6 billion was up more than 2% from 2012, according to the data of the Digital Entertainment Group. GVE remains the only independent distributor with direct relationships with Target, Wal-Mart, and all meaningful digital media providers across the US. We now have over 6,000 doors under our management in the US, including being one of the only two aggregators for independent entertainment media with the second-largest mass retailer in the US.

We continue to add to our portfolio of studios and last week signed a new licensing agreement with Scripps Network, the holding company for popular media content such as the Cooking Channel, HGTV, the Travel Channel, and the Food Network. We will begin selling their content this fall.

Earlier in the quarter, we announced a new multi-platform distribution agreement with Random Media, where GVE will be responsible for all distribution activities in the US and Canada across physical, digital, and TV platforms.

GVE has renewed every contract that was up for renewal this year, including a multi-year extension of our existing home video distribution agreement with National Geographic, a key part of growing our portfolio of documentary content. GVE will release National Geographic's award-winning HD programming, including the highly rated Doomsday Preppers, Wicked Tuna, and Brain Game series.

Also, early in the quarter we secured a multi-year extension for World Wrestling programming, which gives us rights to release 12 WWE pay-per-view events each year, including Wrestle Mania and Summer Slam, as well as ongoing access to an extensive catalog of collectible titles throughout the US on physical and digital platforms.

Equally important, we extended our distribution agreement with Televisa, the largest mass media company in Latin America and across the Spanish-speaking world. As part of this multi-year deal, GVE will continue to distribute many of the top-rated Univision telenovelas in addition to the Company's growing catalog of Spanish-language programming.

We're very pleased with our entertainment unit's performance over the past 12 months and year to date as we renew current content deals, close on new deals, and expand the reach of the business.

Going forward, we have some great opportunities with new titles such as Sharknado and [Taffy] Explorer as well as new cross-promotions with toys for the holidays with our Transformers and My Little Pony brands.

We have some of the most sought-after content, including iconic content brands such as the Weinstein Company, World Wrestling Entertainment, Jim Henson Company, Salient Media, NFL Films, Shop Factory, Hallmark Channel, Discovery, and National Geographic, which positions us as the largest independent distributor of nontheatrical media content in the US and provides us with a greater ability to earn content distribution deals and continue to solidify our leading market position.

Turning to our fitness business, we continue to focus on adding categories and expanding our stores and store opportunities. Our fitness media market share maintains its leadership position with a 39% share. Our fitness products have a presence in over 40,000 doors worldwide. We expect this number to continue to grow as we expand on our Spry, Gaiam Soul, and Gaiam Restore brands.

Until recently, Spry was offered only in the professional gym market. Last year, after a repackaging effort, we strategically launched the brand into the general fitness retail market, beginning with placement in 470 Sports Authority stores. Since then, we've seen strong demand for the brand and believe it has the opportunity to be a leader in the consumer as well as the professional fitness equipment marketplace.

We recently gained further real estate at Sports Authority as the supplier for cross-training products under the Spry brand, which we'll begin shipping this fall.

Our Gaiam Soul line of premium yoga products continues to perform very well, offering a compelling, higher-priced alternative to our traditional Gaiam branded products, which are typically priced at mainstream price points. We're expanding this line with [massive dixs] in REI in Q4 this year.

Our Gaiam Restore branded products are expanding in Q3 this year, which will position us well going into the busy holiday season. As we mentioned on the last call, we will have the opportunity to support this growth across our largest retail partner by moving our display of muscle therapy products to a four-foot section that combines our Gaiam Restore and Spry Active Recovery brands.

This type of expansion allows us to grow our business through existing retail relationships. The breadth of our product offering and continual development of new lines enables us to build on our 15,000-plus store in store placements. The brand statement and unified merchandising offered by our stores in stores is a win-win proposition for retailers, who are always seeking a more cohesive set of products provided by fewer and stronger vendors.

In terms of distribution reach, we are launching product tests with Walgreen's, Staples, and Meyers. We are also testing a new category, [captain status] for yoga at Academy Sports.

In summary, our Gaiam fitness unit continues to be met with a high-level acceptance among consumers and demonstrates the added value we offer as a partner to some of the largest retailers in the country. In fact, our revenues from our top 25 accounts in fitness, media, and equipment grew by 12% in 2013 second quarter as compared with the second quarter of 2012 and is up over 20% year to date. We believe we'll continue with double-digit gains throughout the year.

Turning now to the direct-to-consumer segment, the second quarter of 2013 experienced a sales decline of 9.8% to $15.3 million compared to the prior-year period. As Steve mentioned, the main driver behind the decline was the tough comp versus Q2 of 2012 in DRTV. Without DRTV, the direct-to-consumer segment revenues were up 37.8%.

The first half of last year saw very strong 35% comp performance in our DRTV business on the back of the launch of Jillian Michael's Body Revolution. This year, we experienced a much lower level of revenues that resulted in the $4.9 million decline in Q2 versus the year-ago period for DRTV. We will launch our new Firm branded infomercial in late September, which will help comps, and we are also diligently working with Jillian and others to bring to market new content for DRTV that supports our health and wellness product lines.

Regarding our branded catalog and Internet business, we are in the finishing stages of completing several significant initiatives to better support this business. As we discussed in the last conference call, we engaged IDEO, a highly regarded brand position company, to help us position the Gaiam brand for long-term sustainable growth. Based on the results of this study, we have developed action plans and are moving forward with many exciting initiatives. We will continue to keep the market informed as our plans progress.

Additionally, as a result of the IDEO study, we cut circulation of first half of 2013 with no impact to revenue in order to reposition the catalog towards more proprietary products, in alignment with the study. We will begin to re-increase circulation during the holiday season and launch a separate fitness and wellness catalog to drive brand awareness and competitive advantage.

We continue to invest in our eCommerce platform to increase Web traffic and make our online visit more productive. As we discussed in previous calls, we've migrated to a more robust platform that is scalable and customizable to fit our customers' needs. With the completion of the initial implementation, we are continuing with phased enhancements to improve our online customer experience, support interactive content, and enhance product and landing pages.

Regarding our subscription business, Gaiam TV is now wrapping up a branding phase with increased marketing spend to help introduce the service. We now have a library of 5,300 exclusive titles for digital streaming across fitness, health and wellness, and personal development that affords us critical content mass. This is very important, as incremental content will be a key catalyst for Gaiam TV to attract and retain subscribers.

Our progress in cost-effect Gaiam TV original programming continues. And as of Q2, we were publishing one new program every weekday evening. Viewer approval of Gaiam TV originals is also an all-time high. Our Gaiam TV originals currently make up less than 4% of our library, but now accounts for more than 40% of our monthly total hours viewed.

Our platform expansion continues with Gaiam TV in Q2. We launched the Sony Smart TV app, including support for the 2013 Sony Blue Ray players. We also recently completed development of apps for Sony Playstation as well as smart TVs from LG, Panasonic, and Samsung, all of which we expect to be launched this year.

As consumers are enjoying more video content on line than ever before, and the tremendous innovations in technology are expanding the options for how, when, and where customers enjoy content, we are encouraged by Gaiam TV's results so far and truly excited about its potential.

Going forward, we expect the losses incurred for investment in Gaiam TV to generally stay at the current levels through October. We look forward to a strong third and fourth quarter with the expansion opportunities we talked about today.

As you know, we are a seasonally driven business, with our fourth quarter being our profit-driver. We will have our new Firm infomercial up and running, our core businesses continuing their strong performance, and our investment in eCommerce and Gaiam TV beginning to show improvements on the bottom line.

With these improvements, we expect our full-year results to be in line with our expectations. We will continue to focus on opportunities to grow our business, including expansion in international markets, bringing to the marketplace new product lines in 2014, forging deals with new content providers, expanding our retail partner footprints and categories, further leveraging our catalog and eCommerce platforms, and providing a larger and more visible presence to Gaiam TV.

In summary, we're pleased with what we've accomplished so far this year, including signing and renewing more and larger distribution agreements, leveraging our digital infrastructure, repositioning the Gaiam brand, expanding product and category offerings, investing in a new eCommerce platform, seeking broader placement of Gaiam-branded products, moving Gaiam TV into the marketplace, and improving our balance sheet and overall financial health.

All of this affords us great confidence in our ability to grow our revenue, drive more growth to the bottom line, and generate more value for our shareholders.

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

Thank you. (Operator Instructions) Mark Argento, Lake Street.

Hello? Can you hear me?

Hi, Mark.

I'm sorry, guys; I apologize. I assume you can hear me now?

Yes.

Great; sorry about that. A couple of questions. Ramping up, you've got a lot of different initiatives going on, especially with Gaiam TV and the eCommerce site, and the direct TV, launching some new direct TV. When you think about your marketing spend, and you're now looking at the budgets, do you see a big hockey stick in terms of incremental marketing spend? Talk a little bit about how you think about the spend relative to the return, how you're going to monitor that, roll that out as the year progresses here with some basic new products and services?

Are you talking Gaiam TV or infomercials?

Just talking -- how do you think about -- are you going to spend a lot more to drive traffic to the site on the eCommerce business? Gaiam TV, you said you're in the branding phase of that, or sort of the marketing ramp on that. So maybe you could talk about those two to start with in terms of your overall marketing spend. Are you going to spend a lot more this year than you did last year in terms of your marketing budget?

Actually, on the eCommerce and catalog side, our primary marketing spend is on the catalog and then secondarily on our affiliate programs, or [SCO] and our branded store-within-stores, eCommerce branded store-within-stores. And I would say our spend's going to be about the same.

I think where you're going to see the big improvements, Mark, is going to be on margins as we move more and more towards proprietary product that can't be found in the third-party world of eCommerce.

I would just say for the Gaiam TV, the spend compare would be kind of what we talked last couple of Qs. The marketing spend is going to actually somewhat reduce. We kind of felt that we were going to optimize the cash towards the break-even because the way, how we look, we pretty much (inaudible) Gaiam TV on the bottom line at about $0.5 million or better for the second quarter because we just spent that much on marketing.

So we lowered the amount of cash what we need to spend to break end but extended the break-even for about four months. So the marketing side is really down. So the losses for Gaiam TV on the quarter, still break-even would be lower. As I said, the second quarter was about $0.5 million better -- I mean, less loss -- for the quarter.

When you think about the number of subscribers you need to break even in that business, where are you kind of shaking out to with a sub number.

I think it's much better to talk about revenue dollars because as we -- for example right now go live and like Verizon FIO and the also (inaudible) launch of Comcast. Those are kind of revenue splits. So it's kind of better to look at a revenue -- when I said right now we're somewhere between 400, 450 -- closer to 450. We probably need about 750, 800, probably, for break-even of the net revenue. (inaudible cross-talk) Per month.

So you can kind of say it's a run rate of a little less than $10 million what companies do when it needs to break even. Because the subscribers -- you can kind of figure the subscribers because it's about $10 a month, what we charge. Because right now it's primarily reaching direct, but if you have a little more third party deals in the revenue, it's a better indication than the number of subscribers.

That's helpful. And then, when you think about the ability to get to those kinds of sub numbers, you're already running 450,000. So incremental -- you have 30%, 40% growth -- in terms of your total sub base to get to break-even. Do you feel like you can get to break-even by year end or what's your kind of expectation around getting there in terms of breaking even?

That's what I just said. We kind of -- our goals was doing it by September, by (inaudible) for December, but we would put about $1.5 million more cash into it. So we kind of decided to optimize the cash. So I mentioned, we lowered the marketing about $0.5 million, like in second quarter, over all the bottom line difference. So then we'll move the break-even to about end of April.

All right. And then, when you refer to expectations for full year, have you guys talked about -- do you have formal kind of guidance that you've provided. Just refresh my memory where you guys are at in terms of overall expectations for the business for the year.

Can you repeat the question?

Yes. Have you guys put out any type of guidance? I know in the commentary there was something referred to in terms of expectations for the full year, your expectations. Have you guys provided any type of guidance, or have any ideas in terms of where you want to see the business at by year end?

Well, we haven't provided guidance but what we're saying is that the launch that we experienced in Q2 with our infomercial, both in revenue and bottom line, we expect to make that up in fourth Q.

Because the infomercial actual launch is for --

Fourth Q.

So you see that low infomercial right now, but because the infomercial is launching in the fourth Q. But we didn't already provide any specific guidance.

Okay. And then, last question for me and then I'll let somebody else take a shot. The IDEO brand study -- what came out of that? What kind of information did you get? And what are you going to do in terms of implementation of that?

And then, I've got a question, I guess, for Jirka back in the Gaiam TV. When you've got a catalog of over 5,300 titles now, how valuable of an asset is that in and of itself? In terms of potentially somebody else like a Netflix or another big content company, or a big aggregator of eyeballs. Could you do a deal to sub-lease the catalog or figure out another way to monetize that?

Okay, I'll start on the IDEO study, Mark. It was a pretty extensive study on qualitative information around the Gaiam brand. And what it pointed to was a huge opportunity in the health and wellness, particularly under yoga, for a mainstream moderate brand that people could trust and that can take you from starting as a beginner trying to get into the health and wellness, again primarily through yoga, and take you all the way through an expert status, or just help you -- be supportive as a beginner.

So we're starting to build content around that. We certainly have the products for it; you can see how we're taking from Gaiam to Gaiam Soul and Gaiam Restore so we can be the guide as someone goes through their journey in yoga.

And it also pointed to a huge opportunity in certain other categories, such as a moderately priced apparel line or some kind of physical locations. Just other areas that we should be looking at, and we'll be getting into it in 2014.

I was going to say, in terms of the catalog, Jirka, any thoughts there?

You mean, the Gaiam TV. We have -- kind of give you over all, we probably have in the Gaiam total 14,000 titles. Of that, what's on the Gaiam TV is probably total 5,500 titles. Of that, only about 150 are not exclusive; that's meaning 5,350 are totally exclusive to us, which we either own or have a long-term license. So that really make the things unique -- because you cannot get those titles anywhere else. You cannot stream them at all somewhere on a competing thing.

So how much is it of value? We started to buy these titles, at the time we were the only buyers on the market. So for example, deals we would cut with some people like BBC or kind of bigger producers, we would probably get them, at the time, about $0.02 -- $0.015 to $0.02 -- on the replacement dollar. Because nobody was, at that time, interested in this thing.

It's changed dramatically over the last two years. So the numbers are significantly up. As Lynn mentioned, right now we started producing our titles as we always did for Gaiam, but we started to produce for Gaiam TV exclusively. And it's right now less than 4% of the titles of total, but it's well over 40% of ours. So that's kind of the definitely direction for us. But putting values on it, it's very difficult right now but it's increasing dramatically as different people getting into the game. But it's also the strength of Gaiam TV so I don't think we would really start to license those titles.

We do sell those titles -- for example, on like iTunes or Amazon -- as a download, but not as a streaming option.

Have you ever thought about, like, have a syndication model where you could syndicate out for streaming parts of the portfolio, not the whole thing? To get the whole thing, you've got to go to Gaiam TV. But be able to come up with a syndication model where you can unlock value. Because it seems to me there's got to be -- hopefully you can be able to build a lot of audience and share with Gaiam TV, but there's a lot of latent value in that portfolio that you can maybe untap in some other ways. Untap and (inaudible).

There's definitely time to do that; there's no really rush to do it right now. But we did get approached, by especially some Spanish people, and so we're considering doing a deal -- these broadcasters, linear broadcaster, especially not English. But as long as it's not Internet accessible; it's just on linear TV. We might do something like that. So we get approached and we're actually talking to people and we'll see how it goes.

But really, I don't feel -- time is on our side so I don't think it's really something what you do better if you do it now. I think if you wait, you might get better pricing. Unless we just do [annual] deals. But it's definitely in the cards, but right now, the main thing is to have -- hold things profitable.

Great. Thank you; appreciate it.

Thanks, Mark.

Robert Routh, National Alliance Capital Markets.

Good afternoon, guys. Quick questions -- first, you mentioned you used a lot of your NOLs to shield the gain on the RSOLs, which made a lot of sense. I'm curious -- can you tell us how much more you have in NOLs and what the cash value of them is? Just going forward as you continue to improve results, eventually you might need some tax shield. I'm just curious I guess where that stands.

We still have about $34 million of NOLs that are utilizable.

Okay, and that's the actual -- the cash value of them?

That's the gross.

So let's say today we have $16 million, $16.4, if we have on the same level the $34 million.

Correct.

Great; great. And along those lines I guess, looking at your financials, it looks like your book value's about $5.95, which is kind of close to where your stock price is, which doesn't make a lot of sense. Obviously, your [tangible] book is close to that, too. Given where the share price is, even though the stock's not that liquid and at the (inaudible) you've got more cash on hand, you're not going to be paying taxes, how do you view buy-backs in this environment, given the cost of equity for a company such as yours is significantly higher than the cost of debt -- especially at current prices. But there's also that liquidity issue.

I'm wondering if you're chronically still evaluating that or if that's something off the table, and whether you would even consider creating a derivative, such as selling puts against your own stock. [Or out of] the money in order to purchase shares for the stock to continue to trade close to book value.

I mean, definitely the stock buy-backs -- we bought 25% of our Company back over the last few years. And we still have 2.7 million in our open buy, (inaudible) shares. However, there's the issue of load. But it's always to be evaluated. As we bought Vivendi and we had to borrow some money, now obviously we released the sale our Real Good stock and we also paid a lot already on the original purchase price. So we now have regained more debt -- more cash than debt.

So it's like our first place was to repay the debt before we started to buy stock. I don't think borrowing to buy shares would be the first thing because there's so many places -- there's so many opportunities right now on the table. I'm not saying that we would never borrow to buy shares, but there's several opportunities on the acquisition side (inaudible) will pan out.

But we always kind of look at, okay, do we buy shares? Do we pay dividends, as we did? Do we make acquisitions? So it's always there. So it's never off the table but right now I think the direction that would unlock some more value what's on the balance sheet, like these Real Good shares, they were on balance sheet at zero.

So you reflect, you kind of say, okay, balance sheet reflects 580 or whatever, how (inaudible). But the rest of the Real Good, for example, there is no base in those shares, plus they also owe us some money. So there's several dollars what we can unlock without any basis (inaudible).

What's not reflected on the balance sheet -- our real estate appreciated I think nicely since we bought it. So there's several things. I think pretty much all our purchases kind of appreciated. So it's a question how we unlock it. And I think we want to focus on that because we talked about it for a while and I think it's really time for us to actually take action on those.

But I don't want to really take anything off the table. I think we always evaluate it and how it goes quarter by quarter.

Sure; great. Okay, and then along those lines -- and you talk about actually the Vivendi acquisition and all the deals that you signed and re-signed up with Scripps and WWE, etc.

I'm just curious -- given the size of what you purchased and what you have, what's your capacity for more deals to distribute more content for other third-party providers? And what would the incremental cost to you be? Because I would think given what you purchased, you have a lot of capacity to distribute for other parties in addition to what you've already signed up. And the costs associated with anyone who chose to sign up with you to do that would be de minimis and thus high-margin to Gaiam.

Wonder if you could walk us through that a little bit in terms of what you have available and what the margin would be for each incremental studio, if it's independent, that signs up with Gaiam for (inaudible) partner.

Well, Rob, you've hit the nail on the head. We certainly -- that was our desire with the acquisition of Vivendi, which was to build the largest independent kind of studio that would be direct with all the retailers and the digital players. And that's what we've done.

Now you bring on a new studio, very, very low incremental costs. Incremental costs certainly perhaps for marketing people, maybe a salesperson or two, but very low incremental costs. And so the margin that you make is pretty much straight to the bottom line.

As being pretty much the only one who's (inaudible) this, everyone (inaudible) the target is just right now two-thirds of the volume. And it's being access with a good deal, which is important to all the digitals people like iTunes and Xbox and [Hulu] and stuff. Obviously, buying Vivendi -- because it was -- there was some music, kind of improved our deal in iTunes.

And because of this situation, there's really nobody else who'll get direct access to the situation. So we get studio, we pretty much get most of the business. And two years ago, we would have to put big advances to sign new studios. Now they basically ask (inaudible) people like Warner or Fox or Sony to go to. So if you're independent, we're likely to get their business. And that was the strategy behind doing the deal.

Great. So it's safe to say you still have tremendous capacity if more of these studios choose to use your infrastructure for certain distribution -- you can feel like you can handle it without adding (inaudible) costs.

Absolutely.

Great. Another question -- do you think, given what's going on with Gaiam TV and how it's growing, and all these partners that you're already distributing for like Scripps and WWE, etc. -- obviously, WWE has talked about creating their own network, etc.

But the question is, do they have enough content on their own to do it? Have you thought about any partnerships with any of these entities, making it a little deeper than what you already have? Or is Gaiam TV going to continue to be kind of a 100% proprietary product for Gaiam and the relationship you have with these other entities is going to be what it is? Is there any potential to deepen any of those relationships?

There's definitely potential. We don't have talked too much early because our focus is right now to get Gaiam TV profitable as an operating unit. But we already get approached and we have some discussion people with the kind of creative, kind of (inaudible) label product for them. But at the top of our label, let's say from our 5,500 titles, we can say, okay, but we'll also give you -- you can take this thousand titles if we can be included under your brand.

So we can bring -- build channels for many other brands who cannot do it on their own because today we know what it takes. And with all the different devices and streaming and stuff it's, like, tremendous amount what we're doing and storing and moving in the number of terabytes. So we'll be probably (inaudible) for several of our partners to do that, and several of them already talk to us. We still have some technologies to do.

We're kind of looking to -- we're going to launch soon an ability, what's called tera download. So if you're a subscriber, you can actually download the content and keep it in the computer as long as you're a subscriber, which the Netflix can't already do because they don't have the rights for. So those kind of features we want to first have in our platform and we're probably talking about less than next three months to launch something like that.

So before we start to [wide-]label (inaudible), we have to put those in. And there's a lot of improvements we're launching because now we have feedback from customers, what they are actually using and stuff, which we didn't have that benefit six months ago. So we would definitely want to finish this platform before we do start to wide-label.

Right. That seems to make sense, given what you guys are building and what you have -- distribution as well as ownership rights to the actual content itself. So it seems some of these other partners would have the same type of ownership; it could be a win-win, given the relationships you already have. So it's interesting.

Changing gears a little bit here, given what's going on on the fitness side, and obviously with what you're doing with direct response television, I'm curious if you guys are looking at all at the home shopping opportunity via, say, an HSN or QVC, especially if you want more international or value in terms of having the Gaiam have something on any one of those type of networks for the consumer products that you make and all the brands that you have.

Because I would think that would be an easy way to penetrate certain territories that currently aren't as heavily penetrated, if at all, as they should be, with low risk if any to you as well as partnering with some solid entities as opposed to just the infomercial business, but more the home shopping channel. I'm curious as to your thoughts on that. Is this something you explored or you would consider exploring for the fitness products?

Certainly on our agenda for 2014. I think you're absolutely correct; we should be -- we are spending some time on it and probably for the fitness season the new year, new you 2014 is something we're exploring.

Great. Just one last question, then I'll turn it over to someone else. How do you think -- now that you deconsolidate (inaudible) so well and things are a little clearer and easier to value. But given the capitalization of the Company, if you were in the shoes of analysts on our side of the fence looking at the Company, what's the right way to value Gaiam? Is it a sum of the parts, free cash flow, DCF, P/E? How do you think we should look at the Company in order to value the stock if you were in our shoes? What's the right way to look at it?

Well, long term it's a decision I think it's probably long term it's a P/E story. In the short term, it's definitely more balance sheet, part, the pieces, because you kind of said -- If I would take right now the value, what we said market, and we just spent some time looking at things you'd definitely get today if you would kind of do what we're doing with Real Good (inaudible) look at pieces, you could probably get to $10 or somewhere there. So I think it's the first break to do it based on balance sheet.

But you have to look at the pieces what are not in balance sheet. So we have -- the Real Goods, as I said, it all doesn't have a basis. All of our acquisitions right now are kind of increased because of the synergies. So once you do that part, it would be probably the first part.

The second part would be to kind of say, okay, we need to kind of say that Gaiam TV at least breaks even. Because last time, we said we go -- for this year take a like, $7.8 million hit. Now it's going to be a little less as we kind of said because we're spending less money, changing a little the profile of speed.

But still, it's a big difference if that company starts to contribute, which we expect next year. So you're talking an $8-plus million swing. So P/E ratio, you'd have to adjust the losses. And so we track acquisition clearly this year to get to profitability this way and so we can start to unlock these values. But there is still stuff on the balance sheet what we still want to do in the short term.

So it's visible because I think you kind of saw that when we did the Real Good (inaudible) start to see the value there much more than there was -- we have completed consolidated and we had to report consolidated losses. It didn't really show that there is a value on the balance sheet. And once you've turned it into cash, especially same as NOLs. You're not going to get credits for NOLs till you turn them into cash.

So that's the kind of work we want to do. So I would say in the short term, it's kind of the balance sheet, the value of the pieces. And long term, it's a P/E story.

Great. Thank you very much.

Thanks, Rob.

George Kelly, Craig Hallum Capital.

Hi, guys. Just sticking with the balance sheet, can you talk about your building and the process -- the leasing process -- how far that's (inaudible)?

As we kind of mentioned, we have (inaudible) our things to do is the building. We have the building some folks about $19 million. And also, we basically don't pay rent for the last three years, so you can say that we can adjust it as a real value because we didn't adjust the balance sheet, obviously, for not paying rent.

But the value of the building right now depends how we do it. We have right now Gaiam [coupons]. It's for lease but Gaiam coupons is largely over half of the building. And so we would like to do right now to kind of shrink a little bit, just get it more consolidated, people together, so they will give us a little bit of space to lease. So it will get us a better price if it's not with a co-tenant -- single-tenant building. So it took off 50%. So I think we will do that over the next few months. And we kind of put it in the market and the current value right now is probably (inaudible) on the market. And obviously, if we report a gain on that we have (inaudible) to cover.

Okay. And then another question on the TV side. Operating loss in the quarter was $1.8 million. What are your expectations for the next two quarters?

We kind of talk about it. It's going to always (inaudible) slightly improving since we've gone through increased marketing. But pretty much we have this launch in first week in October of this, what I mentioned, tera download, that you can download all our content, keep it on your computer as long as you're a subscriber. If you stop being a subscriber, it should disappear.

We want to keep another month after that the testing of the marketing side. Then from November, the launch is dramatically decreased and probably we expect to break even in like end of April. And launches after that would be pretty small.

Okay. And then, on the guidance -- or, the expectation that you guys will -- on the DRTV side, you guys will make up the amount the fourth quarter that you lost this quarter. Can you fill in, or give a little more detail -- I don't know how specific you want to get. But asked a different way, do you expect the direct-to-consumer business to be positive this year in gross?

For the year, no. But we do expect it to have a nice increase in fourth Q and we expect to make up the profitability that we lost in Q2.

Okay.

You have to understand -- Gaiam TV is also part of the direct; it's a consumer direct business. Gaiam TV is a part of it and Gaiam TV still has a negative contribution. But what Lynn was saying basically, the difference what we talked about fourth quarter, what was caused -- we have a nice growth, but it was offset with DRTV. So what Lynn's saying, whatever was negative, we clearly make it up fourth Q because that's where we launch the infomercial. And we have a lot of other things happening. So I think that's what she meant; right?

Okay, that's helpful. And then, a couple sort of boring modeling questions. Can you go over the CapEx, stock-based comp, and D&A? I missed that.

Sure. So for the quarter, CapEx was $1.3 million; $0.8 million of it was for property additions and $0.5 million for media assets. And D&A was $1.7 million.

$1.7 million. And stock-based comp?

We didn't release that but I think it was -- let me check on that for you.

Okay.

If you can call us afterward, we can find it for you. It's not a big number.

It's a very small number.

If you call us we'll find it so not everybody has to wait for it.

About $200,000.

Okay, and then last question. The launching in dix in REI with the Soul line -- how does that start? Is it a test sort of thing in the first quarter, or do you know how many stores you'll launch with?

I don't know exact number of stores, but I do believe -- it's in testing phase right now and it's an expansion of the number of doors.

Okay. All right; thank you.

There are no further questions from the phone lines at this time.

So we would like to thank everybody and it was a little longer today but thank you very much. And (inaudible) you about hopefully from us next time. Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.