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Summary

  • Revenue rose just 2% Y/Y. However, a normalized sales growth reached 9%. Comparable GAAP loss remained roughly flat Y/Y at $0.10 per share vs. $0.11 Y/Y. Margins improved 600bp.
  • I reiterate my long thesis and set my target price at $8.5, offering a ~20% upside, as I wait for the Gaiam TV spin-off to materialize in under a year.
  • The long thesis has worked well, as Gaiam continued to unlock value and re-focus on its core business. The stock gained ~60% at the peak in June.

Gaiam, Inc. (NASDAQ:GAIA) reported solid second quarter 2014 results (SEC filing, press release, earnings call). Revenue grew $0.6M Y/Y to $32.5M, up 2% Y/Y. However, the normalized growth for the quarter was about 9%, if adjusted for change in Gaiam's fitness and media category management reporting and impact of Target which is still experiencing challenges from its data breach and shift about $1.1M in the eco-travel business to third quarter. Net revenue for the business segment increased by 1.2% to $20M, while the direct to consumer segment net revenue increased 7% to $12.4M Y/Y. Net GAAP loss reached $2.2M, or $0.10 per share compared to $0.11 loss a year ago if adjusted for the gain from the sale of the Real Goods Solar stake last year.

The company's sales have been hurt by a switch from an inventory model to a consigned distribution model under which Gaiam takes no ownership, so Gaiam now recognizes only the earned distribution fee as revenue, not the entire end-user sales price. But gross profit is not impacted and gross margins actually expanded 600 basis points Y/Y. Operating loss decreased 22% Y/Y to $3.2M, including the $2M operating loss from the Gaiam TV subscription unit which is a rapidly growing business that has high investment needs at this early stage. The results also include a one-time $0.6M legal and audit cost for the Gaiam TV's planned spin-off. Gaiam TV is a global digital video streaming that provides media content (predominantly yoga, fitness and well-being) to its subscribers in over 100 countries. Over 90% of its 6,000 titles are available for streaming exclusively on Gaiam TV through almost any device connected to the internet. During this quarter, Gaiam TV plans to add an unlimited download feature as a major step to differentiate itself from other streaming video players. This feature will allow members to download and watch video offline as long as their subscription remains active. Gaiam TV has 600,000 videos available for exclusive streaming through Gaiam TV platforms, which now has subscribers in more than 100 countries.

My original long thesis from October 2013 was built on Gaiam unlocking value and being undervalued. It worked very well, with the stock quickly gaining ~20% on an announcement of yet another divestiture, and the stock gained ~60% in total at the peak this June, since when it lost some gains amid general small-cap and S&P weakness, but is still up ~32% in less than a year since my original call. I later reiterated the thesis in April on another potential divestiture. Gaiam has now confirmed the timing of the spinoff of its fast-growing Gaiam TV business to take place after the filing of the 2014 10-K report, which should happen during March 2015. Therefore, I reiterate my long thesis and see a target price of ~$8.5 per share after the spin-off takes place. Therefore, the upside is roughly 20% within a year. However, once the separation takes place, the business performance of each separate unit will be more visible and I will closely watch the GAAP gain or loss in the core business as my long thesis has been based on divestitures and unlocking value, not long-term viability of each of the future separate businesses.

Source: Update: Gaiam's Q2 Earnings Show Decent Sales Growth And Narrowing Loss