BabyUniverse: B. Riley Conference Presentation Transcript

TRANSCRIPT SPONSOR

BabyUniverse, Inc. (POSH)
B. Riley Conference
March 14, 2007 5:35 pm ET

Executives

John Textor - Chairman and CEO

Presentation

Moderator

Okay, I think we will go ahead and get started on the next presentation. I'm happy to have here BabyUniverse, which has actually made a significant announcement this morning, which I am sure John will go into in a bit. I am happy to introduce John Textor.

John Textor

Great, thank you Justin. Thank you everyone for being here. We did have a significant announcement this morning. As some of you know, we announced back in September of last year that we wanted to pursue a modified approach to our acquisition strategy.

We wanted to expand the definition of a dramatically considered transformative transaction. We had a number of issues that we thought were important from a business perspective that required scale. Scale for consumer marketing purposes, scale for business model implementation purposes and scale for capital markets benefits as well.

So, we embarked on a pretty aggressive campaign to find a larger complementary acquisition either a private company or a public company. And we successfully concluded our strategic review process with the announcement of our signing of a definitive merger agreement with eToys. It’s a company owned principally by D. E. Shaw, a very credible, strong financial institution.

TRANSCRIPT SPONSOR

Read all investor conference presentation transcripts here. To sponsor an investor conference presentation transcript please contact us.

So, I am going to get to that towards the end of my talk. For those of you that are not familiar with the story, I am going to rip through the typical presentation to try and make sure I leave enough time to talk about the significance of this acquisition, how we think it met our goals going into the strategic process, and how we came out of that process.

So, forgive me for going quickly over some slides. This PowerPoint presentation looks dramatically similar to others we've given, so there are copies that we have put up on our website and any of you can of course call me to discuss any pieces of the core business that I go through too quickly.

The architecture of our business is aligned in sort of three silos: Mainstream eCommerce, Upscale eCommerce and Content/New Media. From the very beginning of our company going public, we made it very clear that we think every e-commerce company today is a new media company tomorrow. We think that every e-commerce site today is going to look dramatically different in two years, three years or five years.

We are seeing significant examples of that already through other portfolio companies that we own, models that are working very effectively. So, when we organized our company, we expected all of these things to work together nicely.

BabyUniverse, and Dreamtime Baby are part of the Mainstream eCommerce, part of our business. Now average order size is anywhere from $130 to $140 per order, which is actually quite high in the e-commerce space. BabyUniverse sells all product categories, you'll see some of those in the later slide.

PoshTots and PoshLiving extremely high end focused, absolutely the wealthiest, expected mothers and new mothers in America know this brand name very, very well. I actually have with me only two copies of our new catalog, but I would love to pass them around. It’s an example of the kind of products that we sell everything from a $59,000 pirate ship playhouse to a windmill playhouse to $47,000 betting playhouse. Actually that might be a little more, I have to check the catalog pricing.

These types of things are, obviously, the leadership products that help us establish our high-end positioning at PoshTots. And it’s one of the things that’s helped us to establish a really strong brand name among wealthy women.

PoshCravings, ePregnancy and BabyTV.com represent our Content/New Media strategy. PoshCravings, it's like the dailycandy.com for the pregnant women. It's a very funny witty content modeled after animated characters, that you can relate to that help you understand who has got the best diaper bag, where is the best maternity boutique, that type of thing.

ePregnancy is the content that you need as you are preparing for the baby. And BabyTV.com is really the first example, not only in the baby space, but in the Internet, a fully integrated social networking and Internet broadcasting platform that supports all of the following: Live video interruptions during a regular television programming schedule; a prerecorded television programming schedule; video-on-demand, if you don't want to watch the prerecorded or the program schedule; user generated video much like the YouTube for mommies, as it’s starting to be called by some of our consumers.

And at the same time on that site having traditional text driven content, articles from other content contributors, message boards, blog capability, polling, traditional social networking, all wrapped up into a nice, tight definable social environment. So, let me go ahead and hand these out.

When we went public, we announced that we had a dual strategy of organic growth and acquisition growth. It was designed to strengthen the company in its core baby and toddler marketplace. But we said from the very beginning that we thought our focus was on women in a certain stage of their lives. Falling in love, getting married, having a baby, building up their home.

And our overall strategy was to expand our organic growth and our acquisition growth model to become a dominant player in the female focused e-commerce and New Media space. And we will talk about how we think we have achieved those objectives through past activities and also these small recent transactions.

In terms of milestones, again this is one of the slides I want to skip over relatively quickly. But we did go public in August of 2005, made a couple of acquisitions that were nice and strategic. We've dramatically improved the gross margin of the business, what was historically at 23%, 24% gross margin business. Now when we are in a stable quarter, without any particular integration activity as we saw in the first quarter, second quarter of last year, we are reporting margins over 30%. So the business is at a much better platform in that sense.

Again the customer life cycle, you see it here, very similar to the strategy that you will see at the [MAPP] or companies like it. Although we are coming at it from a commerce position and adding content. Well, frankly I think the [MAPP] came to it as a content player and is now adding commerce.

And sort of who we are, and this is really important because when you think about the sponsorship of BabyUniverse, it really tells you where we are going to go.

Wyndcrest Holdings is a private investment holding company that started off really designed to be a fund. We never did a fund. We had great success early. We didn't therefore need the outside capital, so I became the lead investor within this partnership.

Our prior investment is Art Technology Group, symbol ARTG even today. Frankly we invested when the company couldn't make payrolls, a private company and shortly thereafter went public and realized into a $10.5 billion marketplace.

We liquidated in the early spring of 2000, Lydian Trust, was a start-up Internet bank VirtualBank.com. That became a diversified financial services company, now with roughly $10 billion under management and private wealth. It was "Private Wealth Manager of the Year" in only its fourth year of existence as judged by Institutional Investor magazine.

Sims Snowboards, can’t explain that one, as fast as about snowboarding, and so we happen to own a major snowboarding company.

In terms of current holding, these three don't look related, but they are. BabyUniverse.com, Digital Domain, which is the leading visual effects and animation studio in Hollywood, responsible for movies such as Titanic, Lord of the Rings. Right now the company is delivering the visual effects for Pirates of the Caribbean and a few other big projects. Multicast Media Networks is the leader I believe in the delivery of television networks over the web, both live and prerecorded.

So how does BabyUniverse fit into this? Well you'll see it. When you look at BabyTV, if we believe that that’s the vision of e-commerce in the future, what occurs in a Digital Domain if you will and is delivered through a Multicast cell pipeline, is the kind of content that e-commerce and new media experiences and that we are going to see increasingly in the future.

So, Wyndcrest is uniquely positioned to participate in this space based on our past experience and our other portfolio of interest. I am the Founder and President of Wyndcrest. We've organized with our own capital. Roughly, we placed $40 million of the capital, has generated liquid returns now in excess of $600 million with $200 million to $300 million unrealized -- still very nice returns.

My partner, Carl Stork is on the Board of BabyUniverse, and is very actively involved with me as a partner. I call him the winner of first job lottery, technical assistant to Bill Gates, right out of college, was there for 20 years. Chief product guy at Windows 95, 98 and NT. Also developed with a team of nine under his lead, the USB interface which is something we all use today.

Dan Marino, he is very active within the business development side of the media side of our business. He is very effective in that regard because of his film and television career, television mostly. Michael Bay was a college roommate, has been a business partner for 10 years now. He is a leading film director; Pearl Harbor, Armageddon, The Rock and this summer coming out with Transformers. He is probably more important in the commercial advertising space, when you think of some of the new media applications we have.

So, why is Wyndcrest involved in a small company like this? We believe in the rise of e-commerce. This is a chart that I have been using for a long time, because it shows capital drying up as demonstrated by that NASDAQ curve. But e-commerce never skipped a beat. There was a change in lifestyle, increasing dependency on purchases over the web. The web used to be about the deals, the discounts and now also about product selection and convenience. It's a multi billion dollar industry that's growing frankly without consideration on some of the things that we thought drove it originally.

The baby e-commerce marketplace; this is one of the slides we will skip over, as our definition is changing dramatically. But in the baby marketplace, we are a leading player within this space. We've got partnerships with a number of internet marketing partners that allow us to position ourselves nicely. These are our e-commerce offerings today. Please visit the websites, the BabyUniverse.com, PoshTots.com and PoshLiving.com.

The highlight of each of these sites of course, I am going to skip over in the interest of trying to get to the eToys issue at the end. Product selection; BabyUniverse is known for offering more products from more manufacturers than anybody in this space. Our product catalogue is of over 25,000 core products, which breaks down into more than 300,000 products SKUs, it is really unmatched by anybody on the web. A complete product category coverage, major brand selection, just about every major brand that's selling on the internet and we've got access to the best.

Dreamtime Baby is much more of a bedding focus. Again, I apologize for skipping so quickly, but please refer to this PowerPoint on our investor site at investor.BabyUniverse.com. Dreamtime Baby is much more of a bedding focus, higher margins; it is a little different in terms of fulfillment. It is a very nice business. We have re-established the margins of Dreamtime Baby after a rocky integration period. So we are happy to see that business performing well again as we turn through the fourth quarter and into the first quarter.

PoshTots.com is a very different business. Average order size is of $480 per transaction as opposed to $140. 4.6 million average page views per month; that's actually more than BabyUniverse. Principally because for those who can't afford the product. It has become a style reference. If you can't afford the products, you go there for design ideas.

PoshTots is upwards of 92% 'top of mind' awareness among extremely wealthy women. That's an unscientific guess, but we were quite comfortable with that number. PoshLiving is an extension to that same customer. If you are already sourcing products for manufacturers, those manufacturers sell beyond the baby's bedroom. If you have already got the attention of these wealthy mothers and you know they are buying furniture for beyond the bedroom, why not take advantage of that.

The Amazon merchant relationship; only in the last few weeks can you finally see examples of what I have been talking about here for months. We said when Babies"R"Us pulled away from Amazon, that we were going to be the most important merchant within the Amazon Baby market place. We used our content which they thought was very attractive from PoshCravings and ePregnancy to trade in to what's called the Platinum level store front. And now we've got permanent logo positioning, which is very valuable on the front page of the Amazon Baby market place.

We also have rotating graphics that have permanent position on the front page, which rotates between PoshCravings and ePregnancy content. So, we have got our content brands which are trying to get market share exposed to a very high traffic Amazon environment.

When you click through the BabyUniverse logo on the front page, notice it looks considerably different than any of the other merchants'. It's a platinum level store front. It typically costs $1 million or more to have that level of functionality at Amazon, Target, Nordstrom. Major national brands will have the platinum store front, but nobody in the baby space other than Target.

So, we were able to get this solution for free by making a content trade. But frankly, I was happy to make it anyway, because of the brand building opportunity for our content brands. So, we are just now starting to see the benefits of that logo placement as it's been up on the Amazon site now for a couple of weeks.

Distribution and fulfillment; of course, this is a discussion point as we talk about the benefits of the combination with eToys. We have our own facility here in Las Vegas which is primarily a bedding facility. We've got a third party group out in St. Louis.

Customer satisfaction; again, please go look to yourself after the difficult integration period in the first and second and even into the third quarter. Our customer service scores have now returned to extremely high levels. The 89% positive number at Amazon is actually up to 93% which is very difficult to achieve in a feedback environment, where most people go there to post negative reviews.

We are a trusted store again after dropping back during those difficult quarters of integration. We predicted that we would drop in our customer's service scores before we went into that process. But, we also predicted that we will come out of it. We have done that nicely.

In the content and new media marketplace, these are the companies we respect. iVillage, The Knot, BabyCenter, DailyCandy and each for different reasons, The Knot, because they are really the first company that impressively has monetized their traffic and they do a lot of good things. In the local advertising market those opportunities are available for us as well.

If you think planning a wedding is difficult, try having a baby. Their advertisers come from the categories of photography, wedding planning, and florist. In our space its night nurses, OB/GYN, gymnasiums, all of the things that come into an early child's life.

BabyCenter; they are on the slide frankly because they make a point that I have been trying to make. Content breeds loyalty and loyalty is key in e-commerce, because e-commerce is a transaction by transaction environment. There is not a lot of loyalty that you are getting by buying pay-per-click at Google.

So, in the case of BabyCenter, they've got a very small shopping button on their front page, but they probably do twice as much in e-commerce as BabyUniverse.com does. That's because they have got expert content, they are a trusted resource, and they have established a relationship with their consumer. That's why we are pursuing that model so heavily with BabyTV.

I don't need to tell the growth of the online content and advertising market. Although I think it is important. If you look at the BabyTV solution, it needs to be highly targeted and you need to be able to synchronize ads to the content displayed. I'll show you how we do that. Women dominating online activity; these are the branded content offerings in a text environment.

I am not a big believer in this environment over time, its important now. I don't think it's all that important later. I think we will show in the case of BabyTV.com that it really needs to be a part of a new media sort of dynamic content delivery strategy.

Our advertising metrics currently are 1.7 million monthly uniques. Now, with the inventory that we have available, now that we are just starting to sell ads, that basically gives us the $4 million a year capability in terms of advertising revenue before you start thinking about the traffic we are building at BabyTV. That is a very different ad model. So that $4 million viewer opportunity has just aside ads that are very subtly implemented across our core e-commerce sites.

What we are doing with that traffic frankly is -- let me skip past this Amazon content partnership which I described. This is the view by the way of the PoshCravings content at Amazon. You will see that if you click on it, ePregnancy as well.

But at BabyTV.com, what's important about our traffic across our sites, the 1.7 million monthly unique, is that when we start up a new concept in the baby space, we can cross market that across all of our properties. For example, if you go to the very front page of BabyUniverse.com, you'll see two big panels for the BabyTV player. You will see the live broadcast for BabyTV and you will see companion ads of similar size for the video frame that are synchronized with the video itself.

So our traffic at BabyTV.com, though we only started it in the last week of December, is already extremely high because we put it on the front page of our primary website and we have also put advertisements for it across all of our internet properties.

Now the rise of internet broadcasting; this is a slide I might as well skip. I think we all know that video on the web is significant. YouTube has done a lot to sort of convince the common consumer that it's something that they can do. The proliferation of digital cameras, broadband, everything else has made this very easy to work into a traditional web environment.

The Knot; I love when I get accused of plagiarizing the Knot multimedia strategy, because the Knot has a beautiful television network on their website. Those big companion ads you see, in this case the jewelry ad. It can be synchronized so that it appears that at the precise moment, the content is delivered through the video frame.

If Martha Stewart, for example on her site, was picking up a blender and mixing a bowl of rice. The blender could be for sale just below.

Well, the Knot television network, which has been incredibly successful, is actually built by a Wyndcrest portfolio company, upon my introduction of David Liu, the CEO of Knot, to that company. So this is something we know a lot about, we are not plagiarizing their strategy, we actually built it for them.

Now, this is frankly what I think websites will look like in the future. This is the current look at BabyTV.com. Notice how much you have on this frame, along the left side you've got videos, actually let me describe the right side. That's the live video player in the upper right corner.

In the center top part of the frame, you see 2 o'clock, 2.19, 2.26. That shows you what's coming up next. You can click a button just above that says show all, and it pulls up the full panel of the days broadcast events.

Over to the left, if you don't want to see what's on the programming schedule, you can pull up a video on the left whether it's in the preconception, pregnancy, baby, parenting category, Bloopers, out of the Oxygen network partnership or MyBabyTV, which is our user generated video.

So, at any moment you can pop back and forth from a live broadcast, a prerecorded broadcast, video on-demand, user generated video, you've really got all the solutions in one space.

Now, we've got articles here as well, if you look on the left side, where we have content that feeds in for the same content management server as PoshCravings and ePregnancy. So that's efficiently delivered as well, message board.

This is really, I think the only example of a site anywhere on the web that has that amount of functionality, nicely and neatly delivered in a logical, easy to navigate form. And I think frankly, well this is BabyTV's look today, I think for years from now, eCommerce sites will look like this as well, where shopping is a byproduct of the experience.

Here is our video approval and update panel, I wanted to make it very clear that our advertisers want safety. They don't want their content up against inappropriate content. This panel allows us to cross-section the videos very quickly to see if anybody has inserted inappropriate content within a video upload. Allows us to accept or decline that content and post it up on to the web.

So advertisers are in a safe environment, needs to be safe for mothers, needs to be safe for family, it needs to be safe for our advertisers.

I am not sure, how much time I have left. I have got five minutes left. Great, I'll save the best for last.

Let me discuss quickly the eToys transaction. We are unfortunately in a situation where because of the S4 and merger proxy process that we've got to go through to get shareholder approval and that we really are effectively in a registration process. And I have got to speak very tightly to what's in the press release, which you can see today.

But in general terms, let me remind you what we are trying to achieve. When we went into the strategic process, we wanted scale for consumers, scale for our business model, scale for the benefits to our business model and scale in the financial marketplace.

Now, what do I mean scale to consumer as well? You got to be big, you got to be out there, you got to be seen. And you got to do that without spending a lot of money in marketing.

So, it's actually a tougher task to try and build that visibility through marketing dollars, than it is to build it through acquisitions. And when you acquire or merge with a company with a large customer population, then all of the things that we are doing at BabyTV can or BabyUniverse can instantly be made available to the customer population of that merger partner.

And that's important because the business of eToys, the customers demographic lines up very nicely without a BabyUniverse. So we just stepped in prospectively of course, subject to the closing of that transaction. And we have a very large customer population that's very similar to the customers we are trying to address in the baby marketplace.

From a business model perspective -- look it's hard to start something, it's expensive to start something and we have been able to get tremendous traction to this incredibly unique and dynamic BabyTV property by introducing it across our 1.7 million monthly uniques.

Well that same opportunity is available by a factor considerably larger because of the customer population at eToys. So, now when you are introducing a new media concept, you don't have to spend a tremendous amount of money to market it, because you can get a significant amount of early traction off of your own cross-pollinated customer database.

Finally, in terms of scale, in terms of the marketplace, if you go back and look at the backgrounds of the guys at Wyndcrest. Our history that we line up very well with large deals. We've been in the multibillion dollar states consistently over the last 20 years and we are comfortable there, and I mean 20 years including Carl's background and over the last 10 years Wyndcrest.

So, we are comfortable that we've got relationships there and we need a big platform because for me to pick the phone and call Carl, and say call your buddies that were around when you guys were building Microsoft and help them somewhere Burp Cloths at BabyUniverse that doesn't make a lot of sense.

So if you want to use the guys on your bench, you got to give them something to chew on. And we can do a lot more with a bigger platform. I can use my bench with a bigger platform and we think that the business strategy with eToys going forward, is a great step in that direction. This is a company that's roughly three times the size of ours, which was purchased for roughly two times the stock issuance.

So please look at that press release. We made the point that we believe it to be accretive. We were not able to put in a lot of information about that business, you'll see that in the pro forma. But it's a business three times our size, it's a mature business, it's a highly automated business. And I think more importantly it's the partnership with the guy that's very important to me and it's a partnership and that's the CEO, Mike Wagner, because I am a guy who likes to talk about the future of the web and I like to work towards the future of the web.

This is a guy that works in the web today. He is focused on building a strong, capable, scalable, efficient business. And he's got a remarkable facility there. He's led a remarkable turnaround of that company which we will be able to discuss in greater detail when you see his numbers and his business.

So I am looking forward to having a partner that focuses on that side of the business. I can be a little bit about the future and he can be a lot about today. He's a pretty good visionary as well, so I don't want to short-sale him there.

And then also the partnership with the owner. This is a company that was owned by D. E. Shaw. If we complete this transaction, it's of course, subject to shareholder approval. We will go on from institutional nothing to an institutional great deal with a major pedigree partner in the mix. And we are a retail dealer right now, and that's difficult for us. It's difficult for the guys at Wyndcrest because we relate very well to the institutional shareholders, but we don't have an opportunity for them to chew on.

So upon the completion of this transaction, we've gone from institutional nothing to institutionally significant with a great pedigree, $29 billion hedge fund as our partner.

So I should stop now for questions, I am already out of time. But Justin, do I have any time for questions?

Moderator

(inaudible).

John Textor

Okay. So we will take questions in the Hallway. And you will point to the appropriate place in the Hallway, and it will help us.

Anyways, thank you very much for listening to the presentation. I am sorry, very long, but still a lot to cover.

TRANSCRIPT SPONSOR Nexus Investor Relations, based in Los Angeles and serving a world wide client base, is a leading investor relations firm specializing in representing undervalued and under-followed companies with the objective of increasing their visibility on Wall Street, ultimately leading to increased shareholder value. Nexus IR represents companies trading on the Nasdaq National and Capital Markets, NYSE , AMEX and the Bulletin Boards. Nexus IR designs and implements customized investor relations programs to meet each client's unique needs. For more information visit us online at www.nexusir.com. Read all investor conference presentation transcripts here. To sponsor an investor conference presentation transcript please contact us.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.