Gaiam, Inc. Q4 2007 Earnings Call Transcript

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Gaiam, Inc. (NASDAQ:GAIA) Q4 2007 Earnings Call March 10, 2008 4:30 PM ET


John Mills - IR at Integrated Corporate Relations, Inc.

Jirka Rysavy - Chairman and CEO

Vilia Valentine - CFO and Treasurer

Lynn Powers - President


Mark Argento - Craig-Hallum Capital

Lloyd Walmsley - Thomas Weisel Partners


At this time, all participants are in a listen-only mode. (Operator Instructions)

Now, I'd like to turn the meeting over to Mr. John Mills. Sir, you may begin.

John Mills

Thank you. Good afternoon, everyone, and welcome to Gaiam's fourth quarter and full year 2007 Earnings Call. The following constitutes a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

Except for the historical information contained herein, the matters discussed in this call are forward-looking statements that 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 risks detailed from time to time in the company's SEC reports.

The company does not undertake any obligation to update forward-looking statements. On the call today representing Gaiam is Jirka Rysavy, Chairman and CEO; Lynn Powers, President, and Vilia Valentine, CFO.

Now, I'd like to turn the call over to the company's Chairman and CEO, Mr. Jirka Rysavy. Go ahead, Jirka.

Jirka Rysavy

Thank you, John, and welcome everyone to our fiscal year 2007 conference call. And I am very pleased to say it was another very good year and quarter. Revenue for the year which ended December 31, 2007 increased 20% to $263 million from $219 million in 2006. Internal growth rate was 17.5%.

Our results improved in all aspects. Gross margin increased. Most expense lines as a percentage of revenue decreased in spite of increased expenses related to our community.

Operating income increased 85% to $10.5 million from $5.6 million a year ago. Net income increased 51% to $8.5 million from $5.6 million in 2006. EPS increased 48% to $0.34 from $0.23 during last year. And depreciation and amortization for 2007 was $12.3 million.

For the fourth quarter, revenue increased 12.4% to $81.8 million from $72.8 million in the same quarter of last year. With the portion of revenue received by end of the third quarter, as we announced in our last call, our internal growth rate for the second half was 19.7%.

Earnings per share for the quarter was $0.17, and depreciation and amortization $3.7 million. During 2007, we generated $13.4 million in cash from operation compared to cash used of $0.5 million during the last year. And after 2.5 million shares repurchased in the year, we ended the year with $66 million in cash and no debt.

According to Nielsen's VideoScan in 2007, our US market share in DVD in the fitness/wellness category increased to 49.4% from 44.7% of last year.

In 2007, we strengthened on our online community by acquiring Zaadz, LIME Media and majority ownership in Conscious Enlightenment, and also became an exclusive provider of paid subscription services and ecommerce for Care2, which is a social networking site with about 7.5 million members. Subsequent to the yearend, we also purchased remaining ownership in Conscious Enlightenment.

Our pre-tax loss from the community during the fourth quarter was approximately $1.7 million or about $0.04 per share. To see our community, you can go directly to or you can go to, and go to the bottom and click on the subscription tab.

As of March 1, we had over 200,000 subscribers who contributed over $2 million in subscription revenues during the month of February. Subscriptions are between $3 and $21 per month.

Subsequent to yearend, we also filed Form S-1 for an IPO for our sole subsidiary of Real Good Solar, divested all of our magazine businesses which we acquired with the purchase in Conscious Media, and initiated a restructuring of our UK subsidiary.

The rest of our international market, including Canada and Japan, were converted to licensing agreements. Licenses are between 10% and 25% of the product net revenues. We also acquired SPRI, a marketer of professional fitness products. Including these acquisitions, divestitures and reporting internal sales as licensing, we expect our revenues for 2008 to be approximately $300 million.

Now, Vilia will give you some more on the numbers, and then Lynn will give you a business overview on strategy for the next year. Vilia?

Vilia Valentine

As Jirka mentioned we are extremely pleased with our financial results for 2007. We achieved double-digit revenue growth, improved our operating margins and generated strong cash flow from operations. For the full year 2007, our revenue grew by $43.5 million to $262.9 million, an increase of 19.8% from $219.5 million in 2006. Revenues generated by our direct-to-consumer segment increased $25.8 million or 20.5% to $151.4 million during 2007 from $125.7 million during 2006. This increase reflects the continued success of our direct marketing programs and from businesses acquired over the last year.

Revenues from our business segment increased $17.7 million or 18.9% to $111.5 million during 2007 from $93.8 million during 2006, reflecting our success in international markets. Overall, gross margins remained strong at 64% of revenue. Solid margins coupled with revenue growth contributed to a $28.1 million increase in gross margin dollars from $140.3 million in 2006 to $168.4 million in 2007.

As a percentage of revenue, selling and operating expenses for the year improved to 53.9% in 2007 from 54.5% in 2006. Our corporate general and administrative expenses as a percentage of revenue improved to 6.2% in 2007 from 6.8% in 2006, reflecting increased leveraging on a higher revenue base.

Operating income for 2007 increased 85.3% to $10.5 million compared to $5.6 million in 2006. Operating margins for 2007 as a percentage of revenue expanded 150 basis points to 4%, compared to 2.5% in 2006. Net income for 2007 increased 51% to $8.5 million or $0.34 per share from $5.6 million or $0.23 per share in 2006.

Turning to the fourth quarter of 2007, our revenue increased 12.4% on top of 35.8% revenue growth in the third quarter of 2007 bringing the growth for the second half of the year to 22.1%. Fourth quarter revenue of $81.8 million increased from $72.8 million for the same period last year.

Revenues generated by our direct to consumer segment in the fourth quarter totaled $46.8 million, up from $40 million in 2006, reflecting strong performance from our direct marketing programs and increased revenues from the investment in our solar operations. Subsequent to year end, we filed a Form S-1 for the IPO our solar subsidiary, which is part of our direct to consumer segment.

Revenues from our business segment increased 6.7% on top of a 57% revenue growth in the third quarter of 2007, bringing the revenue growth in the second half of the year for the business segment to 25.2%. Fourth quarter revenue for the business segment increased to $35 million from $32.8 million for the same period last year.

For the fourth quarter, our overall gross margin as a percent of revenue was 62.5%, compared to 65.5% for the same last year. The decrease in gross margin percentage reflects the change in sales mix between the third and fourth quarters with more of a high margin business shipping in the third quarter and the fourth quarter being more heavily weighted for it's lower margin divisions, such as solar and eco-travel.

As a percentage of revenue, selling and operating expenses improved 120 basis points to 49.4% in the fourth quarter of 2007 from 50.6% during the same quarter of 2006. Our corporate, general and administration expenses improved 110 basis points to 5.1% of revenue for the fourth quarter of 2007 from 6.2% in the same period last year, reflecting improved leveraging of our corporate resources. Our earnings per share increased to $0.17 per share for the quarter from $0.16 per share in fourth quarter of 2006.

For the year ended December 31st, 2007 we generated $13.4 million of cash from operations, which compared to a use of cash of $0.5 million in 2006. This increase is attributable to our strong net income of $8.5 million and non-cash expenses of $13 million, partially offset by increased accounts receivable and inventory driven by our higher revenue base.

As of December 31st, 2007 our balance sheet remains healthy. We ended the year with $66.3 million in cash and cash equivalents, even after repurchase of 2.5 million shares of our stock for $32.9 million and business acquisitions. We ended the year with approximately 25 million shares of common stock outstanding, $200 million in shareholders' equity and no debt.

Depreciation and amortization totaled $12.3 million for 2007, included in the $12.3 million is amortization of $8.7 million from media library. Our capital expenditures totaled $9.5 million for 2007, reflecting $6.3 million of the media productions, included in our new wellness titles. Our days sales outstanding for the fourth quarter of 2007 improved to 24 days from 25 days in the same period of 2006. Inventory turns for the fourth quarter of 2007 increased to 4.3 times from 4.2 times in the prior-year quarter.

Now I would like to turn the call over to Lynn for the business overview. Lynn?

Lynn Powers

Thanks Vilia. We had another great year in '07, achieving a 17.5% internal growth and an 85% increase in operating income. Our revenues increased by 20%, while we continue to execute on the strategies we laid out during the year. We ended the year with a 48% increase in EPS.

As discussed in our March 2007 conference call last year, we focused during the year on several key initiatives. Establishing a new line look and branding for Gaiam to allow international expansion, building the firm as a mass market fitness brand, increasing Gaiam market share in US DVD sales, introducing wellness as a concept in Media, expanding our position as a category manager in LOHAS through our acquisition of the balance of Newmark Media for racking, moving our direct buyers to subscribers, building an online LOHAS community and pursuing strategic acquisitions for community, distribution channels and content.

I would now like to review our accomplishments in these areas by operating segment, and begin to outline our strategy for 2008. 2007 was another terrific year for the business segment. Year-over-year sales increased 19% to $111 million, up from $94 million in 2006. Growth in this segment was driven by the success of our international business, as well as the expansion of media in product categories in domestic trade.

As of the end of 2007, our media titles may be found in approximately 70,000 doors in the US, up from 68,000 at the end of '06. Our industry expertise and commitment to high-quality media content continue to translate into improved market share. At the end of December, according Nielsen VideoScan, Gaiam ranked sixth in overall US non-theatrical DVD sales ahead of 20th Century Fox, Universal and Sony. Our year-to-date market share for the Fitness Wellness category increased to 49% at the end of December compared to 45% in '06. For the quarter ended December 31, 2007 our market share increased to 50% compared to 45% for the fourth quarter of '06. Since we are now close to 50% market share we will sacrifice some of our share in Fitness in order to take on a category management role bringing competitive product into the mix to establish the most complete Fitness assortment in the business.

We tested this in the sporting goods department at Target during January with great results and are working with them on the business model to carry this forward. We believe by taking on this category management role we can improve revenues and profitability. We are also expanding our library of titles and Wellness in green living to position Gaiam as the industry category manager in these areas as well. Our stores-in-store concept remains a strong part of our strategy in retail by showcasing Gaiam products in a branded lifestyle presentation, including custom fixtures designed to be produced by Gaiam. Since implementation in the year 2000, we have grown this concept to approximately 7,000 doors, up from 6,000 at the end of 2006.

During the fourth quarter we launched the first phase of an expanded partnership with in developing the first online stores-in-store concept. This concept was largely designed and influenced by Gaiam to emphasize our media centric merchandising strategy. We are excited about this endeavor and that will be the first online store that is sure to offer shoppers a Wellness and Fitness experience using authentic content such as quarterly get-to-know the trainer video clips, Gaiam equal initiative consumer education videos and sample clips of Gaiam media that can be purchased as the consumer browses the online store. Our acquired in-house studio and post production facility allow this customized approach to online stores-in-store as well as giving us the ability to increase our new releases from 45 titles in 2006 to a 100 titles in 2007.

Last year, we focused our business segment strategy on extending the strength of our media assortment in the Firm and Wellness line. We launched the Firm line with a new look in '07 and I have seen very positive results. In Q4, we launched a full roll out of the Firm and a store within store concept to all Dick's stores.

The grocery channel appears to be an ideal venue for the Firm line, as over 160 stores took first time deliveries of the Firm in Q4. All these initiatives have contributed to our success in growing the firm, stores-in-store presentation to approximately 1,500 doors up from a 1,000 at the end of 2006.

During Q4, we finalized plans for a soft launch of the Wellness program in early 2008. This soft launch includes new Wellness media products, co-branded with our partners at the Mayo Clinic. The book store channel launched the media-only titles in early January and will be looking to launch the full Wellness assortment as it becomes available in second quarter and third quarter of '08.

Through our new mark racking division, we've taken orders for over 330 Wellness displays from major grocery chains such as Whole Foods, Safe Way, some slower markets in [Wegnas].

Based on the success of the Firm and Gaiam's Fitness stores-in-store presentations, we believe there is an opportunity to expand our leadership role in LOHAS by offering stores-in-store concepts for Wellness utilizing our media with the Mayo Clinic as a base for the offering and adding a stores-in-store concept on Green Living that includes New Media and Kids hosted by Ed Begley, Jr. We also license the Living with Ed series.

With these two new categories for store-within-store and the success of our fitness category management strategy, coupled with our racking abilities, we believe we can leverage our media assets and brand to become a category manager for all LOHAS offerings in the future.

Our relationship with Target continues the strong trend we established over the past several years. As I mentioned earlier, we began a 13-week test in the Sporting Goods Department of Target in December to category manage a four-foot fitness media [in cap] through our Newmark racking division. Based on the success of that venture, we are looking to expand our role as category manager in other venues.

Our international business performed well in 2007 driven by the success of our direct response products, primarily in the Japanese market. During '07, we invested in our international operating structure and are marketing and branding for Gaiam and are focused on building sustainable relationships in key global markets for 2008. In '07, we signed licensing agreements with strategic partners in Mexico, Belgium, Luxembourg and Italy for our media products.

We believe that the Gaiam brand translates very well internationally and look forward to cultivating more opportunities in 2008. We're continuing to modify our international strategy to move from a distribution strategy to a licensing strategy, sacrificing topline for bottomline profitability. We believe this is a very positive move and we have executed the strategy in Canada and Japan, and in the process of evaluating the balance of our distribution agreements and partnerships.

To grow our distribution channels, we just recently acquired SPRI products, the leading manufacturer and distributor of rubberized resistance exercise products for the professional health and fitness industry. SPRI is one of the original companies in the professional market with over 20 years of experience and is well established among health clubs and professional trainers.

The company currently offers more than 250 different exercise products, ranging from the highest quality resistance strength training equipment to contemporary and cutting edge fitness solutions, including educational materials, instructional manuals and videos. SPRI is recognized worldwide within the health and fitness marketplace for exceptional product quality, performance and innovation.

This acquisition offers a variety of synergies, SPRI's expertise and marketing in the professional fitness world, including personal trainers and health clubs is a strong compliment to Gaiam's consumer-oriented business and a tremendous cross-selling opportunity for both companies. We plan to leverage Gaiam's strong backend functions and sourcing ability to add bottomline profitability to the organization.

Sales from our direct-to-consumer business, which includes results from direct mail, Internet sales, community subscriptions and our direct response campaign, increased over 20% to $151 million compared to $126 million in 2006. This growth was attributable to the continued success of our web marketing, the growth in our membership base, the latest release of The FIRM and Direct Response, and the growth in our solar division.

During 2007, we identified a major opportunity for our solar energy company Real Goods to expand in select markets. We determined the best approach for this expansion is as a standalone company. By enhancing the Real Goods brand presence outside of the Gaiam corporate name, investing in a standalone web presence and completing the acquisition of a California-based solar company in late Q4, pro-forma revenue for 2007 for the division was over $230 million. On February 6 of 2008, we filed the Form S-1 with the SEC for an IPO of Real Goods Solar, Inc.

2007, we made significant progress towards our goal in investing in our community to create the premier online network experience for our core consumer. The 2007 acquisition of LIME, Conscious Enlightenment and Zaadz were designed to become a base of and to form the foundation of the leading online community network of LOHAS consumers.

As Jirka discussed, we grew our membership base to over 200,000 members that contributed approximately $2 million in revenue in February. Our e-commerce business continues to grow at an impressive pace, as revenue from the web in 2007 grew over 21% compared to 2006. We completed a major upgrade in web technology during the first quarter, which will enhance the online buying experience for our customers. This new web platform will allow us to customize the buying experience to our customers' interests and needs. We will also improve our ability to present the shopper with buying suggestions, specifically tailored to each customer.

Average order size for our e-commerce business was strong at $94, compared to $86 for 2006. Revenues from affiliate programs, search engine optimization and email campaigns continued to drive the overall growth in the web business for 2007.

During Q4, we launched a very successful test program for our fair trade initiative in direct, which is now slated for a full launch to trade in early 2009. We are focused in the coming year on continued growth in these areas, as well as cost savings initiatives to lower overall catalog cost in future quarters.

Recent shifts in buying patterns and media coverage in North America, as well as around the world, are an indicator that the world is more aware than ever of the serious issues of health, wellness and sustainability that the US is facing in the coming years. Gaiam is recognized as one of the authentic leaders in the LOHAS industry and we will continue to implement corporate and strategic initiatives that confirm to our mission and values.

Our strategies for 2008 include; increasing revenues from our community memberships, expanding our wellness store-within-store, launching green living and fair trade into retail stores, picking on the role of category manager in fitness, expanding our brands through international licensing, creating the premier LOHAS internet presence, capitalizing on our solar division and pursuing strategic acquisitions.

On the operations side; we will look to integrate our acquisitions quickly, improve our operating margin through a centralized operating model and decrease our operating cost in direct by moving more sales to online versus catalogue. We are committed to continuing to lever strong EPS growth in the year ahead. To this end we look forward to becoming the globally recognized brand in the LOHAS space.

Now I would like to open up the call for questions. Operator?

Question-and-Answer Session


(Operator Instructions)

Our first question is from Mark Argento with Craig-Hallum Capital. Sir, your line is open.

Mark Argento - Craig-Hallum Capital

Yeah. Hi, Jirka could you comment at all in terms of -- [recruiting] in a slowing economy. Could you comment at all, what you see if any in terms of buying trends both at the retail product side and also the direct to consumer products?

Jirka Rysavy

Overall, obviously you can see it didn't have very much impact on us in the quarter. We were actually -- best performer in Target, even though Target's overall was down, but I will probably let Lynn talk about it.

Lynn Powers

Mark, we're continuing to see strong sell-through at the retail level. However, certainly we as everyone else are reading the publications and watching what's happened at the consumer base. But I can tell you, sell through at retail has not slowed down for us.

Mark Argento - Craig-Hallum Capital

In terms of your new initiative with Target, I know you had mentioned that in the category manager role, you might end up giving up share. But you think you can stay with revenues overall, are you going to end up with more square feet at Target or could you just explain with a little more clarity if possible, how we should think through that relationship?

Lynn Powers

Obviously yes, Mark, the plan is to have more square footage at Target as the category manager. We tested an end cap, four-foot end cap of fitness media within the sporting goods section. As you know, Target media department discontinued fitness in third quarter of this year. It was moved with us as category manager to the sporting goods section, we ended up with four additional feet in a 13-week test. The test right now is looking to be successful, so we're working with Target on how that would go forward after the 13-week test.

Mark Argento - Craig-Hallum Capital

And as the category manager then, are you responsible -- you end up picking the way the products sit on the shelves for who's represented there?

Lynn Powers

That's correct.

Mark Argento - Craig-Hallum Capital


Jirka Rysavy

Plus, in a lot of the stores, we were only fitness there before. We actually bring competitors in our space. That's why we think we'll cannibalize our market share, but increase our revenues overall. Because depending how we charge, what we receive and what's the story, but it's focused to increase revenue and profitability, and it will be a long term hard. We keep growing this market share forever, and we kind of want to keep growing it further, but right now it's important really to expand our presence and increase profitability, so we have kind of taken this bold step to bring competitors to our space, because we have 70,000 doors and most of them have half of that. So we are really kind of holding some leverage here and which we intend to use.

Mark Argento - Craig-Hallum Capital

Then quickly just shifting over to community. I think you provided a number on the call about the loss generated from the community, the $1.7 million, was that for the quarter or for the last year? Could you quantify that and explain that number a little bit?

Jirka Rysavy

That was just for the quarter. We bought three companies in 3Q; there are virtually no revenues but 90 people about. And as well as we are developing and testing our products, so it's all to build up on, so that was absorbed in the fourth quarter, just because people asked how much roughly it is? We only say there is a cost to the community. So they are just trying to provide a color of what it is. Obviously that's improving right now, because as we start to get revenues, we mentioned we have right now, 200 members with a little over $2 million for February. So four months till February. So we just tried to provide some more details on it, because we don't intend to provide these numbers in every quarter because we had so many questions about it.

Mark Argento - Craig-Hallum Capital

Sure. And then in terms of 200,000 number, is that comparable to the 135,000 number that you provided at the end of June last year?

Jirka Rysavy

Well we kind of look at it differently. We get some subscription, but yes this is effectively -- we try to get away from measuring, because some of the clubs, like we launched right now recently, an environmental club circle.

Lynn Powers

Earth Cinema Circle.

Jirka Rysavy

Earth Cinema Circle. And it's a bi-monthly club. So its kind of hard to say if they pay in that month, some pay previous months, so we kind of intend to right now do overall subscribers under revenues because some of the clubs are monthly, some of those will be weekly and some of those will be bi-monthly, so that's why we prefer to do this way.

Mark Argento - Craig-Hallum Capital

Last one and I'll hop back in the queue, but in terms of -- I know you had offering out there. You have been fine tuning the site. When do you actually go out and proactively start marketing, spend marketing dollars to go after subscribers, proactively go after subscribers particularly currently in your core customer. But now it seems like you just have it out there in your beta testing and when do you go to alpha?

Jirka Rysavy

Its not actually beta testing anymore but we are still doing a lot of changes, we do releases almost every week, so we will probably start to market it when all the consumer pick up before the fall.

Mark Argento - Craig-Hallum Capital

Great, thank you.


Our next question from Lloyd Walmsley with Thomas Weisel Partners. Your line is open sir.

Lloyd Walmsley - Thomas Weisel Partners

Good afternoon. I was wondering if you could just give us a little bit of color on how much of the fourth quarter and 2008 guidance is from your acquisitions and particularly in the solar space. And then if you could maybe quantify the impact of the switch from a license -- to a licensing model in some of your foreign territories. Either what revenue could have been? Where your guidance would have been in '08? Had those been booked on the old basis?

Jirka Rysavy

That's exactly the reason why we provided the revenue guidance, which we typically don't give because it's pretty complex. We made these acquisitions which we can go little more and more detail but they are relatively all small, but and we also don't keep all the pieces of them. And then we could divest it some and there's a big -- obviously the spend on the licensing work, typical license if you sell a product which we used to do in Canada; you sell a product, you get a receipt let's say US$15 roughly for a DVD.

In a licensing agreement it would be somewhere depending on the country between 20% and 25% on those revenues what actually we booked through the revenue line, obviously, it's pretty much all gross profit. But there are several changes with going through, we I think one was provided last week -- in January.

Vilia Valentine

In the fourth quarter.

Jirka Rysavy

Fourth quarter, so we always reported that as product revenues. But to really go into detail to say how much it was I think Vilia will have her added touch [on how did you do that]. So we went through -- looked at what's actually going to be and how it works with [solar activations] and that's why we cannot take above the 300 million revenue guidance.

Lloyd Walmsley - Thomas Weisel Partners

So you can't put any parameters around how much of that $300 million might be from international licensing, just so we can get a sense what it would have been on an apples-to-apples basis?

Jirka Rysavy

We can probably try to figure it out, but we don’t have it now.

Lloyd Walmsley - Thomas Weisel Partners

Yeah, okay. And then you mentioned sort of expanding Wellness into potentially green living titles. If I understood you correctly in your prepared remarks, you mentioned potentially looking to expand as a category manager, target to other categories. Would that be associated with green living, and if you could just give us a little more color there, that would be great?

Vilia Valentine

That’s a little bit of a misunderstanding that it would be a target. We're looking to be category manager for those different classifications of business and building out our assortments with that in mind. Not just a target, but to really own the green living space in media and products as well as the Wellness space.

Lloyd Walmsley - Thomas Weisel Partners

Right. And if I understand correctly, the green living would be a new category in terms of media?

Vilia Valentine


Lloyd Walmsley - Thomas Weisel Partners

And is that something you are working on, now or…?

Vilia Valentine

And we plan to launch in late 2008. We will be showing it initially at the Natural Product Show this week and Ed Begley, Jr., has already agreed to be our host for those titles.

Lloyd Walmsley - Thomas Weisel Partners

Well, that's great. Thank you.


I now would like to turn the call back to Mr. Jirka Rysavy. Sir, you may continue.

Jirka Rysavy

Okay. There are no more questions. I would like to thank everybody and hopefully we will see you in another hopefully good year as good as we just had. And we are really happy with whatever happened. And thank you very much.


Thank you everyone for participating in today's conference call. You may disconnect now at this time.

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