Aug 7, 2013
Executives
Norberto Aja - Investor Relations Officer Jirka Rysavy - Chairman Steve Thomas - Chief Financial Officer Lynn Powers - Chief Executive Officer
Analysts
Mark Argento - Lake Street Capital Markets Robert Routh - National Alliance Capital Markets George Kelly - Craig-Hallum Capital Group
Operator
Ladies and gentlemen thank you for standing by. 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. .
Norberto Aja - Investor Relations Officer
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 in today’s press release as well as on the company’s website. With that I would now like to take the turn the call over to Gaiam’s Chairman, Jirka Rysavy.
Please go ahead.
Jirka Rysavy - Chairman
Thank you, Norberto, and good afternoon everyone. Revenue for second quarter which ended June 30th was $44.5 million, which excluding our DRTV business the revenue for the quarter increased $4 million or 11%, all internal growth.
Direct-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 in the second quarter in 2012 which strongly benefited from a very successful launch of the new Jillian Michaels fitness program.
Launch of new Firm 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 Goods Solar as our solar subsidiary in 1999 and called it, called the unit Gaiam Energy Tech until its IPO in 2008. Following the stock sale resigned personally from Real Goods – as a Real Goods Solar Chairman to focus on Gaiam.
Gaiam used portion of its NOL to offset all taxes from the gain and also still continue to own approximately 4.1 million shares of Real Goods Solar. Including the sale of the portion of our founder stake in Real Goods Solar, the 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% or to $101.2 million with an 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, 2012, with the 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’s Videoscan Gaiam Vivendi or GVE how we call it, non-theatrical market, our non-theatrical market share grew about 180 basis point to 14.2%, up from 12.4% in the same period of last year and its also 500 basis point growth of from 13.7 we have in the first quarter of this year.
This unit also recently added several new high profile accounts. The overall U.S.
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 its still improving running in over 70%. Revenue for the last month was about $450,000 and about two which was driven by about 5,300 exclusive video available for streaming.
The operating loss for unit for the quarter was about $1.8 million. With this sale of the portion of our Real Goods – stock of Real Goods Solar we are beginning to unlock some gains in our assets and that should significantly help and improve both our income statement, balance sheet in the coming quarters.
And with that I’d like to turn it over to Steve to give a little more color on the financials.
Steve Thomas - Chief Financial Officer
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 $4.4 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 to consumer segment excluding DRTV was $3.3 million or 37.8%.
Moving down on 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 MG&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 our 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 was 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 Goods 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 Goods 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 a 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.
Annualized inventory turns for the second quarter of 2013 were 2.8 times. Our inventory increased in the quarter as we get ready for resets with our major customers in Q3.
Taking a brief look at our cash flow statement, we report a $2 million use of cash in operations for the first six months of 2013. Recall at the end of Q1 in the prior year we just acquired the Vivendi Entertainment operations and we are 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 with the 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 are 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 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 provide some added detail on the status of the industry and our business. Lynn.
Lynn Powers - Chief Executive Officer
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 exist for the quarter. We expect 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 strategies. Looking at our business segment we continue to achieve strong sales in this segment with second quarter net revenue comps at 3% for the quarter and a 11% year-to-date.
Total sales growth for the segment was 23% year-to-date including the Vivendi Entertainment acquisition that could place at the end of the Q1 2012. This segment has two main genres of categories.
Entertainment and Fitness. Starting with our Entertainment unit which we call GVE we improved our market share position to number two in non-theatrical 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 from the Digital Entertainment Group.
GVE remains the only independent distributor with direct relationship with Target, Wal-Mart and all meaningful digital media providers across the U.S. We now have over 6,000 doors under our management in the U.S including been one of the only two aggregators for independent entertainment media with the second largest mass retailer in the U.S.
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, Travel Channel and the Food Network. We will begin selling their content this fall.
Earlier in the quarter we announced a new multiplatform distribution agreement with Random Media for GVE will be responsible for all distribution activities in the U.S and Canada across Physical, Digital and TV platforms. GVE has renewed every contract that was up for renewal this year including a multiyear extension of our existing home video distribution agreement with Natural Geographic a keep 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 Games series. Also earlier in the quarter we secured a multiyear extension for World Wrestling programming which gives us rights to release 12 WWE pay-per-view events each year including Wrestlemania and SummerSlam as well as ongoing access to an extensive catalog of collectable titles throughout the U.S on Physical and Digital platform.
Equally important we extended our distribution agreement with Televisa the largest mass media company in Latin America and across the Spanish speaking world. It’s part of this multiyear 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 have some of the most sought-after content, including iconic content brand such as The Weinstein Company, World Wrestling Entertainment, Jim Henson Company, Salient Media, Interval Films, Shout Factory, Hallmark Channel, Discovery and National Geographic which positions us as the largest independent distributor of non-theatrical media content in the U.S. and provides us with a greater ability to win content distribution deals and continue to solidify our leading market position.
Turing to our Fitness Business we continue to focus on adding categories and withstanding our stores-in-store opportunity. 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 SPRI Gaiam sole and Gaiam Restore brands.
Until recently SPRI 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 into 470 sports authority stores.
Since then we are seeing 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 market place. We recently gained further real estate it’s sports authority as the supplier for cross training products under this program which will begin shipping this fall.
Our Gaiam sole line of premium Yoga products continues to perform very well offering a compelling higher price alternative to our traditional Gaiam branded products which are typically priced at mainstream price points. We are expanding this line with Mat at Dick’s and 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 afford succession that combines our Gaiam Restore and SPRI active recovery brands.
This type of expansion allows us to grow our business through existing retail relationship. The breadth of our product offering and continue development of new lines and it wants us to build on our 15,000 plus stores-in-store placements.
The brand statement and unified merchandizing offered by our stores-in-store is a win-win proposition for retailers who are always seeking a more cohesive set of products provided by fewer stronger than this. In terms of distribution reach we are launching product test with Walgreens, Staples and Myers.
We are also testing a new category captain status for Yoga at Academy Sport. 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 a top 25 accounts in Fitness, Media and Equipment grew by 12% and 2013 second quarter compared with the second quarter 2012 this up over 20% year-to-date. We believe we will continue with double-digit gains throughout the year.
Turning now to the direct-to-consumer segment. The second quarter of 2013 experience 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 a 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 a market new content for DRTV that supports our health and wellness product lines. Regarding our branded catalog in Internet business we are in the finishing stages of completing several significant initiative to better support this business.
As we discussed in the last conference call we engaged IDEO a highly regarded brand positioning company to help us position the Gaiam brand for a long-term sustainable growth. Based on the results of this study we have developed action plans in our moving forward of 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 in first half of 2013 with no impact to revenue in order to reposition the catalog towards more proprietary products and 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 e-commerce platform to increase web traffic and make our online visits more productive.
As we discussed in previous calls we migrated to a more robust platform that is scalable and customizable to fit our customer’s needs. With the completion of the initial implementation, we are continuing with faced enhancements to improve our online customer experience to support interactive content and enhance product in landing pages.
Regarding our subscription business, Gaiam TV is now referring up a branding phase with increased marketing spend to help introduce the services. We now have a library at 5300 exclusive titles for digital streaming across Fitness, health and wellness and personal development that affords us critical content mass.
This is very important this incremental content will be a key catalyst for Gaiam TV to attract and remain subscribers. Our progress in cost effective Gaiam TV original program continues and as of Q2 we are publishing one year program every week day evening.
Fewer 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 Blu-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 online and never before and the tremendous innovations and technology are expanding the options for how, when and where customers enjoy content. We are encouraged by Gaiam TV’s result so far and truly excited about it’s 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 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 a strong performance and our investment in e-commerce and Gaiam TV beginning to show improvements on the bottom line. With these improvements we expect a full year results to be inline with our expectations.
We will continue to focus on opportunities to grow our business including expansion into international markets bringing to the market place new product lines in 2014. Forging deals with new content providers, expanding our retail partner footprints and categories further leveraging our catalog in e-commerce platform and providing a larger and more visible presence to Gaiam TV.
In summary we are pleased with what we’ve accomplished so far this year including signing, renewing more and larger distribution agreements, leveraging our digital infrastructure, repositioning the Gaiam brand, expanding product and category offerings, investing in a new e-commerce platform seeking broader placement of Gaiam branded products moving Gaiam TV into the market place and improving our balance sheet in overall financial health. All of this affords us great confidence and our ability to grow our revenue, drive more growth to the bottom line and generating more value for our shareholders.
This concludes our prepared remarks and now I would like to turn the call back to the operator for questions, operator?
We have some of the most sought-after content, including iconic content brand such as The Weinstein Company, World Wrestling Entertainment, Jim Henson Company, Salient Media, Interval Films, Shout Factory, Hallmark Channel, Discovery and National Geographic which positions us as the largest independent distributor of non-theatrical media content in the U.S. and provides us with a greater ability to win content distribution deals and continue to solidify our leading market position.
Turing to our Fitness Business we continue to focus on adding categories and withstanding our stores-in-store opportunity. 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 SPRI Gaiam sole and Gaiam Restore brands.
Until recently SPRI 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 into 470 sports authority stores.
Since then we are seeing 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 market place. We recently gained further real estate it’s sports authority as the supplier for cross training products under this program which will begin shipping this fall.
Our Gaiam sole line of premium Yoga products continues to perform very well offering a compelling higher price alternative to our traditional Gaiam branded products which are typically priced at mainstream price points. We are expanding this line with Mat at Dick’s and 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 afford succession that combines our Gaiam Restore and SPRI active recovery brands.
This type of expansion allows us to grow our business through existing retail relationship. The breadth of our product offering and continue development of new lines and it wants us to build on our 15,000 plus stores-in-store placements.
The brand statement and unified merchandizing offered by our stores-in-store is a win-win proposition for retailers who are always seeking a more cohesive set of products provided by fewer stronger than this. In terms of distribution reach we are launching product test with Walgreens, Staples and Myers.
We are also testing a new category captain status for Yoga at Academy Sport. 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 a top 25 accounts in Fitness, Media and Equipment grew by 12% and 2013 second quarter compared with the second quarter 2012 this up over 20% year-to-date. We believe we will continue with double-digit gains throughout the year.
Turning now to the direct-to-consumer segment. The second quarter of 2013 experience 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 a 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 a market new content for DRTV that supports our health and wellness product lines. Regarding our branded catalog in Internet business we are in the finishing stages of completing several significant initiative to better support this business.
As we discussed in the last conference call we engaged IDEO a highly regarded brand positioning company to help us position the Gaiam brand for a long-term sustainable growth. Based on the results of this study we have developed action plans in our moving forward of 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 in first half of 2013 with no impact to revenue in order to reposition the catalog towards more proprietary products and 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 e-commerce platform to increase web traffic and make our online visits more productive.
As we discussed in previous calls we migrated to a more robust platform that is scalable and customizable to fit our customer’s needs. With the completion of the initial implementation, we are continuing with faced enhancements to improve our online customer experience to support interactive content and enhance product in landing pages.
Regarding our subscription business, Gaiam TV is now referring up a branding phase with increased marketing spend to help introduce the services. We now have a library at 5300 exclusive titles for digital streaming across Fitness, health and wellness and personal development that affords us critical content mass.
This is very important this incremental content will be a key catalyst for Gaiam TV to attract and remain subscribers. Our progress in cost effective Gaiam TV original program continues and as of Q2 we are publishing one year program every week day evening.
Fewer 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 Blu-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 online and never before and the tremendous innovations and technology are expanding the options for how, when and where customers enjoy content. We are encouraged by Gaiam TV’s result so far and truly excited about it’s 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 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 a strong performance and our investment in e-commerce and Gaiam TV beginning to show improvements on the bottom line. With these improvements we expect a full year results to be inline with our expectations.
We will continue to focus on opportunities to grow our business including expansion into international markets bringing to the market place new product lines in 2014. Forging deals with new content providers, expanding our retail partner footprints and categories further leveraging our catalog in e-commerce platform and providing a larger and more visible presence to Gaiam TV.
In summary we are pleased with what we’ve accomplished so far this year including signing, renewing more and larger distribution agreements, leveraging our digital infrastructure, repositioning the Gaiam brand, expanding product and category offerings, investing in a new e-commerce platform seeking broader placement of Gaiam branded products moving Gaiam TV into the market place and improving our balance sheet in overall financial health. All of this affords us great confidence and our ability to grow our revenue, drive more growth to the bottom line and generating more value for our shareholders.
This concludes our prepared remarks and now I would like to turn the call back to the operator for questions, operator?
Operator
Thank you. (Operator Instructions).
And our first question is from the line of Mark Argento from Lake Street. Please proceed.
Mr. Argento your line is open.
Mark Argento - Lake Street Capital Markets
Can you hear me? Hello?
Can you hear me?
Jirka Rysavy
Hey, Mark.
Lynn Powers
Hi, Mark.
Mark Argento - Lake Street Capital Markets
Sorry guys I apologize. I assume you can hear me now.
Jirka Rysavy
Yes.
Lynn Powers
We can.
Mark Argento - Lake Street Capital Markets
Great, alright, sorry about that. Couple of questions ramping up you get a lot of your pretty initiatives going on especially with Gaiam TV and the e-commerce side and the direct TV launch I’ve seen your direct TV.
When you think about your marketing spend you are kind of looking at the budgets. Do you see a big talkie stick in terms of incremental marketing spend you talked a little bit about how you think about the spend relative to the return and how you kind of moderate to that and roll that out as the year progresses here with some of these new products and services?
Jirka Rysavy
Are you talking Gaiam TV or infomercial?
Mark Argento - Lake Street Capital Markets
Just how do you think about are you going to spend a lot more to drive traffic to the side on the e-commerce business Gaiam TV sit in the branding phase of that or start of the marketing ramp on that. So maybe you can talk about those two to start with in terms of your marketing overall marketing spend.
Are you going to spend a lot more this year then you did last year in terms of your marketing budget?
Lynn Powers
Actually on the e-commerce and catalog side our primary marketing spend is on the catalog and then secondarily on our affiliate programs our SEO and our branded store within stores e-commerce branded stores-in-stores. And I would say our spends going to be about the same I think what you are going to see the big improvements Mark it’s going to be on margin as we move more and more towards proprietary products that can be found in the third-party world of e-commerce.
Mark Argento - Lake Street Capital Markets
Got you. Yeah go ahead.
Jirka Rysavy
No I would just say for the Gaiam TV the spend compared to what we kind of talk the last couple of Qs the marketing spend actually is going to it’s somewhat reduced we kind of fail that we are going to optimize a cash towards the breakeven because the way how we look we pretty much from a Gaiam TV and bottom lined about $0.5 million better for the second quarter because we didn’t spend as much on a marketing. So we get lowered amount of cash what we need to spend to breakeven but extended the breakeven for about for a months.
But so the marketing is actually down so the losses for the Gaiam TV on a quarters to breakeven would be lower as I said the second quarter was about $0.5 million better I mean less loss for the quarter.
Mark Argento - Lake Street Capital Markets
You need to I mean when you think about the number of subscribers you need to breakeven in that business where you kind of shaking out in terms of the sub number?
Jirka Rysavy
I think it’s much better talk about it revenue dollars because as we for example right now life and like Verizon FiOS and we also going to launch in Comcast and there was a kind of revenue splits. So it’s kind of better to look at a revenues and when I said right now we somewhere between 400, 450 closer to 450 and we probably need about 750, 800 probably for breakeven on the net revenue.
So that pardon me.
Mark Argento - Lake Street Capital Markets
A month?
Lynn Powers
Per month.
Jirka Rysavy
Per month yeah.
Lynn Powers
Yes.
Jirka Rysavy
Per month. So it’s not so you can kind of say it’s run rate of little less than $10 million.
When what the company needs to do at that needs to breakeven. So because the subscribers you can kind of figure the subscribers because it’s about $10 million a month what we charge because right now it’s predominantly everything direct but if you a little more third-party deals the revenue it’s better indication than the number of subscribers.
Mark Argento - Lake Street Capital Markets
That’s helpful. And then when you think about the ability to get to you those types of sub numbers you already running 450,000.
So incremental 30%, 40% growth in terms of your total sub base to get to breakeven. Did you feel like you can get to breakeven by year end.
What’s your kind of expectation around getting there in terms of breaking even?
Jirka Rysavy
That’s what I just said but we kind of that will goes to us during and by September but it is in December but we would put about $1.5 million more cash into it. So we can decided to optimize the cash.
So I mentioned we lowered the marketing about $0.5 million like in the second quarter overall the bottom line difference. So that will move the breakeven to about end of April.
Mark Argento - Lake Street Capital Markets
Got it. Right and then when you referred to kind of expectations for full year you guys talked about you have formal kind of guidance that you have provided just from refresh by memory where you guys are out in terms of the overall expectations for the business for the year?
Jirka Rysavy
Can you repeat the question?
Mark Argento - Lake Street Capital Markets
Yeah. Have you guys put out any type of guidance I know in the commentary there were 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?
Lynn Powers
Well we haven’t provided guidance but what we are saying is that the loss that we experienced in Q2 with our infomercial both in revenue and bottom line we expect to make that up in fourth Q.
Jirka Rysavy
Because the infomercial actually launch in fourth Q.
Lynn Powers
Fourth Q.
Jirka Rysavy
So it’s kind of you see that low infomercial right now but because infomercial is launching in the fourth Q but even though we provided any specific guidance.
Mark Argento - Lake Street Capital Markets
Lynn Powers
Okay. I’ll start on the IDEO study.
Mark it was a pretty expensive study on qualitative information around the Gaiam brand and what I 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 helping you support be supportive as a beginner. So we are starting to build content around that.
We certainly have the products for it you can see how we are taking from Gaiam to Gaiam sole and Gaiam Restores. So we can be the guide if someone goes through their journey in Yoga and it also pointed to huge opportunity in certain other categories such as a moderate replaced the parallel line or some kind of physical location strict other areas that we should be looking at and that we’ll be getting into in 2014.
Jirka Rysavy
So to the other part. Go ahead.
Mark Argento - Lake Street Capital Markets
I’ll just say in terms of the catalog Jirka any thoughts there?
Jirka Rysavy
You mean the Gaiam TV.
Mark Argento - Lake Street Capital Markets
Yeah.
Jirka Rysavy
So we have so kind of give you overall we probably have in the Gaiam total 14,000 titles. Of that Gaiam TV it’s on a Gaiam TV is probably total 5500 titles of that only about 150 are not exclusive that means 5350 are totally exclusive to us which we are owned or have a long-term license.
And so that’s really makes the fix you need to be because we cannot get those titles anywhere else. I cannot stream them at all.
Some of our are only computing things. So how much is in value we start to buy these titles the time there will be 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 the time about $0.02 penny half to $0.02 on the replacement dollar. So because nobody was basically the comp interested and this thing is changed dramatically over the last two years.
So the numbers up significantly up and so we mentioned right now we start to produce our titles as we always did for Gaiam but it will start to produce we started to produce for Gaiam TV exclusively and it’s right now less than 4% of a titles of total but it’s well over 40% of ours. So that’s kind of the definitely direction for us and but putting values on it it’s very difficult right now but it’s increasing dramatically as this different people getting into the game but it’s also on the strength of Gaiam TV.
So I don’t think we do really start to license those titles. We do sell those titles for example on a like iTunes or Amazon as a download but not as a streaming option.
Mark Argento - Lake Street Capital Markets
Do you ever thought about like a syndication model where you could syndicate out of our streaming parts of the portfolio and not the whole thing but you to get the whole thing you got to go to Gaiam TV but be able to come up with syndication or we can like value because it seems to me that it’s got to be hopefully we could be able to build a lot of audience and share with Gaiam TV but might be a kind of late into value and that portfolio that you can maybe on top and some other was or top and some other wasn’t?
Jirka Rysavy
It’s there is definitely time to do that there is no really rush to do it right now but we did get approach for especially some Spanish people and so we conserving doing a deal with broadcasters linear broadcasters especially they are not English but as long it’s not in it’s access but just on Linear TV we may do something like that. So we get approached we are actually talking to people and we’ll see it goes but this is really I don’t feel there is the time is on our side.
So I don’t think it’s really something what we do better if we do it now I think if you wait, we might get pricing unless we just do annual deals. But it’s definitely in the cards but right now the main thing is to have all things profitable.
Mark Argento - Lake Street Capital Markets
Right. Thank you.
Appreciate it.
Lynn Powers
Thanks, Mark.
Operator
Our next question is from the line of Robert Routh from National Alliance Capital Markets. Please proceed.
Robert Routh - National Alliance Capital Markets
Yeah, good afternoon guys. Quick questions, first you mentioned you used a lot of your NOLs to shield the gain on the RSOL sales which made a lot of sense.
I’m curious could 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 and you might need some tax shield and of course you could give us sort of where that stands?
Steve Thomas
We still have about $34 million of NOLs that are utilizable.
Robert Routh - National Alliance Capital Markets
Okay. And then that’s the actual – for the cash value then?
Steve Thomas
That’s the gross.
Robert Routh - National Alliance Capital Markets
Gross…
Jirka Rysavy
Let’s say today we get $16 million, $16.4 million so we use $16.4 million and we have on the same level the $34 million…
Steve Thomas
Correct.
Robert Routh - National Alliance Capital Markets
Okay, great, great. And along those lines I guess looking at your financials I mean it looks like your book value is about $5.95, which is kind of close to your stock prices which doesn’t make a lot of sense.
Obviously and your tangible book is close to that two. Given where the share price is even though the stock is not about liquid and you pay down debt you got more cash on hand, you’re not going to be paying taxes.
How do you – if you buybacks in this environment given the cost of equity for companies such as yours is significantly higher than the cost of debt especially at current prices. But there is also a level of liquidity and so I’m wondering if you’re chronically still evaluating that or if that’s something off the table and what you believe and consider creating the derivatives such as selling (indiscernible) insurance stock that were out of the money in order to repurchase shares where the stock to continue to trade close to book value?
Jirka Rysavy
So we definitely had laided this, stock buybacks we bought 25% of our company backs over the last few years, right. So and we still have $2.7 million in open buy off to minimum of shares.
However there is the issue of flows, so that’s always, but its always to be evaluated, we – as we bought Vivendi and we had to borrow some money and now obviously we use to sale of good stock and we also pay a lot already on the average on the purchase price. So we now have again more debt and more cash than that.
So its like our first place was to we repay the debt before we start to buy stock I don’t think borrowing to buy shares. This wouldn’t be the first thing because its so many places, there are so many opportunities right now in a table, it’s that I don’t say that we would never borrow to buy shares, but there are just several opportunities on acquisition side what will pin out, but we always kind of look at okay do we buy shares, do we pay dividend as we did and do we make acquisitions.
So it’s always here so it’s never all in the table. But right now I think the direction it was - unlock some more now they use the words in the balance sheet like these real good shares, they were in the balance sheet at zero and so they don’t really reflect that when you kind of say okay well your balance sheet reflects 580 or whatever yeah how you calculate it.
But the rest of the Real Goods for example there is no base in the chairs plus they also have some money. So there is just several dollars what we can unlock without any basis, its not reflected in balance sheet, I really stay appreciated I think nicely since we bought it.
So there is just several thing I think pretty much all our purchases kind of appreciate it. So its the question how we unlock it and I think we want to focus on that because we talk about it for a while and this is really time for us to actually take action on those.
And but I don’t want to really take anything on the table I think we always evaluate it and it goes quarter-by-quarter.
Robert Routh - National Alliance Capital Markets
Sure, great, great. Okay.
And then along those lines can you talk about the Vivendi acquisition and of the deals that you signed and re-signed up along with Scripps and WWE et cetera. I’m just curious given the size of what you purchase and what you have, what’s your capacity for more deals to distribute more content to other third-party providers and what was the incremental cost would be because I would think you’ve 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 with the cost associated with anyone who just sign up to do that would be de minimis and that’s high margin for Gaiam in order, if you could walk us through that a little bit in terms of what you have available and what the margin would be for incremental studio, its independent that signs up with Gaiam for as a distribution partner?
Lynn Powers
Yeah, well Rob you hit the nail on the head. We certainly – that was our desire with the acquisition of Vivendi which was to build this 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 if you bring on a new studio very, very low incremental cost, incremental cost certainly perhaps for marketing people maybe a sales person or two but very low incremental cost. And so the margin that you make is pretty much straight to the bottom line.
Jirka Rysavy
The idea that as being pretty much only one who is direct with everybody from Wal-Mart and Target or its just right now two-thirds of the volume. And its – and being (indiscernible) was a good deal which is important to all the digital people like iTunes and Xbox and Wudu and stuff and obviously buying Vivendi because it was Universal Music kind of improve our deal and iTunes.
And because of this situation there is really nobody else who get direct access to that situation, so we get studio, we’re pretty much, we get most of the business and two years ago we would have to put big advances to sign new studios now they basically also or big, big people like (Warner) Fox or Sony to go to. So if you’re independent, if you likely get that business and that was the strategy behind doing the deal.
Robert Routh - National Alliance Capital Markets
Right, great. So it’s safe to say you just saw a tremendous capacity of more of these studios choose to use your infrastructure for certain distribution you could do it, you could handle it without adding incremental cost….
Lynn Powers
Absolutely, absolutely.
Robert Routh - National Alliance Capital Markets
Great, great. Another question is given what’s going on with Gaiam TV and how it’s growing and all these partners that you are already distributing for like Scripps and WWE et cetera, obviously WWE is talked about creating their own network et cetera.
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 that are making 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?
Jirka Rysavy
There is definitely potential, we don’t want to talk too much early because our focus is right now to get Gaiam TV profitable on as an operating unit, but we already get approached and we have some discussion with people when we kind of create the kind of White Label product for them and but top of White Label let’s say from our 5500 titles we can say okay but we also give you, you can pick these 1000 titles, you can be included under your brand. So we can bring, build channels for any other brands, cannot do it on their own, because today we know what it takes and with all the different devices and streaming and stuff its like a tremendous amount what we’re doing and storing and moving in a number of terabytes.
So its – will be probably very little credit for several of our partners to do that and several of them already talked to us and its just the kid of we still have some technologies to do, we’re kind of looking to we’re going to launch soon ability what’s called Tera Downloads subscriber you can actually download the content and keep it on your computer as long you are a subscriber which is kind of an naturally cannot really do because they don’t have the rights for.
Robert Routh - National Alliance Capital Markets
Right.
Jirka Rysavy
So that was kind of features we want to first have in our platform and we’re probably talking about we’re just less than three months to launch something like that. So before we started White Label we have to put those in and there is a lot of improvements we’re launching because now we have a feedback from customers what they are actually using and stuff which we don’t have that benefit six months ago.
So we would definitely want to finish the platform before we just started White Label.
Robert Routh - National Alliance Capital Markets
Right, right. It 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.
And it seems some of these other partners that have the same type of ownership could be a win-win given the relationship which already has, so it’s interesting. Changing gears a little bit here.
Given the front 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 HSN or QVC especially more international or ValueVision in terms of having the Gaiam hour is 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 heavily penetrated if at all as they should be with low risk of any to you as well as partnering with some solid entities as opposed to just the infomercial business for more of home shopping channel in terms of just your thoughts on that is just something to explore or you would consider exploring the fitness products?
Lynn Powers
Certainly on our agenda for 2014 I think you’re absolutely correct, we should be – we are spending sometime on it and probably for the fitness season and the New Year, New Year 2014 is something we’re exploring.
Robert Routh - National Alliance Capital Markets
Great, great. And just one last question then I’ll turn over to someone else is how do you think now that you deconsolidate RSOL and things are little clear and easier to value.
But given the capitalization of the company, if you are in the choice of analysts on all sort of defense looking at the company. What’s the right way to value Gaiam, is it some of the parts, free cash flow, DCF, PE.
How do you think we should look at the company from in order to value this stock this year (indiscernible)?
Jirka Rysavy
Well I think from on a long term it’s a decision I think its probably long-term is the PE story. The short term is definitely more balance sheet and the pieces because you kind of said I mean if you kind of take if I look at right now the value we take into market and we did spend some time on located things you definitely get today if you would kind of do this what we’re doing with Real Goods and we look at pieces you get into 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, right. So we have that the Real Goods I say that it sally doesn’t have basis.
All our acquisitions right now kind of increase because of the synergies and so once you do that part it would be probably the first part, second part of PE we kind of say okay we need to kind of say that Gaiam TV at least breaks even. So because you kind of hit - last time we said we go into for this year takeoff like $7.8 million hit now its going to be a little less I kind of said because we’re spending less money, changing little profile of speed but still it’s a big difference if the company start to contribute which we expect next year.
So its you are talking eight plus million swing. So the PE ratio you have to adjust the losses and so we try to position clearly this year to get to profitability this way and so we can start to unlock these values but there is still stuff on 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 Goods that people actually start to see the value there much more than there was – we did consolidate it then we have to report consolidated losses and didn’t really show that there is a value on the balance sheet. And once you turn into cash especially same as NOLs you don’t really get credits for NOLs to turn them into cash.
So I think that’s the kind of work we wanted to kind of do, so I would say its kind of an short term kind of the balance sheet and value of the pieces along and long term is the PE story.
Robert Routh - National Alliance Capital Markets
Great. Thank you very much.
Lynn Powers
Thanks, Rob.
Operator
Our next question is from the line of George Kelly from Craig-Hallum Capital Group. Please proceed.
George Kelly - Craig-Hallum Capital Group
Hi guys, just sticking with the balance sheet, can you talk about your building in the process, the leasing process there and how far that’s the long way now?
Jirka Rysavy
We have - as we kind of mentioned we have we clearly it’s in our kind of things to do is the building, we have the buildings and books about $19 million and it’s that also we basically don’t pay a rent for the last three years. So you can say that we can adjust it as a real value because we didn’t adjust that balance sheet for the – obviously for the not paying rent.
But the value of the building right now depends how we do it, its - we have right now Gaiam occupies its now full east; Gaiam occupies slightly 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 in once together.
And so we and they will give us little bit of space to lease and so it will get us better price if it’s not what’s called tenant, single tenant building. So its got 50% so I think we’ll do that over the next few months and then we kind of put into market and the current value is probably right now $25 million, $27 million on a market.
George Kelly - Craig-Hallum Capital Group
Okay.
Jirka Rysavy
And we obviously if we report a gain on that we have an oldest recovery.
George Kelly - Craig-Hallum Capital Group
Okay, okay. And then another question on the TV side, so the operating loss in the quarter was $1.8 million.
What are your expectations for the next two quarters?
Jirka Rysavy
Like I was talking about its going to obviously a slightly improving, we’re not going to since we are not going to really increase marketing but it will pretty much we have this launch and first week in October of this what I mentioned Tera downloads that you can download all our content and keep it on your computers as long as you are subscriber and you still being a subscriber it disappear. And its - we want to keep another month after that the testing of an marketing site and then from November the loss is dramatically decreased.
And well its just probably we expect to breakeven like in a wafer…
George Kelly - Craig-Hallum Capital Group
Okay.
Jirka Rysavy
But loss is after that, would be pretty small.
George Kelly - Craig-Hallum Capital Group
Okay, okay, okay. And then on the guidance or the expectation that you guys were on the DRTV side you guys all makeup, the amount in the fourth quarter that you lost in this quarter.
Can you fill in, give a little more detail I don’t know how specific you want to get but as to different way. Do you expect the direct to consumer business to be positive this year of growth?
Lynn Powers
For the year no, but we do expect it to have a nice increase in fourth queue and we expect to makeup the profitability that we lost in Q2.
George Kelly - Craig-Hallum Capital Group
Okay.
Jirka Rysavy
As to understand Gaiam TV is also part of the direct, it’s a consumer business, Gaiam TV is a part of it and Gaiam TV still have a negative contribution. But what Lynn was saying basically that the difference what we talked about in the first quarter what was caused, we have a nice growth but it was offset of negative DRTV so what Lynn saying and whatever was negative we clearly make it in the fourth queue because that’s where we launched infomercial and we have lot of our things happening.
So that’s why I think is what she meant, right.
George Kelly - Craig-Hallum Capital Group
Okay. That’s helpful.
And then a couple of sort of modeling questions, can you go over the CapEx stock-based comp and D&A again I missed that?
Steve Thomas
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.
George Kelly - Craig-Hallum Capital Group
1.7 and stock-based comp?
Steve Thomas
We didn’t release that but I think it was I – let me check on that for you.
George Kelly - Craig-Hallum Capital Group
Okay.
Jirka Rysavy
If you can come us and ask…
Lynn Powers
Yeah, yeah.
Jirka Rysavy
It’s not a big number but…
Steve Thomas
Yeah it’s a very small number..
Jirka Rysavy
That it was and we’ll find it to, not everybody has to wait for it…
Steve Thomas
Yeah it’s about 200,000…
George Kelly - Craig-Hallum Capital Group
Okay. And then last question the launching in Dick’s and REI I would the sole line, how does that start, is it a test sort of thing in the fourth quarter or how many stores you will launch with?
Lynn Powers
I don’t know exact number of stores but I do believe its in testing phase right now and its an expansion of the number of stores.
George Kelly - Craig-Hallum Capital Group
Okay, alright. Thank you.
Lynn Powers
Thank you.
Operator
There are no further questions from the phone lines at this time.
Jirka Rysavy - Chairman
So we would like to thank everybody and its little longer today but thank you very much and hear you about hopefully from us next time. Thank you.
Operator
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.