CURI - NASDAQ

Good afternoon, and welcome to the CuriosityStream Second Quarter 2023 Earnings Call. My name is Briana, and I will be your conference operator today. Please note that this call is being recorded. [Operator Instructions] I would now like to turn today's call over to Denise Garcia, Investor Relations. Please go ahead.

Thanks, Briana. Welcome to CuriosityStream's discussion of its second quarter 2023 financial results. Leading the discussion today are Clint Stinchcomb, CuriosityStream's Chief Executive Officer; and Peter Westley, CuriosityStream's Chief Financial Officer. Following management's prepared remarks, we will be happy to take your questions. But first, I'll review the safe harbor statement. During this call, we may make statements related to our business that are forward-looking statements under the federal securities laws. These statements are not guarantees of future performance, but rather are subject to a variety of risks, uncertainties and assumptions. Our actual results could differ materially from expectations reflected in any forward-looking statements. Please be aware that any forward-looking statements reflect management's current views only, and the company undertakes no obligation to revise or update these statements nor to make additional forward-looking statements in the future. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC website and on our Investor Relations website as well as the risks and other important factors discussed in today's press release. Additional information will also be set forth in our quarterly report on Form 10-Q for the quarter ended June 30, 2023 when filed. In addition, reference will be made to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to comparable GAAP measures can be found on our website at investors.curiositystream.com. Now I'll turn the call over to Clint.

Thank you, Denise. Hello, everyone. I really appreciate you all joining us today, especially as I know we are not your first earnings call this August. Also with me on the call, our COO and General Counsel, Tia Cudahy; and our CFO, Peter Westley. This was a good quarter for us as we move toward profitability. We improved our adjusted free cash flow for a third straight quarter and grew sequential revenue by 14%. We introduced our higher pricing to new direct customers into a small segment of our existing subscribers. We entered into meaningful and thoughtful licensing agreements with several new partners in the Middle East, the U.K. and Europe. We believe this ongoing expansion of our licensing partners, both by territory and platform will benefit us in the quarters to come. In addition, in order to expand the top of our marketing and promotional funnel and further monetize our content, we will be rolling out certain titles and packages into broadcast network syndication for the first time and also with top AVOD partners beginning in Q4. Further, we opportunistically locked in performance-based marketing initiatives with exceptional content creators and influencers that we believe should increase awareness and subscriber acquisition, while at the same time, minimizing risk. As I know we have some new people listening today, let me quickly review what we do and how we make money. Our overarching mission is constant and has never changed. Simply put, our mission is to help satisfy people's curiosity through enlightening premium factual films and programs and also through entertaining instructional talks from subject matter experts. Our efforts to be a go-to content service for anyone who wants to know more about the world are anchored by our flagship subscription service CuriosityStream. Today, anyone in more than 175 countries with a sufficient Internet connection can subscribe to standalone CuriosityStream for $4.99 per month or $39.99 per year or to our premium tier Smart Bundle, which contains over 30,000 titles from six different services for $9.99 per month or $69.99 per year. It's important to not overly rely on a single direct subscription revenue line, we also monetize our content through third-party distribution relationships for our products and services in 11 different languages through third-party content licensing of distinct titles and packages and increasingly through advertising and brand partnerships. Well, Peter will discuss our financials in greater detail later in the call. I couldn't be more enthusiastic about our path to positive adjusted free cash flow, a milestone that we believe we are closing in on. On the expense side, we reduced G&A expense by approximately 25% year-over-year in Q2, and we'll continue to work to bring this spending down further. We've spoken previously to our spending reductions associated with programming and marketing. Our marketing spend for the second quarter of 2023 was down 63% year-over-year, while direct revenues were roughly comparable, down less than 3%. The only increasing costs projected for the second half of 2023 as compared to the first half is marketing, which is 100% in our control and where increased spend is a function of meeting internal growth performance metrics. On the revenue side, our new pricing will take until late 2024 to fully roll through the P&L. To be clear, it doesn't just happen in one fell swoop. All new customers are seeing our increased pricing and while we are rolling it out now to most monthly cohorts, our subscribers on annual plans won't see new pricing until their plans come up for renewal over the course of the year. Further, most of our channel store and App Store partners, while they have it on the near-term roadmap have not yet commercially launched their new pricing. This is why I said at the beginning of my remarks that new pricing has been launched only a small segment of our direct subscriber base. So we expect steady growth as a result of increased pricing associated with our core service and also from our premium tier Smart Bundle, a higher-margin service offering that is growing in part as a result of its closer pricing proximity with CuriosityStream as a standalone service. While I've not talked much about One Day University, ODU subscribers are indeed growing, and ODU is also proving to be a helpful lever and offering for certain existing cohorts contemplating renewal. We believe the third-party demand to license and distribute our content and services is strong and growing. And in addition to traditional legacy licensing partners, non-traditional licensing partners are also emerging. As just one example, we believe we are in the infant stage of a mini broadcast digital channel renaissance catalyzed by ATSC 3.0, which increases the station group's need for content and services for their existing services and for the new ones they want to create. Historically, this has not been an internal functional expertise for them. The top North American AVOD players have plenty of overall volume, but are still light in some key categories where we believe we can help. Outside the U.S., AVOD is more nascent. So while the overall AVOD licensing revenue opportunity is less than in the U.S., we believe the demand for content is greater. As I've been asked, if the current disruption to new content creation is helpful to us, I would say that we believe it provided no identifiable incremental benefit to us in the second quarter of 2023 or the first half of Q3. We also anticipate steady, sustainable long-term advertising and sponsorship revenue growth and increased consumer awareness as we place certain content into AVOD FAST and broadcast syndication. Moving to content. While our critical mass library of more than 15,000 programs has enabled us to reduce our year-over-year cash content spend also by 63%, We added hundreds of new titles and some underserved factual genres like money and finance and more in tried and true genres like modern history, tech and biographies, all within our planned content budget. As to what's on the screen now, we kicked off the quarter with the premiere of Lift the Ice, the global 6-part series that filmed 20 expeditions across 12 countries and five continents, showcasing the harshest spots on the earth and revealing surprising secrets from our planets melting cryosphere, from ancient viruses to new clues about the location of Alien Life. In May, we premiered our series Giants. We're world renowned naturalist, Dan O'Neill tracks down the planet's biggest creatures. These are the ones that can eat you and compares them with the help of CGI to the nastiest beasts that have ever roamed our planet. On the science and tech front, we continue to produce timely, deep dives into trending stories of the day with specials like Attack of the

Thanks, Clint. During the second quarter, we believe we continued to make good progress on our path to positive adjusted free cash flow while delivering on our near-term financial commitments. We introduced our increased pricing for new direct subscribers and tested to find the most effective ways to increase the prices paid by our existing subscribers. Those increases for existing subscribers are being put into full effect this quarter. On the cost side, we remain disciplined in our spending. As a result of our focused execution, second quarter revenue and adjusted free cash flow were in line with our guidance ranges. Turning to our second quarter results. Revenue was $14.1 million compared to $22.3 million in the prior year quarter. The year-over-year change was primarily driven by decreases in content licensing, bundle distribution and enterprise revenues. Our largest revenue category this quarter was our direct business. Direct revenue came in at $8.3 million, a 3% decrease compared with the second quarter of 2022. As Clint mentioned, this slight decrease came despite a 63% year-over-year reduction in marketing expenses during the quarter. We expect direct revenues to grow sequentially in the third quarter as the impact of the price increases to new and existing subscribers begins to flow into the financial results. However, it will take a full year or more for the impact of these price increases to completely flow through our financial statements given the fact that the significant majority of our direct subscribers are currently on annual subscription plans. We expect this positive impact to begin to materialize in the third quarter of 2023. Turning to content licensing, which was our second largest revenue category this quarter, we generated $3.6 million of revenue compared with $6.7 million in the prior year quarter. The profitability of those revenues was much higher this year however, as more than 80% of our content licensing revenues in the second quarter of 2022 were zero margin presales deals and more than 80% of our content licensing revenues in the second quarter of 2023 were attractive margin library licensing deals. Our next largest category was bundled distribution, which generated $1.5 million of revenue in the quarter. If we deduct $2.6 million of revenue from the second quarter of 2022, related to a contract that we did not renew in the middle of last year, bundled distribution revenue would have grown 13% year-over-year. Second quarter gross margin of 29.5% decreased from 41.9% in the prior year quarter, driven by lower year-over-year revenue but improved from 27.3% in the first quarter. The sequential improvement in gross margin was primarily driven by growth in library-based content licensing deals during the second quarter. Our second quarter advertising and marketing expense of $4.2 million was down $7 million year-over-year as we remain intent on maintaining tight discipline around our marketing spend. G&A expense during the second quarter of 2023 was $8 million - of $8 million was down $2.6 million or 25% year-over-year. We will continue to focus on looking for ways to bring this spending down going forward. Moving to profitability. Adjusted EBITDA loss of $6.5 million was 39% less than our $10.6 million loss in the prior year period. Second quarter cash spend on content was $3.3 million, down $5.6 million or 63% compared with the prior year quarter as we continue to benefit from the critical mass library of content that we have built. Adjusted free cash flow use of $4.3 million improved $1.7 million year-over-year and $2 million sequentially. This represents our third consecutive quarter of sequentially improving adjusted free cash flow and underscores our continued momentum towards positive adjusted free cash flow. We think that this metric is a particularly useful guide for investors as to the underlying economic realities of our business, which is why it's one of the financial figures we use in our forward-looking guidance. At the end of the second quarter, cash, cash equivalents and restricted cash totaled $44.8 million. We had no outstanding debt at the end of the quarter, and we believe our overall balance sheet remained in great shape with $133 million of assets and $30 million of liabilities, translating into book value of $103 million or approximately $1.94 per share. One other item worth noting is that we conducted an impairment analysis that is reflected in this quarter's financial statements. That analysis determined that the fair value of our investment in the German TV joint venture exceeded the carrying value as of June 30. And as a result, we recorded a $2 million noncash impairment related to that investment during the quarter. Before I turn to our guidance, I thought it would be worth taking a moment to revisit our prior comment, the Q1 2023 would be a trough for us as we look to build from there. If you look at our second quarter results, you'll see that sequentially we increased our revenues by 14%, our gross margin by more than 200 basis points and our adjusted free cash flow by $2 million. We like the trajectory of the business. Moving to our third quarter guidance. We expect revenue in the range of $13.5 million to $15.5 million and adjusted free cash flow in the range of negative $5.5 million to negative $3.5 million. I'd also like to revisit the guidepost that we laid out previously related to certain expense items for the year. We continue to expect that our cash spend on content for the year will be in the $10 million to $15 million range, but we are lowering our expected expenses for the two other categories that we discussed previously. We now expect content amortization for the year to be $22 million to $27 million, which is down from our $25 million to $30 million prior estimate and we expect advertising and marketing expense to be $17 million to $22 million, down from our $20 million to $25 million prior estimate. As we look to increase our marketing spending in the second half of the year, while continuing to maintain discipline around this effort. Before turning the call over to the operator for questions, I wanted to highlight one final housekeeping item related to our options and restricted stock units. As you will see in Note 14 to our financial statements in the 10-Q that we filed with the SEC this afternoon, in July, following approval by the company's Board of Directors and shareholders, we exchanged approximately 4.6 million employee stock options for 1.6 million restricted stock units of an equivalent fair value, a net reduction of 3 million fully diluted shares for the company. With that, operator, let's open the call to questions.

[Operator Instructions] Our first question comes from Laura Martin with Needham. Your line is open.

Hi. Maybe just a couple. So the margins were lovely on this content licensing. But my question is, is that really recurring? Because when you content a license, you can't only do it once and then you can't really content a license again. So is it really a recurring positive for you, the margin expansion is coming from content licensing. That's my first one.

Yes, that's a great question, Laura. And I would say that in light of - if you're only a U.S.-based company or only focused on one region, I think it might be challenging. But in our case, because of the global appeal of the content, I think because of the emergence of kind of non-traditional licensing partners, we don't really see any end insight there. We had, I think, 13 different licensing partners in the quarter. We entered into those agreements in what I would say was thoughtfully and meaningfully. And we don't anticipate any cannibalistic impact and really believe that in certain parts of the world, especially just the presence of our content will be a positive for generating increased awareness.

Cool. And then my second question is, could you give us an update on what's happening with the FAST channels and the ad revenue stream progress, please?

Yes. So we signaled to that a little bit. We will be rolling out in the fourth quarter with large AVOD platforms, and then we'll be also putting some content into a broadcast syndication. And the same goes for FAST. We've been encouraged, obviously, to do this for a while. We want to make sure that we crafted deals that made sense because, as you know, it's easy to just stick a FAST channel out there. It's easy to just put AVOD content out there. But if you're not aligned with the large platforms, if you don't have any promotion and if you don't have the right positioning, you risk yelling into the wind. So we want to be real thoughtful about this and create a revenue stream that is growing every quarter, and we think we can really build on and that we think will be really additive to what we're doing even in the subscription space through enhancing the top of the funnel.

If I could add just a little bit, Laura. The - those revenues appear in our other revenue category. That category had $622,000 of revenues in the second quarter. That was up from $274,000 in the first quarter and down from $1.7 million in the second quarter of 2022, but that quarter had $1.6 million of the $1.7 million was related party revenue. So non-related party revenue was roughly $100,000 a year ago. So that is a category that has experienced some nice growth when you subtract out the related party revenue a year ago.

Very helpful. Thank you, guys. Thank you.

Your next question comes from Peter Henderson with Bank of America. Your line is open.

Yes, hi. How're you guys doing? Thank you for taking the question. I guess - I'd like to start, I know you haven't passed through the price increases across the entire base. I'm just kind of curious, though, for where you have instituted the price increases, if you can sort of discuss the response or what kind of trend you're seeing or people are not on annual plans? And then finally, when do you actually expect to have the price increases through the entire base? I mean, I guess, what percentage of you could remind us? What percentage of the base is on annual plans at this point?

Yes. So what we are seeing of our B2C customer base, the vast majority of those folks are on annual plans of the existing subscriber base, north of 90%. Our partner direct revenues is more of a monthly cycle of subscriber rate. We are seeing, as we - so we did a lot of testing this quarter about - with different cohorts of our subscriber base, depending on whether you were monthly or annual, what type of price point you were paying out, what type of package you were you are coming in at. We tried and we tested a whole bunch of different trials to see how best to pass through price increases, what packages would generate the best outcomes for us. And so we are starting to see some increase in that pricing start to flow through the financials now, early days. We're also seeing a slight increase in churn, which was not - which was fully anticipated. And what we're seeing was well within the range of what was anticipated. But as you expect and as we - when we talk about this price increase, to begin with, we expect that the economic benefit of the price increase, given the magnitude of the increases will offset - much more than offset any increase we see as a result of churn that happens with the existing subscriber base.

Okay. Thank you.

Your next question comes from Jim Goss with Barrington Research. Your line is open.

Thanks. I'd like to follow up a little on what Laura was asking about the licensing and probably also the response with this global appeal, which we recognize as an advantage. Wondering what the cost might be to ready the content for other markets? Is it minimal or do you think substantial? How key category do you expect that to be? And what level of consistency do you think it might have within the income statement?

Excellent questions. Jim, thank you for asking those. In regard to localizing and languaging our content, there's a range of costs. The good news is that we believe, over time, that will come down considerably, particularly if we're able to take advantage of generative AI solutions that are out there. I will say that in our case, a lot of our languaging is behind us. We've - as part of MVPD distribution agreements that we entered into; we had some licensing obligations. So we have most of that is in our rearview mirror. We'll continue to license kind of moderately going forward. But I think the good news is like the price has come down, which has given us and the fact that we've just done a lot has really provided us with a lot of flexibility going forward. And again, there are hundreds and hundreds and hundreds of licensing partners when you have, thankfully, premium factual content that you can put anywhere into the world. So actually, we like that trend. And I think that - I think you could really argue that we've been a little too precious about our content in the past, and we have a lot of different people that we can work with going forward, and we just want to make sure that we do that in the most thoughtful, meaningful way.

Yes. I do think just kind of following up on Clint's comments. It will continue to be a bit lumpier category for us in some of our other categories. Obviously, the direct business, for example, is - tends to be just a kind of a smoother line in terms of what you're seeing and content licensing deals can be big and lumpy. But the fact that we're bringing in increasing number of content licensing partners makes us very - feel us very good about kind of the sustainability and repeatability of that part of the business.

Okay. And just one other thing. In terms of the price increases you were trying to put into effect, would you say you're getting not very much resistance from those you're offering the service at a higher price? Or can you give any guidance as to share of individuals who are staying with you versus declining?

Yes. So I mean, we've seen a slight uptick in terms of people leaving the service relative to what we had experienced before we had price increases. But again, it's well more than offset by the positive impact of the increases themselves. And a lot of what we spent the second quarter doing with different cohorts was looking at what would be the offers that would be most positively received and most likely to bring people - have people continue to stay on the service, but at a higher price point. So that could be, for example, bundling in ODU with the renewal of a CuriosityStream subscription. It could be encouraging people to upgrade to Smart Bundle, which is, Clint said is no longer at such a premium price point to the now standalone price point for CuriosityStream. So a lot of work and effort was done with different groups to figure out what the best offer for each of them was. And - the - so we are seeing some slight upticks in some of the metrics in terms of people leaving, but again, well within the range of what was anticipated.

We should have increased pricing earlier, Jim, to trade will take any day.

Okay. Thank you so much.

[Operator Instructions] Your next question comes from Tom Forte with D.A. Davidson. Your line is open.

Hi. This is Sharanjit on for Tom Forte. Thank you so much for taking my questions. My first question is how, if at all, are you affected by the writers and actors strikes we would think that you are relatively well positioned versus your peers, given that it seems though you are less reliant on writers and actors.

Thank you for asking that, Sharanjit. I think we're better aligned than most in the industry. And we've seen no impact in regard to our massing of content, either through creation and acquisition and we've seen no identifiable impact to licensing revenue. Should it continue for a long time, I think it could create a small tailwinds, but we haven't even seen that to date.

And for my second question, Disney seems more interested in partnering with companies than it has been in the past. And the best example right now is its online betting effort with Penn Entertainment and given its focus on content from National Geographic, is there an opportunity for CuriosityStream to work more closely with Disney? Especially as it ramps its efforts to cut costs, including for content?

Thank you for asking that as well, Sharanjit. I would say as sure as the sun will set in the West, bundling offers and alliances will increase. We've always believed that, and we will leverage those opportunities appropriately. Even for our premium tier Smart Bundle that Peter just talked about, we're receiving new inquiries and requests every week to be a part of that. And so I won't speak specifically to Disney, but boy, what an opportunity they created for Penn's former content partner. But we will align as both an anchor and a complementary service wherever it makes sense.

Thank you.