Hello, and welcome to the CuriosityStream Q3 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Denise Garcia, Investor Relations. Please go ahead..

Thanks, Gael. Welcome to CuriosityStream's discussion of its third 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 September 30, 2023 when filed. In addition, reference will be made to non-GAAP financial measures. A reconciliation of these non-GAAP measures to comparable GAAP measures can be found on our website at investors.curiositystream.com.

Now, I'll turn the call over to Clint..

The Interesting Bits, a fast-paced journey into the weird wild and salacious details behind history's biggest events; 3-part series Nature's Hidden Miracles, a look at the surprising ways many different species secretly collaborate to survive, which is co-produced with our terrific partners at the NHK; and 3-part series Queens of Ancient Egypt, a brand-definitional original that sheds new light on some of the most mysterious and powerful women in history.

In August, we also premiered a second season of Rescued Chimpanzees of the Congo, with the iconic Jane Goodall, which captures the final steps in a decades-long effort to rehabilitate and release an amazing cast of orphan chimpanzees at Jane's Tchimpounga Sanctuary, back into the wild.

In addition to our collaborative commissioning work with great factual producers, Curiosity Studios released its own slate of originals, including the dramatic little-known story of the Hunt for the First Nazi Jet, and new episodes of our cutting-edge science and tech strand Breakthrough covering everything from the latest advances in AI, to predictions of where and when the next big earthquake will strike and the first US mission to recover a sample from an asteroid.

Looking forward, we're all really excited about today's premiere of Connections, the modernized reboot of the historic series hosted by James Burke, who many consider the world's smartest man; and by our upcoming celebration of all things dinosaur and Dino Week, anchored by the premiere of Amazing Dinoworld 2.

Let me close by sharing what we've said in the past. In a transitioning media environment where many companies have overspent, some are trying belatedly to course correct, we like our position.

In light of production slowdowns that have adversely affected the 2024 film business and possibly additional workforce instability next year, we believe that consumers and an expanding roster of third-party buyers, will place even higher value on existing premium factual content and brand-safe relationships.

In sum, we continue to believe that our direct subscriber base and direct platform, our broad and deep content library, our multiyear partner agreements, our strong cash position, our public currency and our lack of debt are uniquely favorable attributes that provide us with a firm foundation and exceptional flexibility.

I'd like to now pass the baton to my friend and colleague, Peter, who like James Burke, many consider the smartest man in our room. Over to you, Peter..

Thanks very much, Clint. We continued to make good progress on our path to positive adjusted free cash flow, while delivering on our near-term financial commitments during the third quarter. As a result of our strong execution, third quarter revenue and adjusted free cash flow both came in above the high end of our guidance ranges.

We continued to tightly control expenses while remaining disciplined in our customer acquisition investments. Turning to our third quarter results. Revenue was $15.6 million compared to $23.6 million in the prior year quarter. The year-over-year change was primarily driven by decreases in content licensing, enterprise and bundled distribution revenues.

Despite this decline in revenue, we were able to improve our adjusted free cash flow from negative $12.6 million in the prior year quarter to negative $3 million, in this year's third quarter as a result of our intense focus on bottom line. This was our fourth straight quarter of sequential improvement in our adjusted free cash flow.

Our largest revenue category this quarter was our direct business. Direct revenue came in at $8.6 million, up 3% sequentially as we were starting to see the impact of our price increases put in place earlier this year. On a year-over-year basis, direct revenue was relatively flat.

Turning to content licensing, which was our second largest revenue category this quarter, we generated $5.1 million of revenue compared with $10.8 million in the prior year quarter.

Content licensing is an inherently lumpy part of the business and we faced a tough comparison this quarter as Q3 of 2022 was an exceptional quarter for us in this revenue category.

One thing that should be pointed out about this quarter is that $4.9 million of our Q3 2023 content licensing revenue related to barter deals we entered into during the quarter.

Content swaps like these, which are common in the media industry, allow us to bring fresh content to our services without spending cash and to raise awareness of CuriosityStream through additional non-competitive distribution channels.

In these transactions, we generally recognize revenue based on the value of the content delivered at the time we deliver our content to our partners with a corresponding increase in content assets on our balance sheet related to the content that we receive from those partners.

Our next largest revenue category in the third quarter was bundled distribution which generated $1.5 million of revenue in the quarter. If we deduct $1.2 million of revenue from the third quarter of 2022 related to a contract that we did not renew in the third quarter last year, bundled distribution revenue would have grown 7% year-over-year.

Third quarter gross margin of 45.7% increased from 42.4% in the prior year quarter, driven by stronger content licensing margins. Our third quarter advertising and marketing expense of $5.1 million was down 9% year-over-year and we continue to exercise discipline and analytical rigor in deploying our customer acquisition dollars.

G&A expense during the third quarter of 2023 of $7 million was down $1.8 million or 21% year-over-year. Also included in our third quarter operating expenses was a $19 million non-cash charge, related to the impairment of our content assets, which I will discuss later in my comments.

As a result of this charge, our upcoming amortization expense will be lower than would have otherwise been the case, which we expect to benefit adjusted EBITDA net income moving forward. Moving to profitability.

Adjusted EBITDA loss was $3.9 million, the calculation of which excludes the $19 million non-cash impairment charge compared to an adjusted EBITDA loss of $2.6 million in the prior year quarter.

Third quarter cash spend on content was $3.9 million, down $3.5 million or 47% compared with the prior year quarter as we continue to benefit from the critical mass library of content that we have built. Year-to-date we spent $9.7 million of cash on content, which excludes all content added through barter transactions.

That compares with $36.4 million of cash spent on content in the first three quarters of 2022, a reduction of $26.8 million or 73%. Adjusted free cash flow use of $3 million improved $9.6 million year-over-year.

As I mentioned previously this represents our fourth consecutive quarter of sequentially improving adjusted free cash flow and underscores our continued momentum toward positive adjusted free cash flow.

In order to demonstrate our seriousness about achieving this objective, management has identified more than $15 million of additional planned reductions in expenses and cash spending for 2024 relative to our expected spending levels for 2023.

This plan has been approved by our Board of Directors and we will begin implementing these changes this quarter. Due to the decline in our share price during the third quarter, which resulted in a market capitalization that was less than our cash balance at quarter end, we identified indicators of asset impairments.

That led us to assess the value of our assets including content assets and equity method investments under the respective accounting guidance for each asset in consultation with outside valuation experts and our accountants.

That analysis led to non-cash impairments of our content assets by $19 million and of our equity method investment in Nebula by $2.3 million. The non-cash impairment of our investment in Nebula was primarily due to the official non-renewal of the marketing partnership between Nebula and CuriosityStream.

The change in our business relationship does not impact Curiosity’s ownership position in Nebula, which was 16.875% as of September 30, 2023. After these adjustments we believe our overall balance sheet remained in great shape with $106 million of assets, $29 million of liabilities, and book value of $77 million, or approximately $1.45 per share.

We ended the quarter with total cash, cash equivalents and restricted cash of $40.8 million and no outstanding debt. Before I turn to our guidance, I thought it would be worth taking a moment to revisit our prior comment that Q1 2023 would be a trough for us, ass we would look to build from there.

We believe our second and third quarter results reflect solid execution as we delivered significant sequential improvements in both revenue and Adjusted Free Cash Flow.

Moving to our fourth quarter guidance, we expect revenue in the range of $14 million to $16 million and adjusted free cash flow in the range of negative $5.5 million to negative $3.5 million. Relative to the third quarter, we expect fourth quarter 2023 adjusted free cash flow to decrease slightly due primarily to seasonal factors.

I’d also like to revisit the guideposts that we laid out previously related to certain expense items for the year. We now expect that our cash spend on content for the year will be in the $10 million to $12 million range, as compared to the $10 million to $15 million range we had previously communicated.

In addition, we expect content amortization for the year to be $21 million to $23 million, excluding the impairment to content assets that we took in the third quarter, as compared to the $22 million to $27 million range we discussed last quarter.

We expect full-year advertising and marketing expenses to be in the $18 million to $20 million range, which is a tightening of the $17 million to $22 million range provided previously. With that, operator, let’s open the call to questions..

[Operator Instructions] Your first question comes from the line of Tom Forte of D.A. Davidson. Your line is open..

Great. So one question and one follow-up. So you talked a little bit in the prepared remarks but can you talk more about when you decide to end in –sorry when you decide whether or not to enter into barter agreements.

Are you not intending to do that on a go-forward basis? And then when you do what's the relative margin of those versus I guess just I don't want to say regular sales – sales outside of barter agreements?.

Really glad you asked that question Tom, and let me take the why and Peter can speak to some of the specifics. So summary answer is that, we needed to obtain new content and to a much lesser extent tap into marketing opportunities without spending cash because we're trying to get to profitability as quickly as possible.

As I'm sure you're well aware Tom, the direct-to-consumer subscription streaming business has only become more challenging. Outside Netflix, the losses are pretty staggering. Disney's lost over $12 billion from their streaming initiatives. NBCU's lost over $6 billion since 2020.

Paramount is in the same ballpark as NBCU and happy because they may only lose $2 billion this year. WBD hasn't spent nearly as much as their counterparts but they've reported losses of over I think 2 million subs in the second quarter and just under 1 million in the third.

And some significant players who are trying to grow in the space maybe going to zero or some form of bankruptcy and certainly some other subscale streaming services will probably go under all together. So it's a tough time it's a tough market but we're on top of it. And so the first key is to rationalize your cost base as Peter said.

So like many others we're doing that. We know what cost we can take out of G&A and core and programming and we're doing it. Our most variable costs of course marketing and programming both of which are important in the direct subscription business. So we know today about what we need to spend annually to maintain our direct revenues.

And for the overwhelming majority of companies in the direct-to-consumer subscription business, paid marketing is a requirement. I mean you just – you have to do it. There's no real non-cash solve at scale today for acquisition marketing.

However, provided one has a critical mass content library and other assets there are creative ways to amass content that don't require hard cash. We need to offer new content every week to hold serve and grow direct revenues and to monetize in other areas.

So in our case, specifically, we needed to top off some key genres within factual in order to enhance our direct proposition, in order to provide us the ability to launch up to 12 fast and free-to-air channels. Specifically, we wanted more host driven content. We wanted proven true crime. We wanted auto and aviation.

And we wanted to try scripted historical which is much, much more costly than standard nonfiction fare. We want to do all of this and not spend any cash. It's not easy, but through a lot of hard work by a lot of people we were able to secure over 200 new titles in all of these vital categories that I mentioned without spending any cash.

I think it's a unique quarter, in regard to the scope of that. But we'll continue to be opportunistic when opportunities warrant.

So as well as to the accounting treatment Peter?.

Yeah. Let me -- probably the simplest thing to do is walk through a kind of hypothetical example about how the content works. So imagine a scenario in which we are swapping content with a partner that's valued at -- the value of the content is basically $1 million in each direction.

When we deliver that content to our partners we would recognize the $1 million of revenue at the time the delivery is accepted in both directions. So we recognize revenue. We would not have expense associated with that revenue at that time.

What we would do is also book on our balance sheet in addition to our content assets of $1 million for the content that's coming back to us. When we publish that content we would amortize the content just like we would with any other licensed content.

So we do kind of an accelerated amortization for the first couple of months and then straight line through the balance of the life of the license. So roughly that -- for most of this content as with most of our license content typical would be three years.

And so over the life of -- because it's a swap over the life of the relationship the revenue we would recognize and the content amortization would equal out over the life of the swap effectively..

Excellent. All right. So then for my one follow-up question, I think I know the answer, but I'm going to ask anyway.

So it seems like as a result of the solution to the writers' strike that content cost may be going up for some and they seem to be then potentially raising prices as a result I know you already had a price increase in place but I don't want to assume.

But I suspect that you're not going to see the cost inflation on the resolution of writers' strike that others might..

If I can -- thank you for that question Tom. And obviously, we're really happy for all the people who are involved in that that they can go back to work now. However, I do think there is risk next year of a couple of other unions associated with the production business that could choose to strike.

However, what I would -- the key point that, I don't know that we can emphasize enough is a small percentage of our overall direct subscriber base has actually been exposed to our rate increase. So when you think about -- we have a lot of annual customers well over 80% as we've said in the past.

So most of them have not seen the rate increase and then as it relates to our channel store partners, all of them are either they have just announced it or are just beginning to adopt it. So it will take a while. It's good news for 2024 for those growth areas.

Peter anything to add?.

No. Just to the extent that there are new terms related to the settlement of the writers' strike that effectively doesn't impact us..

I mean obviously 2024 is [indiscernible] Thank you. Thank you, Tom..

Thank you..

There are no further questions at this time. This concludes today's conference call. You may now disconnect..