Norberto Aja - Investor Relations, Vice President at JCIR Incorporated Jirka Rysavy - Chairman of the Board Lynn Powers - Chief Executive Officer, Director Steve Thomas - Chief Financial Officer, Vice President.
Mark Argento - Lake Street Capital Markets George Kelly - Craig-Hallum Capital Group.
Ladies and gentlemen, thank you for standing and welcome to Gaiam's 2014 second quarter results 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, this conference is being recorded today Wednesday, August 6, 2014.
I would now like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead, sir..
Thank you, operator, and good afternoon, everyone. Thank you for participating in Gaiam's 2014 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 we get started however, I would like to take a minute to read the Safe Harbor language. The following constitutes a 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, timely development of new businesses, 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 10K and 10-Q. Gaiam assumes no obligation to publicly update or revise any forward-looking statements.
Today's call 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 the company's website.
With that I would now like to turn the call over to Gaiam's Chairman, Jirka Rysavy. Please go ahead..
Thank you, Norberto, and good afternoon, everyone. So revenue for the second quarter of this year grew $0.6 million to $32.5 million. It's just a 2% growth.
However, the normalized growth for the quarter was about 9%, if adjusted for change in our fitness and media category management reporting which we talked about in last call and impact of Target which is still experiencing challenges from its data breach and shift about $1.1 million in our eco-travel business to third quarter.
Gross margin improved by 600 basis points. Operating loss decreased 22% year-over-year to $3.2 million but that $3.2 million includes $2 million operating loss from our Gaiam TV subscription unit and also about $0.6 million one-time legal and audit costs for the unit's planned separation.
The business segment secured 1,100 new store-within-store placement at cost, starting in September. Gaiam Sport now have approved the separation of the subscription unit from the Gaiam branded business and we currently expect that they will occur after we file 10-K for 2014.
In this quarter, Gaiam TV plans to add an unlimited download feature as a major step to differentiate itself from other streaming video players. This feature will allow members to download and watch video offline as long as their subscription remains active. The content is encrypted and this become disabled when subscription lapses.
Gaiam TV has 600,000 video available for exclusive streaming through Gaiam TV platforms, which now has subscribers in more than 100 countries. Because of its wide international acceptance, Gaiam TV will accelerate its support for languages.
The conversion rate from the free trial to subscription has held pretty much steady from last call at well over 70% level. During the second quarter at Gaiam, cash grew to $30.9 million and current ratio to about 3.0. And now I would like to turn over to Steve who will give you more detail about quarter..
Thank you, Jirka. I will spend a few minutes reviewing the financial results in greater detail and offering additional perspective on the performance for the quarter.
Let me begin by reminding everyone that the results we reported earlier today and that we will discuss on this call do not include any contributions from Gaiam Vivendi Entertainment or GVE, our former non-Gaiam branded entertainment media business, nor do they include contributions from our direct response television marketing operations as we made a strategic decision to discontinue that business in the fourth quarter of 2013.
As a result, we now report both of these businesses as discontinued operations in all figures reflected only are continuing operations. Beginning with the income statement. Net revenue for the second quarter of 2014 was $32.5 million, an increase of approximately 2% or $0.6 million compared to $31.9 million in the prior year period.
Net revenue for the business segment increased by 1.2% or $0.2 million to $20 million while the direct to consumer segment net revenue increased 7% or $0.8 million to $12.4 million, compared to the second quarter of fiscal 2013.
As a reminder, our business segment is comprised of our sales to domestic and international retailers including store-within-store and our direct-to-consumer segment is comprised of our branded e-commerce catalog and travel businesses, as well as our Gaiam TV subscription service.
The business segment continues to be affected by the sales decline at our largest retailer and our conversion on third-party media to distribution arrangement. These events combined with the timing of certain trips between quarters at our travel business affected revenues by approximately $2.3 million in the quarter.
Gross profit for the 2014 second quarter grew to $15.5 million or 48% of net revenue compared to gross profit of $13.3 million or 42% of net revenue in the second quarter of 2013.
The increase in gross margin reflects the growth in the high margin Gaiam TV business and the change to our category media management business to distribution model which we discussed last quarter.
We converted our media category management business from an inventory purchase model under which we used to buy and resell inventory to a consigned distribution model under which we handle third-party inventory without taking ownership.
The result is that we are experiencing decreased revenues because we now recognize only our earned distribution fee as revenue, but our gross profit is not impacted and our gross margins are expanding.
Operating expenses totaled $18 million or 56% of net revenue in this 2014 second quarter compared to $17 million or 53% of net revenue in the second quarter of 2013. The slight increase in operating expenses was primarily due to the ongoing investments around Gaiam TV.
We will continue to closely manage operating expenses across the board while investing in strategic areas to drive growth. Operating loss from continuing operations for the three months ended June 30, 2014 was $3.2 million, a 22% improvement compared to the $4.1 million in the second quarter of 2013, reflecting the improvement in gross margin.
Included in our operating loss for the 2014 second quarter is $0.6 million of legal and auditing costs related to the proposed separation of Gaiam TV. Without those costs, operating income improved over 32% quarter-over-quarter.
Our business segment generated income from operations of $1.4 million compared to $0.1 million in the same period last year, primarily reflecting lower operating expenses, while our direct-to-consumer segment recorded a net loss from operations of $4.6 million compared to a net loss of $4.2 million in the same period last year including the $600,000 of legal and audit expenses related to the separation of Gaiam TV.
During the quarter, we recognize a gain of $1 million on the sale shares of Real Goods Solar and Cinedigm common stocks. We recognized a tax expense of $130,000 related to our non-wholly-owned subsidiaries. We have approximately $50 million of Federal and $31 million state tax NOLs which are not reflected on our balance sheet.
We recorded a valuation allowance against the NOLs in the fourth quarter of 2013 and continue to provide valuation allowances against the deferred tax assets from NOLs incurred this year. As income is generated in future periods, we expect the reverse valuation allowance and utilize the deferred tax assets.
Our net loss from operations for 2014 second quarter was $2.2 million or a loss of $0.10 per share compared to a loss from operations in the second quarter of 2013 -- or an income from continuing computing operations from the second quarter of 2013 of $8.1 million or $0.36 per share inclusive of a $16.4 million or $0.47 per share net of tax gain from the sale of Real Goods Solar stock during the second quarter of last year.
Taking a look at the balance sheet, we ended the quarter with a total cash of $30.9 million and no debt compared to cash of $17.5 million and $12 million of debt at June 30, 2013.
Our current ratio was 3.0, a metric that continues to reflect the health of our balance sheet and our ability to fund our growth, which compares favorably to the 2.1 in the second quarter of 2013. Inventories and turns improved to an annualized rate of 3.6 times in the quarter from 2.8 times in the second quarter of 2013.
Overall the quarter reflects our expectations as we continue to narrow our losses, reposition the brand and invest in Gaiam TV. This improvement reflects our efforts to control costs, improve margins while maintaining a strong underlying business.
We remain confident that our business strategy, product offerings and financial position are primed to continue to deliver improved results in the coming quarters.
With a leading consumer brand in the fast growing category, a healthy and robust balance sheet, including a good cash position and no debt, we have the financial flexibility to invest in and support our repositioned yoga, fitness and well-being business and to leverage our resources in a more focused and efficient manner.
With that I would now like to turn the call over to Lynn, who will provide some additional detail on the status of industry and our business after which will open up the call for questions.
Lynn?.
Thanks, Steve. Overall second quarter results were in line with our expectations as we continue our strategic repositioning. Our topline growth in the quarter was muted by continued challenges at our largest retail partner and a difference in the booking of trips between quarters at our eco-travel division.
Together, these issues impacted revenue by about $2.3 million. At the same time, reflecting our brand strength and the progress we are making in the retail market, our largest 25 customers grew 7% during the quarter and excluding our largest customer grew over 30%.
Today, I would like to review our key initiatives for the year and how we are executing against them as we continue to reposition our company around the strategy of being a leading provider of yoga fitness and well-being products and solutions.
As of the end of 2013, we divested our entertainment business and shut down our direct response television business.
These actions allowed us to focus our attention and resources on our core strength and to set a 2014 operating plan that calls for one, expanding our store-within-store placements for our Gaiam and Gaiam Restore brands, two, expanding placement for our SPRI brand, three, accelerating our product innovation and four, improving our e-commerce branding and performance.
Regarding store-within-store growth, we are pleased to confirm that Kohl's, a major US retailer will place a Gaiam branded eight foot store-within-store set in 1,100 of its doors beginning in Q3 this year.
The set will include Gaiam Yoga and Gaiam Restore products and media, and will be an example of the kind of impactful and sustainable growth we are seeking.
On the SPRI distribution during the third quarter, we will be replacing fitness products that we currently manufacture under a third-party brand with SPRI branded products across over 1,700 doors.
This replacement allows us to broaden the visibility of the SPRI brand and capture improved economics compared to the current business we operate in those stores. We also added SPRI to the mix and mire. We are increasing our store-within-store presentation by eight feet to 20 feet.
Really, both the store-within-store and SPRI distribution is our expansion into international markets. International represents less than 6% of our revenues. We believe there is a large opportunity to address the yoga, fitness and well-being business abroad as we have successfully address it in the U.S.
We have some excellent retail partnerships already with Rebel Sport in Australia, Sport Chek in Canada and John Lewis in the U.K. We are currently testing Gaiam products in 220 Tesco stores in the U.K. with the opportunity to expand to their large-format stores.
Before I talk about our fourth initiative, the ways in which were innovating within our industry, I want to provide a little context. In prior calls, we have noted the rapid growth of yoga participation, with practicing accounts growing 25% from 16 million in 2008 to 20 million in 2012, and spending growing 75% during the same period.
The NPD group recently reported that during 2013, the U.S. activewear market grew 9% during the year, almost five times faster than the 2% growth in the overall U.S. apparel market. At $34 billion, the U.S. athletic apparel market has ample opportunity for Gaiam. It is within this context that both Gaiam and our retail partners operate.
With slow growth in the overall apparel market and declining interest in some sports, our partners are aggressively pursuing opportunities in the fast-growing and emerging segments in which we operate.
Based on these growth trends, we are quickly building out our leading position in yoga and fitness through brand extensions into adjacent categories as well as innovation within our existing categories. Gaiam Restore and Cross Train are recent example of our efforts in this area and both helped our retail partners achieve growth in store traffic.
The first phase of our strategic repositioning focusing our sales and development teams entirely on our core business is complete and has enabled us to begin execution on the first three initiatives I just reviewed. We are now beginning to see the renewed innovative capabilities of our realigned team.
Today we are working to innovate within our core categories and in adjacent ones. We are planning four product launches that exemplify the opportunities we can now access as a result of our repositioning. First, athletic and men's yoga accessories and media.
Our products will include longer mats and straps, denser blocks, neutral colors and media focused on yoga for sports and sports conditioning. This will pre-launch in the fourth quarter this year with a 100 store test at Dick's Sporting Goods.
Reaction to the line and launch has been excellent and we expect it will provide the Gaiam brand with additional square footage in many of our accounts. Second, yoga accessories and media for kids. This new initiative will launch in spring 2015.
Our ability to develop both fashion accessories and high-quality media with reputable and highly recognizable talent and to present these products in a compelling branded store-within-store is unique within our industry.
We believe that the Gaiam approach to kid's yoga will not only give us additional opportunity at our existing accounts, but will help us open new accounts that cater to the children's market. Third, active sitting.
With the continued success of our balance ball chair, and the recent news coverage on the health issues associated with extended periods of sitting, we are designing a line of active sitting products that include an office chair, balance ball covers and another posture devices. This product line will launch in fall 2015.
This launch and the kid's yoga launch both exemplify the ways in which we can extend our brand into adjacent categories. Finally, our exciting new apparel line.
We have hired team, brought on outside consultants on fit and design and are extremely excited about our market positioning and the white space associated with the mid tier yoga line with brand recognition.
With price points yet high-end technical fabrics and attractive designs, our new apparel line will be the first of its kind not exclusively offered through branded stores, making it very attractive to our retail partners, who as I noted before are searching for ways to capture a part of this strong growth in the active apparel market.
We have several high profile accounts which have given us very positive feedback and are interested in partnering on the apparel launch. We expect to add approximately $1.5 million in expenses for apparel in the back half of 2014 in anticipation of the launch in spring 2015. We expect revenues in excess of $10 million to $15 million in 2015.
Looking at these four areas of innovation, I can honestly tell you that I cannot remember a time in our history when I felt more excited about the opportunities for the brand in the short and long-term. But our work is not complete.
We talked about the growth opportunities around our current brands and the new initiatives, but there is also a second phase to our repositioning, which is also directly related to our fourth initiative of improving the performance in our key e-commerce effort.
Historically our direct-to-consumer business primarily has existed as a catalog business focused on an older customer looking for eco-friendly and healthy living products. That is about to change.
We are moving our direct-to-consumer business from the traditional catalog model to a mobile and social centric digital model, including new relationships with social media savvy talent, Gaiam.com exclusive product lines and new forms of media distribution.
We already have representation among all the leading digital media providers and these relationships together with our planned for Gaiam app will help Gaiam become the go-to place for healthy living products and content in the digital world.
Based on the positive response to our brand repositioning, we have decided to accelerate our pivot strategy in our direct business to fully occur in the back half of 2014. This will entail reduced circulation in revenues, as well as associated one time costs.
This will affect our revenues in the back half of 2014 by over $3 million but will improve our overall earnings moving forward. We expect revenues in the direct-to-consumer segment to drop by another $5 million in 2015 but expect profitability to improve by approximately $3 million in 2015 on an annualized basis, as we complete this transition.
The new Gaiam website will be complete in January, and two new websites for the professionals' market, GaiamPro for yoga and SPRI for fitness will be up and running this year as we move towards catering to the influencers and turning the direct-to-consumer business into the destination for yoga, fitness and well-being.
As you can see we are hard at work growing our brand and our company.
We believe we can exceed by bringing the market great products, launching new consumer experiences and developing a more engaging retail concept across both our stores and store retail footprint as well as in our e-commerce platform that would help drive excitement and energy for our brand.
By staying true to the spirit that has made Gaiam the leading brand for yoga equipment, we believe we can expand our consumer demographics as well as our product categories, make our offerings more accessible and thereby capturing increasing share of the growing consumer interest in leading a healthy lifestyle, while delivering value for our shareholders.
I will now turn the call back to the operator, so we can answer any questions.
Fran?.
(Operator Instructions). Our first question is from the line of Mark Argento from Lake Street Capital Markets. Please go ahead..
Yes, hi. Good afternoon..
Hi, Mark..
Just lots going on in the second half of this year. Maybe we could touch on the Kohl's relationship. It looks like eight feet.
Will this be a standalone fixture? Or will this be in line with some of their other fixed terrain? Maybe if you could talk a little bit about the opportunity at Kohl's?.
Yes. The relationship with Kohl's is going to be another really positive retail partnership. They are going after the healthy living space, as they can see tremendous growth potential there. Gaiam will be positioned on a standalone fixture with great branding and it will incorporate both Gaiam Yoga and Gaiam Restore products.
We are also in discussions on additional product line expansions for 2015 as well as an expanded assortment on kohls.com..
Great, and that product, you said, for Q3 that will be in place and ready to go for the holiday season?.
Absolutely..
And have you started shipping yet? Or when will we see the impact in terms of the P&L? Did you catch any of that shipping this quarter? Will that mostly all be in Q3?.
Q3 and going into Q4..
Okay. Great..
Mid-September, for the majority of it..
Okay. Great. That's helpful.
And then I believe in your prepared remarks, you had mentioned that and I just want to make sure I got the numbers right here but of your top 25 customers, growth was 7% on a year-over-year basis? And excluding your largest customer, sales were up 30%? Did I hear that right?.
That's correct. Very strong growth at Amazon and Sports Authority are driving that..
Okay. Last question, and then I will let somebody else chime in.
But on the apparel opportunity, in terms of specific number, the $10 million to 15 million for next year, to get to that kind of level of sales, can you talk about, you look to do an exclusive with the retailer? Or how do you see potentially rolling this out in your go-to-market strategy with apparel?.
Right now, our go-to-market strategy is twofold. First and foremost is that we are working with several of our current retail partners on the high-end Gaiam Sol line as well as several of the yoga studios. And then secondarily, we are also looking at some segmentation in apparel for some of our mid tier retail partnerships..
So when you launch, when you are targeting this $10 million to $15 million, I assume that would incorporate some of the middle market? It's not just boutique or the higher end stuff?.
That's correct. We are just going to fill a huge white space in the market..
Fantastic. Thanks..
Thanks, Mark..
Our next question is from the line of George Kelly from Craig-Hallum Capital Group. Please go ahead..
Hi guys. First just a follow-up on one of Mark's questions. You just mentioned that Amazon and Sports Authority did very well in the quarter.
I am wondering if you could be more specific if there were any product lines or brands, what was driving that growth?.
The Amazon growth is across all of our product categories. As you know, Amazon, since there is virtual shelf space, they take a lot of our products and they are doing well with everything from active sitting to yoga to SPRI.
And on Sports Authority, a lot of it is coming from them creating a destination for yoga as well as the SPRI Cross Train products that we shipped in third quarter last year..
Okay, and then with Target, how does it look after the quarter, just through July? Any improvement there?.
Yes, we are seeing a little bit of comping in July. But they continue to struggle as you saw from the article and Wall Street today..
Okay, and then, Jirka, on the TV side, have you started to step on marketing there at all? Or what kind of marketing have you guys been doing recently?.
We just hired a new head of marketing, started like two weeks ago. Earlier she has same position in Microsoft. She was in charge of launch and supporting the Xbox. And so she is here about two weeks. So we will do a step.
We kind of have the second quarter pretty much, we right now -- as we plan to separate, we look at it much more closely our Netflix number. We also try to change how we report to the way how Netflix reports, so people can compare it. And second quarters were slow for them, and so we too a little down, the marketing for second Q.
The best way to get customers is in between October and January. It is kind of pretty much of fourth and first quarter, where Netflix gets 80% of their subscribers. So we plan to step it up about mid-September for those months, if that's what you are really asking..
Okay, and then the expected loss on the TV business for the full year? Has that changed?.
Well it did not since yet per se, but because as I mentioned, we are getting so much international acceptance, we probably going to do some more, actually a little bit of language support. So we want to do some Spanish and probably another European language.
Fortunately how this is accounted, when you translate an existing title, it will hit upfront before you get any revenue. But it's growing really well there. And as we talk internally, especially with Kohl's and stuff, we have a great opportunity to have next year very exciting year, earnings wise.
So I think you want to get as much into this year with all these changes. So that would be probably what we can do a little margin in the second part but for the first half, it's right on the budget..
Okay. All right. Thank you..
Thank you. This is the operator. Speakers, I will return the call back to you. You may continue with your presentation or closing remarks..
Thank you very much. And our next call will be probably somewhere early November. Thank you very much..
Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation. Have a great day everyone..