Curiositystream - Q2 2023

Transcript

Operator (participant)

Good afternoon. Welcome to the CuriosityStream Second Quarter 2023 Earnings Call. My name is Brianna, and I will be your conference operator today. Please note that this call is being recorded. At this time, all lines have been placed on listen-only mode. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at this time, please press star followed by the number one on your telephone keypad. To withdraw your question, again, press star one. I would now like to turn today's call over to Denise Garcia, Investor Relations. Please go ahead.

Denise Garcia (Director of Investor Relations)

Thanks, Brianna. 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. 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 the management's current views only. 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 30th, 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.

Clint Stinchcomb (CEO)

Thank you, Denise. Hello, everyone. 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 moved 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 the 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. As it is 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 cost 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. While 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 a year. Most of our channel store and app store partners, while they have it on the near-term roadmap, have not yet commercially launched our new pricing. This is why I said at the beginning of my remarks that new pricing has been launched in only a small segment of our direct subscriber base.

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. 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 station groups' 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 in 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, a global six-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 planet's melting cryosphere, from ancient viruses to new clues about the location of alien life. In May, we premiered our series, Giants, where world-renowned naturalist, Dan O'Neill, tracks down the planet's biggest creatures. These are the ones that can eat you. 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 Zombie Fungus, a wild look at the true story in science behind the HBO hit series, The Last of Us.

Our popular Breakthrough franchise premiered Jupiter's Moons and the Search for Life, which probes new missions that may answer astronomy's biggest question. Our new special roundup, 2023: A Space Odyssey, a comprehensive look at some of the year's biggest space stories. We also continued in our quest to share compelling, untold tales from the past. Our series, War Gamers, is the story of a small group of British women who came up with the winning tactics to defeat deadly Nazi U-boats in the Battle of the Atlantic. Unearthed Ancient Mysteries is a series that places legendary homicide detective, Rod Demery, back in time to solve some of history's most notorious cold cases.

Among other new premieres, we capped off the quarter with one of our most ambitious original productions to date, a four-part series, The Real Wild West, which tells the beautiful, broad story of the emergence of the American West, and at the same time, tells the stories of the heroes and influencers you perhaps have never heard of. Black and Hispanic cowboys and leaders like Bass Reeves, Nat Love, Bill Pickett, female homesteaders, Chinese immigrants, and Native Americans like Crazy Horse and Sacagawea. This series is presented by the Grammy Award-winning artist, Dom Flemons. Based on consumer assumption and press coverage, from Entertainment Weekly to Cowboys & Indians to Rolling Stone, The Real Wild West series itself seems to be emerging into the cultural zeitgeist. Let me close by sharing what we've said in the past.

In a transitioning media and tech environment filled with choppy water, where many companies have overspent and some are trying belatedly to course-correct, we like our hand. We believe we move closer every day to turning the corner and generating optimized and sustainable levels of cash. Further, at a time when content creation has slowed and large media companies scramble to rationalize product portfolios and costs, many of their secondary and tertiary services are struggling, as are many undercapitalized independents. We believe that consumers and an expanding roster of third-party buyers will continue to place an even higher value on existing premium factual content and brand-safe relationships.

In sum, we believe that our direct subscriber base, our broad and deep content library, our multi-year partner agreements, our strong cash position, our public market 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, our CFO, Peter Westley.

Peter Westley (CFO)

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 way 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. Year-over-year change was primarily driven by decreases in content licensing, bundled 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 spent 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 30th, and as a result, we recorded a $2 million non-cash impairment related to that investment during the quarter. Before I turn to our guidance, I thought it would be, would be worth taking a moment to revisit our prior comment that 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-$15.5 million and adjusted free cash flow in the range of -$5.5 million to -$3.5 million. I'd also like to revisit the guideposts 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-$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-$27 million, which is down from our $25 million-$30 million prior estimate.

We expect advertising and marketing expense to be $17 million-$22 million, down from our $20 million-$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 I turn 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 (participant)

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Our first question comes from Laura Martin with Needham. Your line is open.

Laura Martin (Senior Research Analyst)

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

Clint Stinchcomb (CEO)

Yeah, that's a great question, Laura, and I would say that in light of, you know, if you're only a U.S.-based company or only, you know, focused on one region, I think it might be challenging. In our case, because of the global appeal of the content, I think because of the emergence of kind of nontraditional licensing partners, we don't really see any end in sight there. We had, I think, 13 different licensing partners in the quarter. We entered into those agreements, you know, in what I would say was thoughtfully and, and, meaningfully. You know, 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.

Laura Martin (Senior Research Analyst)

Cool. 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?

Clint Stinchcomb (CEO)

Yeah. 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, you know, and, and the same goes for FAST. We've been encouraged, obviously, to do this for a while. We wanna 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.

We want to be real thoughtful about this and, and create a, create a revenue stream that is, you know, growing, every quarter and, you know, 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.

Peter Westley (CFO)

If I if I could add just a little bit, Laura. That, 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. That, 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. That, that is a category that has experienced some nice growth when you, when you subtract out the related party revenue a year ago.

Laura Martin (Senior Research Analyst)

Super helpful. Thank you, guys. Thank you.

Clint Stinchcomb (CEO)

Thank you.

Operator (participant)

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

Peter Henderson (Research Analyst)

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

Peter Westley (CFO)

Yeah. What we are seeing, you know, of, of our D2C 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 month, a monthly cycle subscriber base. We are seeing as we... 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 at, what type of package you are coming in at. We tried, we tested a whole bunch of different, different trials to see how best to pass through price increases, what packages would, would generate the best outcomes for us.

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 fully anticipated, and what we're seeing was well within the range of what was anticipated. As you, you know, as you expect, and as we when we talked about this price increase to begin with, we, we expect that the economic benefit of the price increase, given the magnitude of the increases, will well offset, much more than offset any increase we see as a result of churn that, that happens with existing subscriber base.

Peter Henderson (Research Analyst)

Thank you.

Operator (participant)

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

James Goss (Research Analyst)

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

Clint Stinchcomb (CEO)

Excellent questions, Jim. Thank you for asking those. In regard to, you know, 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, you know, 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, you know, as, 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 kinda moderately going forward.

I think the good news is, like, the, the, the price has come down, which has given us, and the fact that we've just done a lot, has, has really provided us with a lot of flexibility going forward. Again, there, there are hundreds and hundreds and hundreds of licensing partners when you have, thankfully, kind of premium factual content that you can- that you can put anywhere into the world. We actually like that. We like that trend, and I think that, you know, I, I think you could really argue that we've been a little too precious about our content in the past. You know, we have, you know, a lot of different people that we can work with going forward, and we just wanna make sure that we do that in, you know, a most thoughtful, meaningful way.

Peter Westley (CFO)

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

James Goss (Research Analyst)

Okay, thank you. 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, at a higher price? Or, can you give any guidance to the share of individuals who are staying with you versus, declining?

Peter Westley (CFO)

Yeah. I mean, we've seen a slight uptick, in terms of, you know, people leaving the service relative to what we had experienced before we had price increases. Again, it's, it's, you know, well more than offset by the positive impact of the increases themselves. A lot of what we spent the second quarter doing with different cohorts was looking at what, what would be the offers that would be most most positively received and most likely to bring people to have people continue to stay on the service but at a higher price point. You know, that could be, for example, bundling in ODU with the renewal of a CuriosityStream subscription.

It could be, you know, encouraging people to upgrade to Smart Bundle, which, as Clint said, is no longer at such a premium price point to the, the now standalone price point for CuriosityStream. A lot of work and effort was done with different groups to figure out what the best offer for each of them was. So we are seeing some slight upticks in some of the, in some of the metrics in terms of people leaving, but again, well within the range of, of what was anticipated.

Clint Stinchcomb (CEO)

We should have increased pricing earlier, Jim. It's a trade we'll take any day.

James Goss (Research Analyst)

Okay. Well, better late than never, I guess. Thank you much.

Operator (participant)

Again, if you would like to ask a question during this time, please press star followed by 1 on your telephone keypad. Your next question comes from Tom Forte with D.A. Davidson. Your line is open.

Sharon Ji (Analyst)

Hi, this is Sharon Ji 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 to us you are less reliant on writers and actors.

Clint Stinchcomb (CEO)

Thank you for asking that, Sharon Ji. I think we're, yeah, better aligned than most in the industry, and we've seen no impact in regard to our amassing 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 tailwind, but we haven't even seen that to date.

Sharon Ji (Analyst)

Thank you. 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 app effort with PENN Entertainment. 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?

Clint Stinchcomb (CEO)

Thank you for asking that as well, Sharon Ji. 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, you know, new inquiries and requests every week to be a part of that. I won't speak specifically to Disney, but boy, what an opportunity they created for PENN's former content partner. We will align, you know, as both an anchor and a complimentary service wherever it makes sense.

Sharon Ji (Analyst)

Thank you.

Operator (participant)

There are no further questions at this time. With that, we will conclude the CuriosityStream second quarter earnings call. I would like to thank everyone for joining us today. Have a great evening. You may now disconnect.