Curiositystream - Q2 2024

Transcript

Operator (participant)

Good afternoon. My name is Brianna, and I will be your conference operator today. At this time, I'd like to welcome everyone to the CuriosityStream Second Quarter 2024 Earnings Conference Call. Please note that today's call is being recorded. 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. If you would like to ask a question, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. I will now turn the call over to Tia Cudahy, Chief Operating Officer and General Counsel. You may begin your conference.

Tia Cudahy (COO and General Counsel)

Welcome to CuriosityStream's discussion of its second quarter of 2024 financial results. Leading the discussion today are Clint Stinchcomb, CuriosityStream's Chief Executive Officer, and Brady Hayden, CuriosityStream's Chief Financial Officer. Following management's prepared remarks, we'll 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, 2024, 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. Unless otherwise stated, all comparisons will be against our results for the comparable 2023 period. Now I'll turn the call over to Clint.

Clint Stinchcomb (CEO)

Thank you, Tia. Good afternoon, everyone. In addition to Tia, our COO and General Counsel, our CFO, Brady Hayden, is on our call today. I appreciate everyone joining us today for this milestone quarterly report. In light of well-directed, hard, and efficient work by a tight, talent-dense team of people, we generated our highest ever quarterly adjusted free cash flow. Specifically, we generated $2.5 million in adjusted free cash flow in the second quarter, a year-over-year improvement of about $7 million, and an over 100% improvement from Q1 2024. This marks our seventh consecutive quarter of adjusted free cash flow improvement. We also increased our top-line revenue sequentially. And I'm happy to say, and I would like to make it abundantly clear, that Curiosity is generating cash.

I know that sometimes accounting terms like EBITDA and adjusted EBITDA can be confusing, which is why I'm using this very concrete language about generating cash. Even as we paid a significant dividend, our cash position from Q1 to Q2 increased. We believe we're well positioned to grow top-line revenue, to generate meaningful adjusted free cash flow, and to continue to pay our dividend from surplus cash. In Q2, we increased our direct subscription revenue sequentially and year over year. At approximately $10 million in direct revenue for the quarter, our annualized direct revenue alone now exceeds our current annualized operating expenses, including our more variable categories like content and marketing. As we have considerable flexibility around our marketing and content investments, we do have the ability to lever up our marketing and acquisition spend based on seasonality, key promotables, and other relevant company and industry dynamics.

While our overall licensing and bundled revenue was up slightly sequentially, I would like to note that we did expand into some new categories of licensing partners in Q2 and granted some rights that we had never explicitly granted. As licensing can be lumpy, these new categories will not necessarily reduce spikes, but they will certainly help to increase our floor. We are achieving new heights and critical milestones while continuing to thoughtfully rationalize our cost base. A simple way for companies to cut costs is to just slash marketing. Now, that's the easy way out, and that can have a damaging long-term impact on growth. We've not done that. We believe our cash marketing spend in 2024 will be roughly equivalent to what it was in 2023. We've done the harder work in reducing annualized overall operational costs by more than 30%.

We've renegotiated vendor relationships, consolidated vendors, leveraged certain emerging productivity tools, and like other profitable companies, properly incentivized cost containment across the organization. On the content front, we launched several new programming initiatives, including Earth Month, anchored by the premiere of our landmark original series, The Sun. The Jaws and Claws Week, anchored by the premiere of our three-part original series, Tracker's Diary: Tigers of Nepal. And our extensive new Summer Docbusters campaign, with a premiere of groundbreaking original series, Fateful Planet. Throughout the quarter, we continued to premiere many other original series and specials across the full spectrum of factual, including original series like Taste: The Flavor of Life, a great look at the evolutionary role of deliciousness, and Wings: World War II in the Skies, a two-part special chronicling the air wars in Europe and the Pacific, released for the eightieth anniversary of D-Day....

In closing, I'm delighted to again reinforce that for the quarter, we generated $2.5 million in adjusted free cash flow, and we ended the period with nearly $40 million in cash and equivalents and 0 debt. We believe our strong balance sheet and projected 2024 positive cash flow make us stand out in the current environment. Moreover, we continue to believe that our global appeal, our direct subscriber base and direct platforms, our broad and deep content library of tens of thousands of licensable audio and video programs in raw footage, as well as monetizable datasets like images, transcripts, code, and text, our multi-year third-party agreements, our public company currency, and our rationalized cost structure are uniquely favorable attributes that provide us with sustainable long-term strength and exceptional flexibility. I'd now like to pass the baton to my friend and colleague, Brady Hayden.

Brady Hayden (CFO)

Thank you, Clint, and good afternoon, everyone. First of all, let me just say that I'm grateful to be taking the reins of the finance organization at such a pivotal time in the company's history. Having successfully reinforced the financial foundation of the company, we are now squarely focused on creating shareholder value through profitable growth and prudent capital allocation. We have already demonstrated clear progress on this journey. In each of the past two quarters, we have increased our cash balances, even after returning cash to shareholders through our dividend and share repurchases. Thanks to our strong balance sheet and positive cash flow profile, we see a wealth of possibilities moving forward. As Clint said, we achieved another milestone in the second quarter as adjusted free cash flow of $2.5 million came in at the high end of our guidance range.

This also represented the highest quarterly adjusted free cash flow in the company's history and our seventh straight quarter of sequential improvement in this metric. Revenue for the second quarter was $12.4 million, compared to $14.1 million a year ago, and near the midpoint of our guidance range. Adjusted EBITDA improved by $5.5 million, and our adjusted free cash flow improved by $6.8 million as we continued our intense focus on the bottom line. Second quarter gross margin of 52% increased from 33% a year ago, driven by lower content amortization, as well as significant reductions in our cash-based cost of revenues. Our gross margin, excluding content amortization, which really gets at the cash cost of delivering our services, was 89% in the quarter, compared to 75% a year ago.

Our largest revenue category in the quarter was our direct business, which generated $9.8 million, up 17% from a year ago and 3% from the first quarter, as we continued to benefit from the price increases we began rolling out last year. Our additional revenue categories, content licensing, bundle distribution, and other, generated $2.6 million in the quarter, compared to $5.7 million a year ago. This change was driven mostly by the timing of content licensing deals, as this continues to be an inherently lumpy part of the business. Turning back to second quarter expenses, G&A was $6 million, down 25% from a year ago, as we continued to realize the benefits of our planned spending reductions, as well as our finance transformation and workforce optimization efforts.

Second quarter advertising and marketing expense of $3 million declined 29% from $4.2 million a year ago, as we increased our efficiency in deploying our customer acquisition dollars. Adjusted EBITDA loss was $1 million in the quarter, compared to a loss of $6.5 million a year ago. While we don't provide guidance with regard to this metric, we believe that break-even adjusted EBITDA is within our reach as we expect margins to continue to improve in the coming quarters. As we mentioned earlier, adjusted free cash flow was $2.5 million in the quarter, compared with a negative $4.3 million a year ago.

We, of course, paid our first dividend of $1.3 million in April, and we ended June with total cash and equivalents of $39.6 million and no outstanding debt. We believe our balance sheet remained in great shape, with $91 million of assets, $26 million of liabilities, and book value of $65 million, or approximately $1.21 per share. One final note on the second quarter. On June 11, we announced that our board had approved a share repurchase plan for up to $4 million. And through the end of June, we had repurchased 22,000 shares of our common stock, and we will continue to strategically buy back shares going forward.

Moving to third quarter guidance, we expect revenue in the range of $12 million-$14 million and adjusted free cash flow in the range of $1.5 million-$3 million. With that, operator, you can open the call to questions.

Operator (participant)

Thank you. We will now open the line for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. To withdraw your question, press star one again. If you are dialed in and listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Our first question comes from the line of Laura Martin with Needham & Company. Please go ahead.

Laura Martin (Analyst)

Thanks. Okay, so just, you gave a long list of the assets you own. Have you thought about doing anything and trying to license the rights that you own to generative AI large language models, by chance?

Clint Stinchcomb (CEO)

Thank you for that question, Laura. I think, you know, we started reading about a lot of the publishing agreements that had been entered into, you know, over the last 3-5 months with between companies like Google and Reddit and, you know, Runway and Getty Images, and Microsoft, and Informa and, you know, OpenAI and Shutterstock. And clearly, there is an interest from many of the Generative AI companies in licensing various data sets to train their models. And I would say that we feel really good about the position that we're in as it relates to that. When you consider the scope of assets that we have, we, you know, well over 100,000 hours of raw footage. We have, you know, over 10,000 finished programs. We have 7,000 plus audio programs.

We have a lot of code. We have a lot of, you know, hundreds and hundreds of thousands of images, review questions, tech tests, and, you know, a lot of content that we understand is rather appealing. So I think just as we try to negotiate, you know, fair and good value exchange with the traditional licensing partners, we're well aware of the opportunity that exists in licensing for training purposes, and I think even down the road for derivative exchanges and other exchanges. So, yes, it's certainly something that is that we're focused on right now.

Obviously, not at the exclusion of, you know, continuing to grow our direct business, but we really do see that as a meaningful opportunity, and we'll likely talk much more about that on our next call.

Laura Martin (Analyst)

Okay, that's super helpful. And then, really great cost control. Are you offshoring any of your FTEs?

Clint Stinchcomb (CEO)

Well, we are offshoring some of our engineering activity. They're not FTEs, but yeah, we've had - I think we've done a. Our head of engineering has done a terrific job over the last nine months in really reimagining what that organization should look like and, you know, leveraging, you know, just some really talented people around the world.

Laura Martin (Analyst)

Okay. So they don't show up in the full-time headcount. They're like contractors, basically. Is that the idea?

Clint Stinchcomb (CEO)

That's right. I mean, we did, you know, we obviously, as part of sort of optimizing the workforce, you know, there were certain, there were some people who, you know, were FTEs, whose, you know, functions are now replaced by offshore engineers and the like.

Laura Martin (Analyst)

Okay. Super helpful. Thank you very much.

Clint Stinchcomb (CEO)

Thank you, Laura.

Operator (participant)

Our next question comes from the line of Jim Goss with Barrington Research. Please go ahead.

James Goss (Analyst)

All right, thanks. The first couple of quarters, your revenue comps were down at least a little bit from a year ago, and third quarter guidance looks to be the same. Could you talk a little about what's driving that? Obviously, you've made up for it with the cost controls, but what is behind the revenue declines?

Clint Stinchcomb (CEO)

Well, I think if you look actually, Jim, at our cash revenue for 2024, we think that will actually exceed our cash revenue from 2023. It's non-cash revenue in 2023, as you know, do all companies. And I think that, you know, the good news is really, you know, we've put some roots in the ground. We put some real, I think, helpful guardrails around various parts of our spending, and we're confident that we're going to continue to grow our direct revenue and continue to grow our licensing revenue. We're trying to be relatively conservative in how we project that today.

James Goss (Analyst)

Okay. And, if you look at... Well, maybe you might update a little on the VIZIO FAST channel, how that is working out, and to the extent that JVs are becoming more commonplace, is that, that one of the areas you're focusing on, getting other partnerships that you think could work for you?

Clint Stinchcomb (CEO)

Yeah. Thank you for asking that, Jim. It's a great question, and yes, we launched with VIZIO in the U.S. in late June, and I will tell you that just in the last, you know, in the last few weeks, we've rolled out our AVOD content with Tubi in the U.K., with Pluto in the U.S., and even with Samsung in several countries in Europe. So as you know, you know, those deals take a long time to do, and then it can take a long time to get your content or, you know, published or your channel launched even after an agreement is in place. So there's a bit of a lag there, but we're excited about, we're excited about what's happening there and, and what's possible over time.

We even turned on pay TV advertising recently with our pay TV channel in Australia with our partner, Fetch, there. So that advertising revenue will continue to... That will continue to grow and, you know, will be durable and, certainly, you know, more predictable than it's been in the past. There's just a pretty healthy lag from getting a deal done with companies and then, you know, getting all of the content to them, and then having them actually, you know, publish it on their platforms. In regard to JVs, I mean, well, I wouldn't, you know, characterize it necessarily as a JV. We work with, and we are working with, Estrella Media, excuse me, you know, the top Hispanic media organizations in the US and the world, quite frankly.

And, you know, Samsung is launching three of our channels so that we've developed with them, Curiosity en Español, Curiosity Jóvenes, and Curiosity Animales. So we're excited about that, and, you know, we will work with partners where it makes sense. We have various partners that, you know, whose content we incorporate into our broader structure for, you know, exploitation on AVOD, for exploitation on FAST, and even in various licensing agreements. So I think we've been quietly doing a lot of work in that area. You know, we're quite optimistic that that will bear fruit here over time.

James Goss (Analyst)

Okay, one last one. The theatrical exhibitors have focused a bit more on alternative content than has historically been the case, but that might be getting pushed back as fresh content starts to come in to a greater extent. But I was curious if you think any of the content that you have might lend itself to either an alternative content series or edited to fit, like, 1 or 2 theatrical films? And what is the video or audio quality of the content you have? Would it be applicable to a theatrical setting?

Clint Stinchcomb (CEO)

Yeah, I think that, you know, as far as the quality of content that we have, I don't think anybody can take issue with that. It's, it's, I think by any objective standard of measurement, extremely high quality. And sort of going back to a question that Laura asked, you know, when you talk to the large Generative AI companies, what they will tell you is what they are looking for is, you know, really kind of three things, and that is, quality of the video, meaning is it, you know, 4K, HD? Or in our case, like, we have, we have content in 5K. We have content that's in, eight K.

They're also looking for volume, which we have, and they're also looking for diversity of imagery, which is something that, you know, obviously, we're blessed to have, having built the library that we do. In regard to, you know, doing some sort of theatrical release, we've looked at a few opportunities to do that. It's been hard to figure out a way to make the money work based on, you know, the amount of time that we would have to put in. But what I will say is, like, we're constantly looking at new areas to license our content into. One example from the last quarter is we did two licensing deals within the confinement space, where I think our, you know, our content is well suited.

And you know, we also licensed a new asset class of content to a partner in Q2, that being raw footage, which was interesting. So we're looking at all those. I guess I'll just. The last thing I'll say there, Jim, is that we did, you know, we did licensing deals with six companies with whom we'd never worked with last quarter. You know, confinement, public broadcaster, tech category, that we'll talk more about. Some, you know, a couple of partners in Asia. So always looking at the best ways to display and license our content, and if we can figure out, you know, the right economic exchange there, it's something that we would take a hard look at.

James Goss (Analyst)

All right, thanks very much.

Operator (participant)

Our next question comes from the line of David Marsh with Singular Research. Please go ahead.

David Marsh (Analyst)

Hey, guys. Thank you for taking the questions. With regards to your revenue guidance for the next quarter, can you just talk about what the puts and takes are that would allow you to get towards the top end of the range? And can you give us a sense of, you know, your feeling in terms of, you know, how much recurring revenue might help support kind of the bottom end of the range, please?

Clint Stinchcomb (CEO)

Yeah, I think that's a great question. Thank you. I'll let Brady fill in here. But you know, as I mentioned at the beginning of my remarks, our direct revenue continues to grow, and we believe that it will, you know, continue to grow next quarter as well. That, in and of itself, today, on an annualized basis, is at a stage where, you know, that alone, on an annualized basis, covers our annualized operating costs. So you say, "Okay, everything above that is margin." In our case, you know, we have a robust content licensing business.

As you know, as no surprise to anybody, we're in a number of conversations with great partners around the world, and there is just there's a broad range of outcomes there. Like, we're really enthusiastic about, you know, the ultimate outcomes of many of these, but what's a little harder to predict is, you know, okay, you know, which of those will close by September thirtieth? Like, that's the, that's the calculus. And so, if some come in a little bit earlier, then, you know, we're, we're at the top end and, and, and even, you know, potentially above. If they come in later, then, you know, maybe not at the top end, I guess, is a good way to say it. What would you say, Brady?

Brady Hayden (CFO)

Yeah, no, I think, Dave, you're spot on with the question. It's if you take just our direct business, including both DTC and partner direct, bundle distribution is pretty easy or easier to predict. And even in the other categories, some of the advertising revenue, I would certainly say, has become recurring. That probably gets you near the bottom of the range. It's the content licensing and the timing of those transactions that would push it to the top of the range or perhaps even above it.

David Marsh (Analyst)

Okay, that is really super helpful. Appreciate that. And then the other question, I mean, I guess, you know, just to echo, Laura's comments, like, the cost control is amazing, and you're just looking at gross margin. I mean, this is like a super, super gross margin quarter relative to as we look back, you know, the last couple of years. Yeah, is this gross margin rate sustainable, going forward? And, you know, what would be the types of things that might cause it to retrench, you know, kind of back into the mid-forties?

Clint Stinchcomb (CEO)

Yeah. I'll Yeah, just having been here a little bit longer than Brady, I'll take that, Dave, but and then hand over to Brady for any additional color. But without a doubt, you know, we continue to do work on the cost side. And, you know, we have, you know, a handful of vendor agreements coming up over the next 6 months that could help us improve there relatively significantly. And, you know, just as we see a really interesting revenue opportunity as it relates to as it relates to the emergence of AI, we're already seeing efficiency tools that are available there in editing, you know, in marketing in some other areas that can help enhance our margin as well.

Whereas we tend to, like, focus really hard on cash accounting internally, because we think that yields ultimately the best results. I think that you'll see, you know, based on our content amortization levels, like, you'll see our profile, even from an EBITDA standpoint, you know, just continue to improve, you know, over the next many quarters.

Brady Hayden (CFO)

Yeah, I'll just say we would anticipate that our content amortization would continue to decline over the next few months. Obviously, it, you know, we will acquire and publish new content, which essentially would keep that number flat at some level, and there's a floor there at some point. But yeah, certainly both on the content amort side and on our cash-based cost of sales, we've seen some improvements there.