Q1 2023 CuriosityStream Inc Earnings Call

Speaker 1: I I.

Speaker 2: 2023 earnings conference call. At this time, all participants are in a listen-only mode, and please be advised that this call is being recorded. After the speakers prepare to mark, there will be a question and answer session. If you would like to ask the question during this time, simply press star one on your telephone keypad.

Speaker 2: And if you would like to withdraw your question, simply press star one again. And now this time I would like to turn a call over to Ms. Denise Garcia Investor Relations. Please go ahead, Van. Thanks, Bo. Welcome to Curiosity Stream's discussion of its first quarter 2023 financial results.

Speaker 3: Leading the discussion today are Clint Stinchcombe, CuriosityStream's Chief Executive Officer, and Peter Wesley, 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 Law.

Speaker 3: Our actual results could differ materially from expectations reflected in any forward-looking statement.

Speaker 3: 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 your actual results, please refer to our SEC filings available on the SEC website and on our Investor Relations website.

Speaker 3: 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 10Q for the quarter ended March 31, 2023, Wind Vile. In addition, reference will be made to non- GAAP financial measures, a reconciliation of these non- GAAP measures to comparable GAAP measures .

Speaker 4: can be found on our website at investors.curiositystream.com. Now I'll turn the call over to Clint. Thank you, Denise. Hello, everyone. I appreciate you all joining us today. Also on the call is our COO and General Counsel Tia Cudahy, our CFO Peter Wesley, and our Head of Content Rob Burke.

Speaker 4: our new direct subscriber pricing. We've added several million paying subscribers through new bundle distribution partnerships around the world and we've enhanced our critical mass library with unique and compelling new factual content.

Speaker 4: We believe that our direct subscriber base, content library, multi-year distribution agreements, strong cash position, and lack of debt are favorable business and strategic attributes that provide us with exceptional flexibility.

Speaker 4: sharing purchases, potential business combinations, and scale partnerships.

Speaker 4: We finished Q1 in a solid cash position, moved closer to profitability, and are encouraged by the positive momentum we are seeing in the business.

Speaker 4: Looking ahead, I'm pleased to report that not only do we expect better results in the second quarter, but we believe our Q1 results represented the trough for revenue.

Speaker 4: Despite lower revenue compared to the prior year quarter, we significantly increased adjusted EBITDA and adjusted free cash flow.

Speaker 4: Our improving financial trajectory reinforces my conviction that our decision to prioritize long-term profitability and cash flow over near-term revenue growth over the past couple of quarters was in the best interest of the company and our shareholders despite the dampening effect that had on our top line results.

Speaker 4: As Peter will discuss in greater detail, our positive financial outlook is based on favorable trends in our subscription businesses.

Speaker 4: the growing pipeline of opportunities across other lines of revenue, and our continued commitment to prudent expense management.

Speaker 4: We remain laser focused on achieving positive adjusted free cash flow while making the investments necessary to generate efficient, sustainable top-line growth moving forward.

Speaker 4: We expect the current environment of rising interest rates and tighter financial conditions to result in a growing pipeline of potentially accretive opportunities as less diversified and less well capitalized players face increasingly daunting challenges.

Speaker 4: Well, it's difficult to say exactly when, or if we might pull the trigger on any particular opportunity.

Speaker 4: We won't enter into any transaction that doesn't adequately reflect what we believe to be the full value of what we bring to the table We're in command of our business and confident about our future

Speaker 4: Turning to the business, I'll briefly touch on a few key recent developments and highlight some of the exciting new additions we've made to our Critical Mask Content Library before I turn it over to Peter.

Speaker 4: for more detailed discussion of our first quarter results in Q2 financial guidance.

Speaker 4: We are pleased by the performance of our direct subscription business in the quarter. Direct subscription revenues grew on a year-over-year basis and were relatively consistent with the prior quarter, even as we significantly reduced marketing investment during our extensive pricing tests.

Speaker 4: And while it's only been a few weeks since we rolled out our higher standard service price.

Speaker 4: For new monthly and annual subscribers, early results have been encouraging and consistent with our expectations. Turning to our global bundle distribution business, our content continues to resonate with scale partners around the world who are seeking high-quality, cost-effective alternatives to increasingly pricey content from legacy media companies.

Speaker 4: The sizable investments we've made in languaging and localizing our content are enabling us to expand quickly and aggressively with a variety of partners. And earlier this quarter, we were pleased to announce key new partnerships which expand our footprint across Asia, Europe , Latin America, North America, and Australia.

Speaker 4: These new relationships incorporate curiosity subscription services and channels and will help deliver our premium nonfiction films and programs to several million new paying subscribers. Recent launch partners include Amazon's Prime Video channels in India, Fetch TV in Australia, the Netherlands' largest MVPD, Zigo, the Dutch streamer NL Ziet, Mexico's IZY Telecom, and central and eastern European distributors MTS, Telecom Slovenia, and Megafund among others. We expect meaningful improvement in our revenues from distribution partners moving forward is our n Anthropologyree Thanks toaj Rafal,

Speaker 4: and increasingly predictable, we're working to ensure that we secure what we believe to be full value for our content.

Speaker 4: These environments also provide the ability for us to promote to our subscription tiers in an efficient and highly targeted manner.

Speaker 4: On the content side, we continue to invest in highly differentiated original content while leveraging our critical mass library of over 15,000 programs.

Speaker 4: so that we can deliver new and engaging experiences. In January , we kicked things off with the Lucy mission, behind the scenes look at NASA's boldest mission yet to unravel the origins of our solar system.

Speaker 4: the first African American woman to earn a pilot's license.

Speaker 4: well-known forensic investigation tools.

Speaker 4: and the tragic impact they've had in the lives of the wrongfully convicted. The series was augmented with a six-part companion podcast.

Speaker 4: These are just a few of the original series and specials slated for release on CuriosityStream and Curiosity Audio Network in 2023. Other notable titles include Giants, a landmark five-part natural history series that unlocks the evolutionary secrets of the biggest beasts that walk our planet, and The Real Wild West, a beautiful four-part history series that shines a light on the Native American tribes, women, African Americans, and immigrants who shaped the American West. Looking ahead, we are confident that we have the assets and capabilities in place to drive improving profitability and adjusted free cash flow.

Speaker 4: With the decisive actions we've taken to reduce our cost base and with the outsized content creation and language investments required to build a large scale library behind us, we believe we've created a foundation for significant operating leverage as we've prudently invest to drive growth moving forward.

Speaker 4: We see many ways to win in this environment as we execute on our organic initiatives while continuing to explore value creation opportunities with a wide variety of strategic and commercial partners.

Speaker 4: In summary, our Q1 results demonstrate the significant progress we made on the path to achieving positive adjusted free cash flow in the near term.

Speaker 5: on our most productive channels of customer acquisition. First quarter revenue and adjusted free cash flow came in toward the high end of our guidance ranges, and as Clint mentioned during his remarks, expect to build from these levels in Q2 and beyond. To provide some context around the extent of our transformation, in the first quarter, we reduced our advertising and marketing expenses by more than $11 million, or 79%, and our cash spent on content by more than $15 million, or 76%, compared with a comparable quarter in 2022.

Speaker 5: We were able to achieve these reductions while still growing our direct business on a year-over-year basis. Turning to our first quarter results, revenue was $12.4 million compared to $17.6 million in the prior year quarter.

Speaker 5: The year-over-year change was primarily driven by a $2.3 million reduction in bundled distribution revenues.

Speaker 5: a $2.2 million reduction in content licensing revenues, and a $1.1 million reduction in enterprise revenues, partially offset by revenue growth in our direct and other categories.

Speaker 5: Our largest revenue category this quarter was our direct business. Direct revenue came in at $8.6 million, an increase of 3% compared with the first quarter of 2022.

Speaker 5: We believe the most important activity in this part of the business during the quarter was our extensive price testing, which concluded with the price increases for new subscribers that we introduced at the end of March, as we discussed on our last call.

Speaker 5: Turning to content licensing, which was our second largest revenue category this quarter, we generated $2 million of revenue compared to $4.2 million in the prior year quarter.

Speaker 5: While content licensing revenues decreased year over year, the profitability of this revenue line actually increased due to an improved mix of revenue with a lower percentage of zero margin presales deals in the first quarter this year.

Speaker 5: Our next largest category was Fundal Distribution, which saw $1.5 million of revenue in the quarter.

Speaker 5: If we deduct 2.6 million of revenue from the first quarter of 2022, related to a contract that we did not renew mid-year last year, Bundle Distribution Revenue would have grown 21% year-over-year. As Clint mentioned, we were pleased to enter into several new Bundle Distribution partnerships in the first quarter.

Speaker 5: remain actively engaged with potential distribution partners worldwide. First quarter gross margin of 27.3% decreased from 32.8% in the prior year quarter driven by lower year-over-year revenue but improved from 9.4% in the fourth quarter.

Speaker 5: primarily driven by lower content amortization expense.

Speaker 5: As I mentioned earlier, our first quarter advertising marketing expense of $3.1 million was down more than $11 million year over year.

Speaker 5: We did purposefully keep our marketing spend at a reduced level during our first quarter pricing test.

Speaker 5: We do expect our advertising and marketing expense to be at a higher level in the remaining quarters of the year.

Speaker 5: GNA expense of $8.1 million during the first quarter was down 23% year-over-year. Drimmed by last year's workforce reduction and continued expense discipline.

Speaker 5: Moving to profitability, adjusted EBITDA loss of $6.4 million improved 63% from a loss of $17.5 million in the prior year period.

Speaker 5: And was 53 percent better than last quarter's 13.6 million dollar loss.

Speaker 5: First quarter cash spend on content of $4.9 million was down slightly on a sequential basis and was more than 75% below the prior year quarter.

Speaker 5: Adjusted free cash flow use of $6.3 million improved by $6 million year over year and $2.5 million sequentially.

Speaker 5: This underscores the tremendous progress we made in improving cash flow, as well as our continued positive momentum.

Speaker 5: At the end of the first quarter, cash, cash equivalence, and restricted cash totaled $49.2 million.

Speaker 5: We had no outstanding debt at the end of the quarter, and we believe our overall balance sheet remained in great shape with $143 million of assets and $32 million of liabilities.

Speaker 5: Translating into book value of $111 million or approximately $2.10 per share. Moving to our second quarter guidance, we expect revenue in the range of $13 to $15 million and adjusted free cash flow in the range of negative 6 to negative $4 million. Our adjusted free cash flow guidance reflects our continuing focus on bringing down our cash burn.

Speaker 5: as this remains a top priority for us. I'd also like to reaffirm the 2023 guideposts that I laid out in last quarter's call. As a reminder, in 2023, we expect content amortization expense of $25 to $30 million.

advertising and marketing spends of 20 to 25 million dollars and cash spend on content of 10 to 15 million dollars.

With that operator, let's open the call to questions.

Pressing Star 1 again. We'll take our first question this afternoon from Tom Porta, BA Davidson.

So it sounds like you're early in determining the customer response to the price increase.

the new pricing for new subscribers.

That's moving along in line with our expectations. This quarter we're testing upgrade options with a subset of our existing customers. And as the majority of our subscribers are on annual plans, it will take some time to roll through the financials yet.

more than 3 million visitors to our service.

And as we've looked at the data, we weren't surprised to see a slight decline in conversion rates and retention, but also seeing a shift to a higher percentage of monthly plans.

and the increase in price and the shift toward smart bundle subscriptions where we did not change the price. So all of that's more than made up for the churn. Overall, we expect this change to give us a greater than 40% increase in the lifetime value for new subscribers. But we'll have a lot more to report next quarter. Thank you, Clint, for that. All right, so the second question is,

It looks like you spent 3 million on marketing and you're expecting to spend 20-25 million on a full-year basis. In the full-year outlook, are there some contractual?

marketing spend, or is there some contractual marketing spend? And then how are you thinking about maximizing your return on every dollar of marketing? Are you heavily focused on search engine optimization? Or what are you finding in the most effective way?

to generate the highest return on your marketing dollar. I'll take the first part of that and then I'll hand over to Peter to add an additional color. So.

As it relates to the spend, Tom, we want to be thoughtful about how we do that, obviously. There are some areas.

where we've not spent marketing money in quite some time that we see is pretty fertile right now.

What I mean by that is we have partners who offer our direct service, our subscription video and demand service, who are really good at marketing. If you look at how we have acquired direct subscribers in the past and our composition of, you know,

pure direct subscribers as compared to those that come through the large channel stores. You know, unlike many S-FODs who generate, you know, 50 to 85 percent of their subscribers through those channel stores, that was...

It's fertile territory. It's predictable and we're going to we're going to spend.

appropriately and in a way that

where we can scale appropriately. So we're seeing a lot of

Really good trends there and you know our confidence that will continue to increase the marketing spend over course the year.

as we work with those partners and as we...

work closely with those channels that make the most sense for us.

the balance of the year, so less than a million dollars of commitment. So one of the things that we did previously have some pretty substantial commitments, so this lack of contractual commitments really does give us the ability and flexibility to alive and improve our education system as well.

to concentrate the marketing spend on whatever the most effective channels are for us, which will allow us to drive a much better return on that marketing spend. Thank you, Clint. Thank you, Peter. I'm going to get back in the queue. Thank you, Peter.

We'll go next now to Laura Martin of Needham.

Hi there. Hey guys. I was really intrigued by this thing that your bundle distribution was a million five in revenue, but it would have been up 21% if you deducted the 2.6 million that wasn't renewed. So I guess what I'm questioning is what kind of deal were you doing in the olden days that actually it sounds like wasn't profitable?

And now we're signing a lot more bundle deals. How are these different than the one we discontinued last year, which ended up hurting revenue but actually helping profitability? Yeah, great question, Laura. Thank you for asking that and allow me to try to clarify. So we entered into a three year agreement with a distributor of scale in late 2019.

And at the point that we entered into that agreement, that distributor owned...

a number of national networks, both digital and traditional video-owned regional networks, and had a really compelling advertising proposition. And so, as we looked at our advertising spend, you know, over the course of the next two years, and we looked at their platforms, it made sense for us.

to spend with them on that side of the business. And so.

We weren't going to spend with them though unless there was a distribution component as well. And so at the time that we did the deal and over the first two years, we had an advertising commitment, you know, like so many pay services have had for years. And it worked out reasonably well for us, but as they...

as they shed assets and moved into a different direction, as we looked at it, we didn't see it as something that we wanted to move forward with. We thought we could put the money to use, better use in other places. So that was a unique deal. For the new distribution agreements that we've signed, we entered into those with no obligations beyond sort of traditional.

you know, baseline, content volume.

provisions that, you know, are, of course, no problem for us at this point since we've built a library that we have. Does that make sense?

Yeah, totally makes sense. Yeah, super helpful. And then Clint, can we get an update on what's going on with the ad tiers? You were talking about, I think, last quarter launching a fast channel or an Ava channel. I'm sort of forgetting. Can you tell us where you are in the advertising revenue stream update? Yep, so thank you for asking. I think that.

We've been a lot of conversations there.

And as I mentioned the last call.

Well, we do have some content in front of the paywall. We've done very little there to date as we've been heavily focused on building our subscription tiers.

We do have, you know, we have one biography title that we put out in front of the paywall that

Very, very limited distribution, generated around $100,000 just for that single title alone. And so, our approach here is to work with the largest AVOD and FAST platforms and secure

the right kind of placement, the right kind of marketing commitments because...

Since the business has matured, we have a really good idea of what our content will generate. A lot of comps to look at now. So we're trying to do the right deals there. We do have a fast channel that's in the marketplace.

Dipped our toe there with a few distributors. We'll have several more to report on next quarter and our intent is to take it internationally as well. So moving in there, we will generate revenue from ABOD and FAST and Free2Air through both.

direct distribution with these platforms and also through Content licensing agreements where we would license certain parties You know AVOD and potentially fast rights.

Okay, that's super helpful. Thanks very much. Appreciate the answers.

Okay, that's super helpful. Thanks very much. Appreciate the answers. You bet. Thank you, Laura.

We go next now to Peter Henderson of Bank of America.

Yes, hi, thank you for taking the question. So I guess I'm just wondering, you have several new distribution partners in the quarter who sort of ran through this. I'm just wondering if you can sort of talk about how those new deals work and any color on the economics or the subs, just any color that you can provide on those deals would be helpful.

Thank you for taking the question. So I guess I'm just wondering you have several new distribution partners in the quarter sort of went through. I'm just wondering if you can you know sort of talk about how those new deals work and any color on the economics or the subs, just any color that you can provide on those deals would be helpful. Yeah, I think so.

You know, obviously in the US, the traditional distributors, as you well know, Peter, are doing whatever they can to reduce fixed costs. Outside the US, you know, Pate TV is still growing at zero to a few points a year. And so there are really some wonderful opportunities to work with.

distributors of scale and our proposition is typically, you know, in exchange for a multi-year agreement and

With a fixed fee, you know, we're not we don't close the door and CPS deals, but.

We, whenever possible, you know, we try to do fixed fee deals, just provides more security for everybody.

in light of the additional products and services that we have to offer today, as compared to a few years ago, it's become certainly easier for us. The other thing I would add is that the one dynamic going on in the marketplace is that

There are a lot of larger legacy media companies who are looking to drive really significant rate increases. And so, you know.

are a lot of larger legacy media companies who are looking to drive really significant rate increases. And so, you know, when that happens.

ideally over the next handful of years.

handful of years. Thank you.

We go next now to Jim Goss of Barrington Research.

Thanks. The content expenditure frame of $10 to $15 million for a year, is that a run rate we should expect? How level is that per quarter and what will that buy you? To buy, for example, $ gems.

All of those series you listed in the press release. So the 10 of 15 so we had we spent.

We spent roughly, hold on, bear with me just a sec. We spent 4.9 million in Q1, so that leaves 5.1 to 10.1 million for the balance of the year. So we do expect on a quarterly basis our cash spend on content to come down a little bit for the balance of the year. That would imply kind of a...

$2 to $3 million per quarter range if you average out the balance of the year. And in terms of go forward, we haven't really set a budget for 2024 and beyond, but it's probably somewhere in that same kind of order of magnitude would be our expectation. Just add a little bit more color, Jim.

We have certainly that content that I mentioned in my opening remarks has been in production for 18 to even 24 months in some cases. And so some of that's coming from prior expenditures, obviously, that gets reflected in the content amortization. Well, at the same time,

We're seeing even increased consumption for some of our franchise series like Breakthrough. So we're confident that with what we have and with what we have coming down the pike.

that we have sufficient content to provide people with plenty of new content and then to provide them, continue to provide them with a library of breadth and depth is really is what keeps people. And can you tell me how big your or what level of involvement you have through all the stages of creation?

you know, probably hundreds of years of experience, you know, when you add it all up.

Because of our heritage and because of the content that we've created in the past, because of the people that we have, we tend to see nearly every factual idea that you could ever imagine. We have relationships today with well over 150 production partners and distribution partners. So we see a lot of ideas, we've seen a lot of ideas, and...

if we make the decision to commission a piece of content, then yeah, we're heavily involved through the process with them. Every producer has five or six milestones that they need to meet.

and experience to bear in all of this stuff.

And we have, as I said, we have just large partners around the world, whether it's NHK or Bana J or CFD or OTF or CDE or whomever it might be. We have great factual relationships around the world. We leverage those. And through all of that, we have a lot of work to do.

We also see a lot of acquisition opportunities. The nice thing about the factual space as we've talked about in the past is

content costs are a fraction of a fraction of what you need to pay for scripted entertainment or sports rights. So we're very confident that we have access to plenty of content to keep our keep our subscribers happy and wanting more. Is that helpful Jim?

Disney was down big today, for example, and I'm wondering if you could...

discuss what this contextual framework implies to your business opportunities and any strategies.

I'll start and then I'll hand over to my good friend and colleague, Peter. I would say, Jim, that, you know, I think.

I'll start and then I'll hand over to my good friend and colleague Peter. I would say Jim that I think what we're seeing is...

So reality, wearing its head, right? I mean, I think that, you know, we saw early on that it's really difficult to build a business that is 100% reliant on pure direct subscription revenue.

So, the path to victory, the key to success is to take a step back and really consider what business you are in. In our case,

We provide the best factual entertainment in the world. We want to help people satisfy their intellectual curiosity through premium factual video. And we're happy to do that through direct subscriptions. We're happy to do that through working with bundled partners. We're delighted to do that through working with brand partners and even through licensing our content too.

other media companies and parts of the world where it can be additive for us. So that's our approach. I think there was such a rush to just generate top line growth, generate subscribers that I think a lot of companies just overspent. I don't know another way to say it, Peter. Look, I...

and

and distinct and differentiated compared to many of the other services out there. The breadth and depth of content that we have in this category is really unrivaled. We also have the ability not only to offer our service and our selection of services,

But then we also have the ability to bundle a variety of other kind of complementary services in our smart bundle Which we think is a really differentiated offering in the marketplace as well So, you know there there are there are a number of reasons why we think our story, you know is is Different and unique relative to some of the larger streamers out there who are really kind of butting heads and

and losing significant amounts of money as they go about trying to build their businesses. Well said, Peter. I couldn't emphasize enough the global proposition that we have. Lots of companies talk about going global, Jim. It's not easy for a variety of reasons, including.

fractured rights that are associated with most people's content in light of the

So the economic profile of the content that we're in, we're able to control, you know, broad set of rights across a broad set of territories.

The beauty of evergreen factual content is what's appealing to someone in India can be equally appealing to somebody in Indiana.

Okay, thank you very much. Appreciate your interest. Thank you, Jim. And just a quick reminder, ladies and gentlemen, Star 1 for any questions. And we'll take a follow-up question now from Tom at DA Davidson.

Great, thanks. So for my follow-on question, Clint, I can't let you off the hook. So can you give more high-level thoughts on business combinations and scale partnerships?

It's too juicy a statement just to let it sit there. I think.

I guess what I would say, Tom, is it's no secret that Wall Street today has limited affection for small companies. We're unique in the media ecosystem, and what I mean by that is we have considerable cash, no debt, clear path to positive, adjusted, free cash flow.

We have a wide, deep, and evergreen content library. We have direct subscribers in 178 countries, multi-year bundled agreements in over 100 countries, programming in 11 languages, demonstrated global appeal.

considerable dry powder, and a public currency. So that's a unique profile. And I think one that is attractive to a broad set of combination partners.

including companies who may not be obvious in the media landscape. So as I said, it's no secret that

including companies who may not be obvious in the media landscape. So, as I said, it's no secret that.

Wall Street has limited affection for small companies. I think like many people, we want to do what's in the best interests of our shareholders and certainly it appears to today that we need to be larger. So where those opportunities exist, where

You know, happy to have conversations with people and again, I think, you know, in light of our content in light of our profile, we have the ability to have conversations with.

I think companies that might not be as obvious as they would be for other media companies. Peter? No, I think you can. Nuber might not be as obvious as there

companies that might not be as obvious as they would be for other media companies. Peter? No, I think you can capture it. Thank you for the additional comments.

Thank you, Tom. Thank you. And ladies and gentlemen, it appears we have no further questions this afternoon. I'd like to thank everyone so much for joining the CuriosityStream first quarter 2023 earnings conference call. Again, thank you all so much for joining and wish you all a great evening. Goodbye.