Q3 2023 CuriosityStream Inc Earnings Call
Please wait the conference will begin shortly.
[music].
Hello, and welcome to the curiosity stream Q3, 2023 earnings call all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time. Please press star one on your telephone keypad. If you would like to withdraw your question again press Star one now.
Turn the conference over to Denise Garcia Investor Relations. Please go ahead.
Thanks, Joe welcome to curiosity strange discussion of its third quarter 2023 financial results, leading the discussion today our coincidence.
<unk> <unk>, Chief Executive Officer, and Peter Westley curiosity streams, 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 September 32023 when filed.
<unk> 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. Dr. Curiosity stream Dot com now I will turn the call over to Clint.
Thanks, Denise and good afternoon I appreciate you all joining us today also with me on this call are our CFO and general counsel.
Our CFO Peter Westley.
This was another good quarter for us as we move closer to sustained profitability.
We grew sequential revenue by 11% and we improved our adjusted free cash flow for a fourth straight quarter as we cut our cash burn to $3 million, well actually increasing our marketing spend by approximately 20% in the second quarter.
We introduced our new pricing plans to new direct customers in two cohorts of our existing subscribers.
As most of our annual subscribers have not come up for renewal and as our channel store partners are just now beginning to adopt or announce our increased pricing. We anticipate it will take through the end of 2024 for the price increase to fully roll through the financials.
We entered into long term licensing agreements with several new partners in Europe, and North America.
And as follow up to my Q2 remarks in order to expand the top of our marketing and promotional tunnel and further monetize our content.
We leaned into two of our advertising initiatives as we launched into broadcast syndication for the first time in September with two seasons of fourth and forever.
Also in September we began rolling out a <unk> package with the top USA by distributors and we are delighted with the week over week growth today.
We have a large evergreen globally appealing library of content thousands of hours.
We are now putting to work across new platforms that we believe will both increase and enhance.
The reliability durability and predictability of our revenues going forward.
In regard to revenue I am delighted to report that our direct revenue services curiosity stream ODU smart bundle grew in a quarter, where real growth was a real challenge for most streaming services.
ARPA was up and our channel store partners are helping us grow more in that environment than we have in previous years.
Traditional content licensing and inherently lumpy area increase significantly from Q2.
As we work to add revenue that is less lumpy that is more predictable reliable durable and substantial we're moving more aggressively into advertising vehicles that we believe we are uniquely suited to leverage and which require no additional cash investment.
I mentioned, Dave <unk> broadcast indications two of our AD initiatives. We've also prepared 12 channels for SaaS and free to air distribution.
And this actual genres of science history nature Motors kits and additional categories, where we hold the leadership position <unk>.
Additionally, we will be working with a terrific team to help grow our Youtube and audience first channels.
Very small piece of our business today that we believe offers significant upside.
The last AD initiative I'll mentioned is linear pay television advertising, we currently run spot advertising with a small subset of our pay TV distributors, we plan to light up several more in 2024.
All of these initiatives are tied to simple metrics impressions ratings in Cps.
None of these require significant additional cost and cumulatively. We believe they will help ensure that we improve the overall durability and growth of our company.
Lastly, our heightened presence across these platforms should play a key role in reducing our reliance on paid marketing in the long run.
Well, Peter will discuss certain non cash impairments and a broader third quarter financials in greater detail later in the call I couldnt be more enthusiastic about our march toward positive adjusted free cash flow an important milestone within our reach through.
The additional cost reductions within cost of revenue and G&A expense lines.
We are reducing our cost to a level that will drive both flexibility and profitability.
While we have a strong critical mass library that has enabled us to significantly reduce our annual content spend we further fortified our content war chest by adding over 200 targeted genre titles in Q3 through a variety of strategic opportunistic and cost effective acquisition initiatives.
After content top highlights from the quarter include the Premier of our eight part original series history. The <unk>.
Interesting.
SaaS based journey into the weird wild installations details behind history's biggest events.
Three part series nature didn't miracles, well look at the surprising ways. Many different species secretly collaborate to survive, which was co produced with our terrific partners at the NH Kay and.
And three part series Queens of ancient Egypt.
Our brand definition, all original that sheds, new light on some of the most mysterious and powerful women in history.
In August we also premiered a second season of rescue chimpanzees of the Congo with the iconic Jane Goodall, which captures the final steps in a decade's long effort to rehabilitate and release, an amazing cast of orphan chimpanzees.
At James Shimbun, Gar, Thanks, Larry back into the wild.
Addition to our collaborative commissioning work with great factual producers curiosity studios released its own slate of originals, including the dramatic little known story of the hunt for the first not the jet.
And new episodes of our cutting edge science and texture and breakthrough covering everything from the latest advances in AI to predictions of where and when the next big earthquake will strike and the first U S mission to recover a sample from an asteroid.
Looking forward, we're all really excited about today's premier of connections modernized reboot of the historic series hosted by James Burke from.
Consider the world's smartest man.
And by our upcoming celebration of all things dinosaur and Dino <unk>.
By the Premier of Amazing Dino World too.
Let me close by sharing what we've said in the past and is transitioning media environment, where many companies have overspent <unk>.
Some are trying to lately of course, correct, we like our position.
Production slowdowns that are adversely affected the 2020 for film business and possibly additional workforce instability next year, we believe the consumers and expanding roster of third party buyers were placed even higher value on existing premium factual content and brand safe relationships and.
In sum, we continue to believe that our direct subscriber base and direct platform.
Our broad and deep content library.
Our multiyear partner agreements.
Our strong cash position, our public currency and.
Our lack of debt are uniquely favorable attributes that provide us with a firm foundation and exceptional flexibility.
I'd like to now pass the Baton to my friend and colleague Peter.
James Burke, many consider the smartest man in a row.
Over to you Peter.
Thanks, very much Glenn.
We continue to make good progress on our path towards positive adjusted free cash flow, while delivering on our near term financial commitments during the third quarter.
As a result of our strong execution third quarter revenue and adjusted free cash flow. Both came in above the high end of our guidance ranges. We continue to tightly control expenses, while remaining disciplined in our customer acquisition investments.
Turning to our third quarter results revenue was $15 $6 million.
Third to $23 6 million in the prior year quarter.
The year over year change was primarily driven by decreases in content licensing enterprise and bundled distribution revenues.
Despite this decline in revenue, we were able to improve our adjusted free cash flow from negative $12 6 million in the prior year quarter to negative $3 million in this year's third quarter as a result of our intense focus on the bottom line.
This was our fourth straight quarter of sequential improvement in our adjusted free cash flow.
Our largest revenue category. This quarter was our direct business direct revenue came in at $8 $6 million up 3% sequentially as we're starting to see the impact of our price increases put in place earlier this year.
On a year over year basis direct revenue was relatively flat.
Turning to content licensing, which was our second largest revenue category this quarter.
We generated $5 $1 million of revenue compared with $10 $8 million in the prior year quarter.
Content licensing is an inherently lumpy part of the business and we faced a tough comparison this quarter as Q3 of 2022 was an exceptional quarter for us in this revenue category.
One thing that should be pointed out about this quarter is that $4 $9 million of our Q3 2023 content licensing revenue related to partner deals we entered into during the quarter.
Content swaps like these which are common in the media industry allow us to bring fresh content to our services without spending cash and to raise awareness of curiosity streams through additional noncompetitive distribution channels.
In these transactions, we generally recognize revenue based on the value of the content delivered at the time, we deliver our content to our partners with a corresponding increase in content assets on our balance sheet related to the content that we received from those partners.
Our next largest revenue category in the third quarter was bundled distribution, which generated $1 $5 million of revenue in the quarter.
If we deduct $1 2 million of revenue from the third quarter of 2000 2022 related to a contract that we did not renew in the third quarter last year bundled distribution revenue would have grown 7% year over year.
Third quarter gross margin of 45, 7% increased from 42, 4% in the prior year quarter, driven by stronger content licensing margins.
Our third quarter advertising and marketing expense of $5 $1 million was down 9% year over year, and we continue to exercise discipline and analytical rigor and deploying our customer acquisition dollars.
G&A expense during the third quarter of 2023 of $7 million was down $1 $8 million or 21% year over year.
Also included in our third quarter operating expenses was a $19 million noncash charge related to the impairment of our content assets, which I will discuss later in my comments.
As a result of this charge our upcoming amortization expense will be lower than would've otherwise been the case, which we expect to benefit adjusted EBITDA net income moving forward.
Moving to profitability adjusted EBITDA loss was $3 $9 million, the calculation of which excludes the $19 million noncash impairment charge compared.
Compared to an adjusted EBITDA loss of $2 $6 million in the prior year quarter.
Third quarter cash spend on content was $3 $9 million.
$3 $5 million or 47% compared with the prior year quarter as we continue to benefit from the critical mass library of content that we have built.
Year to date, we spent $9 $7 million of cash on content, which excludes all content added to barter transactions.
That compares with $36 $4 million of cash spent on content in the first three quarters of 2022 a.
A reduction of $26 $8 million or 73%.
Adjusted free cash flow use of $3 million improved $9 $6 million year over year.
As I mentioned previously this represents our fourth consecutive quarter of sequentially, improving adjusted free cash flow and underscores our continued momentum toward positive adjusted free cash flow.
In order to demonstrate our seriousness about achieving this objective management has identified more than $15 million of additional planned reductions in expenses in cash spending for 2024 relative to our expected spending levels for 2023.
This plan has been approved by our board of directors and we will begin implementing these changes this quarter.
Okay.
Due to the decline in our share price during the third quarter, which resulted in a market capitalization that was less than our cash balance at quarter end, we identified indicators of asset impairments.
That led us to assess the value of our assets, including content assets and equity method investments under their respective accounting guidance for each asset.
In consultation with outside valuation experts and our accountants.
That analysis led to a noncash lead to noncash impairments of our content assets by $19 million and all of our equity method investment and nebula by $2 $3 million.
The noncash impairment of our investment in Nebula was primarily due to the official non renewal of the marketing partnership between Nebula and curiosity stream.
Change in our business relationship does not impact curiosities ownership position in nebula, which was $16, 875% as of September 32023.
After these adjustments we believe our overall balance sheet remained in great shape with $106 million of assets $29 million of liabilities and book value was $77 million or approximately $1 45 per share.
We ended the quarter with total cash cash equivalents and restricted cash of $48 million and no outstanding debt.
Before I turn to our guidance I thought it would be worth taking a moment to revisit our prior comment that Q1 2023 would be a trough for us as we look to build from there.
We believe our second and third quarter results reflect solid execution as we delivered significant sequential improvements in both revenue and adjusted free cash flow.
Moving to our fourth quarter to quarter guidance, we expect revenue in the range of $14 million to $16 million.
And adjusted free cash flow in the range of negative five five to negative $3 $5 million.
Relative to the third quarter, we expect fourth quarter adjusted free cash flow to decrease slightly due primarily to seasonal factors.
I'd also like to revisit the guidelines guidepost that we laid out previously related to certain expense items for the year.
We now expect that our cash spend on content for the year will be in the $10 million to $12 million range as compared to $10 million to $15 million range. We previously communicated.
In addition, we expect content amortization for the year to be $21 million to $23 million, excluding the impairment of content assets, we took in the third quarter as.
As compared to $22 million to $27 million range, we discussed last quarter.
We expect full year advertising and marketing expenses to be in the $18 million to $20 million range, which is a tightening of the 17% to $22 million range provided previously.
With that operator, let's open the call to questions.
Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again one moment. Please for your first question.
Your first question comes from the line of Tom Forte of D. A Davidson your line is open.
Great. So one question and one follow up so you talked a little bit in the prepared remarks, but can you talk more about when you decide to end I'm, sorry, when you decide whether or not to enter into barter agreements.
Are you not intending to do that on a go forward basis, and then when you do what's the relative margin of those versus I guess just.
Irregular sales sales outside of BARDA agreements.
Okay.
Glad you asked that question Tom.
Take the why and then Peter can speak to some of the specifics so.
Summary answer is that we needed to obtain new contents and to much lesser extent tap into marketing opportunities without spending cash as we're trying to get to.
Profitability as quickly as possible.
As Im sure Youre, well aware, Tom the direct to consumer subscription streaming business has only become more challenging outside Netflix the losses are pretty staggering.
<unk> lost over $12 million from the streaming initiatives NBC you lost over $6 billion as 2020.
Paramount is in the same ballpark as NBC, you and happy because they may only lose 2 billion. This year W. BD hasnt spread nearly as much as their counterparts, but they.
They reported losses of over 2 million subs in the second quarter and just under $1 million in the third.
And some significant players who are trying to.
We're trying to grow in this space.
Maybe going to zero.
<unk> former bankruptcy and certainly some other subscale streaming services will probably go under altogether. So it's tough times tough market, but we are on top of it and so the first is to rationalize our cost base as Peter said, so like many others. We are doing that we know what costs, we can take out of G&A and core and programming and we're doing it our most variable costs of course marketing.
Programming, both of which are important in the direct subscription business. So we know today about what we need to spend annually to maintain our direct revenues.
And for the overwhelming majority of companies in the direct to consumer subscription business paid marketing is a requirement that you mean, you just you have to do it there's no real noncash solved at scale today for acquisition marketing.
However, provided one has a critical mass content library and other assets there are creative ways to amass content that don't require hard cash.
We need to offer new content every week to hold serve and grow direct revenues.
<unk> and other areas so in our case specifically.
We needed to top off some key genres within factual in order to enhance our direct proposition in order to provide us the ability to launch up to 12, SaaS and free to air channels.
Specifically, we wanted more host driven content.
Wanted proven true crime.
We wanted to auto in aviation.
And we wanted to try scripted historical which is much much more costly.
Standard nonfiction there.
We wanted to do all of this and Thats been any cash does not easy but.
There are a lot of hard work by a lot of people.
We were able to secure over 200, new titles and all of these vital categories that I mentioned without spending any cash.
It's <unk>.
Our unique quarter.
In regard to the scope of that but we will continue to be.
<unk> win opportunities warrant.
As well as to the accounting treatment.
Yeah, Let me probably the simplest thing to do is walk through.
Kind of hypothetical example, about how the content work, so imagine a scenario in which.
We are swapping content with a partner that is valued at the value of the content is basically a $1 million in each direction. When we deliver that content to our partners. We would recognize the revenue at the time the deliveries accepted in both directions.
So we recognize revenue we would not have expense associated with that revenue at that time, what we would do is also book.
On our balance sheet. In addition to our content assets of a $1 million for the content that's coming back to us.
When we publish that content, we would amortize the content just like we would with any other licensed content. So we do a kind of an accelerated amortization for the first couple of months and then straight line through the balance of the life of the license so roughly.
For most of this content as with most of our licensed content typical would be three years.
And so over the life of because its a swap over the life of the relationship.
The revenue, we recognize and the content amortization would equal out over the life of the over the life of the of the swap effectively.
Excellent.
My one follow up question I think I know the answer was going to ask anyway. So it seems like as a result of the solution to the writers strike.
Content costs, maybe going up for some they seem to be then.
Essentially raising prices result, I know you already had a price increase in place, but I don't want assume but I suspect that you.
We're not going to see the cost inflation on the resolution that letter states that others might.
If I can thank you for that.
Tom and obviously, we're really happy for all the people who were involved in that.
They can go back to work now.
However, I do think there is there is risks next year of.
A couple of other.
Unions associated with the production business that could to strike.
However, what I would see as the key point that I don't know that we can emphasize enough is.
A small percentage of our overall direct subscriber base is actually going to Ben.
Both to our rate increase so when you think about we have a lot of annual customers well over 80% as we've said in the past so.
Most of them have not seen the rate increase and then as it relates to our channel store partners.
All of them are either.
Just adopt just announced it or are just beginning to adopt it. So it will take a take a while so it's good news for 2024 growth.
Growth areas Peter.
It takes stent that.
Their new terms related to the settlement of the Writers' strike that effectively doesn't doesn't impact us.
Okay.
I mean, obviously, thank you for taking my questions. Thank.
Thanks, Tom.
Thank you.
There are no further questions at this time.
This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
Yes.
[music].
Okay.
Yes.
[music].
Yeah.
Okay.
Yes.
Yes.
[music].