CuriosityStream Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 5 speakers on the call.

Operator

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. I'll now turn the conference over to Denise Garcia, Investor Relations. Please go ahead.

Speaker 1

Thanks, JL. Welcome to CuriosityStream's discussion of its Q3 2023 financial results. Leading the discussion today are Clint Finchcomb, CuriosityStream's Chief Executive Officer and Peter Wesley, Curiosity Stream's Chief Financial Officer. Following management's prepared remarks, we will be happy to take your questions. But first, I'll review the Safe Harbor statement.

Speaker 1

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.

Speaker 1

Additional information will also be set forth in our quarterly report on Form 10 Q for the quarter ended September 30, 2023 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. Now, I'll turn the call over to Clint.

Speaker 2

Thanks, Denise, and good afternoon. I appreciate you all joining us today. Also with me on this call are our COO and General Counsel, Tia Cuddy and our CFO, Peter Wesley. This was another good quarter for us as we move closer to sustained profitability. We grew sequential revenue by 11%.

Speaker 2

We improved our adjusted free cash flow for a 4th straight quarter as we cut our cash burn to $3,000,000 while actually increasing our marketing spend Approximately 20% in the Q2. We introduced our new pricing plans to new direct customers and to a cohort 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 funnel and further monetize our content, we leaned into 2 of our advertising initiatives As we launched into broadcast syndication for the first time in September with 2 seasons of 4th and Forever.

Speaker 2

Also in September, we began rolling out NABOD package with Top USA VOD distributors and we are delighted with the week over week growth to date. We have a large evergreen Globally appealing library of content, thousands of hours that 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'm delighted to report that our direct revenue services, Curiosity Stream, ODU, our Smart Bundle grew in a quarter where real growth was a real challenge for most streaming services. ARPU is up and our channel store partners are helping us grow more in that environment than we have in previous years. Traditional content licensing, Inherently lumpy area increased significantly from Q2.

Speaker 2

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 AVOD and Broadcast Syndication as 2 of our ad initiatives. We've also prepared 12 channels for fast and free to air distribution In the factual genres of science, history, nature, motors, kids and additional categories where we hold a leadership position. Additionally, we will be working with a terrific team to help grow our YouTube and audience first channels, a very small piece of our business today that we believe offers significant upside. The last ad initiative I will mention is linear pay TV advertising.

Speaker 2

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 and CPMs. None of these require significant additional costs 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.

Speaker 2

While Peter will discuss certain non cash impairments in our broader Q3 financials in greater detail later in the call, I couldn't be more enthusiastic about our march toward Positive adjusted free cash flow, an important milestone within our reach. Through additional cost reductions within cost of revenue and G and A expense lines, We are reducing our cost to a level that will drive both flexibility and profitability. And while we have a strong critical mass library that has enabled us Significantly reduced 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. As to content, top highlights from the quarter include the premiere of our 8 part original series, History, The Interesting Bits, A fast paced journey into the weird, wild and salacious details behind history's biggest events.

Speaker 2

3 part series Nature's Hidden Miracles, A look at the surprising ways many different species secretly collaborate to survive, which was co produced with our terrific partners at the NHK And the 3 part series Queens of Ancient Egypt. The brand definition of original that sheds new light on some of the most mysterious and powerful women in history. In August, we also premiered a 2nd season of Rescued Chimpanzees of the Congo with the iconic Jane Goodall, Which captures the final steps in the decades long effort to rehabilitate and release an amazing cast of orphaned chimpanzees at Jane's Chimpoonga Sanctuary back into the wild. In 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 1st Nazi jet And new episodes of our cutting edge science and tech strand breakthrough, covering everything from the latest advances in AI To predictions of where and when the next big earthquake will strike and the 1st U. S.

Speaker 2

Mission to recover a sample from an asteroid. Looking forward, we're all really excited about today's premier of Connections, a modernized reboot of the historic series hosted by James Burke, Many consider the world's smartest man and by our upcoming celebration of all things dinosaur and Dynaweek, Anchored by the premier of Amazing Dino World 2. Let me close by sharing what we've said in the past. In a transitioning media environment where many companies have overspent, some are trying belatedly to course correct, we like our position. In light of the production slowdowns that have adversely affected the 2024 film business and possibly additional workforce instability next year, We believe that consumers and expanding roster of 3rd party buyers will place an even higher value on existing premium factual content and brand safe relationships.

Speaker 2

In sum, we continue to believe that our direct subscriber base and direct platform, our broad and deep content library, our multi year 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, who like James Burke, Many consider the smartest man in our room. Over to you, Peter.

Speaker 3

Thanks very much, Glenn. We continue to make good progress on our path to a positive adjusted free cash flow while delivering on our near term financial commitments during the Q3. As a result of our strong execution, 3rd 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 Q3 results.

Speaker 3

Revenue was $15,600,000 compared to $23,600,000 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 $12,600,000 in the prior year quarter to negative $3,000,000 in this year's Q3 as a result of our intense focus on the bottom line. This was our 4th straight quarter of sequential improvement in our adjusted free cash flow. Our largest revenue category this quarter was our direct business.

Speaker 3

Direct revenue came in at $8,600,000 up 3% sequentially as we are 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 2nd largest revenue category this quarter. We generated $5,100,000 of revenue compared with $10,800,000 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.

Speaker 3

One thing that should be pointed out about this quarter is that $4,900,000 of our Q3 2023 content licensing revenue Related to barter 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 CuriosityStream through additional non competitive 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 receive from those partners. Our next largest revenue category in the Q3 was bundled distribution, which generated $1,500,000 of revenue in the quarter. If we deduct $1,200,000 of revenue from the Q3 of 2022 Related to a contract that we did not renew in the Q3 last year, bundled distribution revenue would have grown 7% year over year. 3rd quarter gross margin of 45.7 percent increased from 42.4% in the prior year quarter, driven by stronger content licensing margins.

Speaker 3

Our 3rd quarter advertising and marketing expense of $5,100,000 Was down 9% year over year and we continue to exercise discipline and analytical rigor in deploying our customer acquisition dollars. G and A expense during the Q3 of 2023 of $7,000,000 was down $1,800,000 or 21% year over year. Also included in our Q3 operating expenses was a $19,000,000 non cash charge related to the impairment of our content assets, which I will discuss later in my comments. As a result of this charge, our amortization expense will be lower than would have otherwise been the case, which we expect to benefit adjusted EBITDA and net income moving forward. Moving to profitability.

Speaker 3

Adjusted EBITDA loss was $3,900,000 the calculation of which Excludes the $19,000,000 non cash impairment charge compared to an adjusted EBITDA loss of $2,600,000 in the prior year quarter. 3rd quarter cash spend on content was $3,900,000 down $3,500,000 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 $9,700,000 of cash on content, which excludes all content added through barter transactions. That compares with $36,400,000 of cash spent on content in the 1st 3 quarters of 2022, A reduction of $26,800,000 or 73 percent. Adjusted free cash flow use of $3,000,000 improved $9,600,000 year over year.

Speaker 3

As I mentioned previously, this represents our 4th 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 $15,000,000 of additional planned reductions in expenses and 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. Due to the decline in our share price during the Q3, 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 the respective accounting guidance for each asset in consultation with outside valuation experts and our accountants. That analysis led to non cash impairments of our content assets by $19,000,000 And of our equity method investment in Nebula by $2,300,000 The non cash impairment of our investment in Nebula was primarily due to the non renewal of the marketing partnership between Nebula and Curiosity Stream.

Speaker 3

Change in our business relationship does not impact Curiosity's Ownership position in Nebula, which was 16.875 percent as of September 30, 2023. After these adjustments, we believe our overall balance sheet remained in great shape with $106,000,000 of assets, $29,000,000 of liabilities and book value of $77,000,000 or approximately $1.45 per share. We ended the quarter with total cash, cash equivalents and restricted cash of $40,800,000 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 4th quarter guidance.

Speaker 3

We expect revenue in the range of $14,000,000 to $16,000,000 And adjusted free cash flow in the range of negative $5,500,000 to negative $3,500,000 Relative to the Q3, we expect 4th quarter adjusted free cash flow to decrease slightly due primarily to seasonal factors. I'd also like to revisit the guidelines guideposts 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 $10,000,000 to $12,000,000 range as compared to $10,000,000 to $15,000,000 range we previously In addition, we expect content amortization for the year to be $21,000,000 to $23,000,000 Excluding the impairment of content assets we took in the Q3 as compared to $22,000,000 to $27,000,000 range we discussed last quarter. We expect full year advertising and marketing expenses to be in the $18,000,000 to $20,000,000 range, Which is a tightening of the $17,000,000 to $22,000,000 range provided previously. With that operator, let's open the call to questions.

Operator

Thank Your first question comes from the line of Tom Forte of D. A. Davidson. Your line is open.

Speaker 4

Great. So one question, one follow-up. So you talked a little bit in the prepared remarks, but can you talk more about when you decide to end in 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 I don't want to say regular sales, sales outside of barter agreements?

Speaker 2

Really glad you asked that question, Tom. And let me take the why and Peter can speak to some of the specifics. So Summary answer is that we needed to obtain new content and to much lesser extent tap into marketing opportunities without spending cash We're trying to get to profitability as quickly as possible. As I'm sure you're well aware, Tom, the direct to consumer subscription streaming business has only become More challenging, outside Netflix, the losses are pretty staggering. Disney's lost over $12,000,000,000 from their streaming initiatives.

Speaker 2

NBCU It's lost over $6,000,000,000 since 2020. Paramount is in the same ballpark as NBCU and happy because they may only lose $2,000,000,000 this year. WBD hasn't spent nearly as much as their counterparts, but they've reported losses of over, I think, 2,000,000 subs in the 2nd quarter and just under 1,000,000 in the 3rd. And some significant players who are trying to grow in the space, maybe Going to 0 or some form of bankruptcy and certainly some other subscale streaming services will probably go under altogether. So it's a tough time, it's a tough market, but we're on top of it.

Speaker 2

And so the first key is to rationalize your cost base, as Peter said. So like many others, we're doing that. We know what cost we can take out of G and A and core and programming, and we're doing it. Our most variable costs, of course, marketing and 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.

Speaker 2

For the overwhelming majority of companies in the direct to consumer subscription business, paid marketing is a requirement. I mean, you just you have to do it. There's no real non cash solve at scale today for acquisition marketing. However, provided one has a critical mass content library In 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 And to monetize in other areas.

Speaker 2

So in our case, specifically, we needed to top off some key genres within factual In order to enhance our direct proposition and in order to provide us the ability to launch up to 12 fast and free to air channels. Specifically, we wanted more host driven content. We wanted proven true crime. We wanted auto and aviation. And we wanted to try scripted historical, which is much, much more costly than standard nonfiction fare.

Speaker 2

We want to do all of this and not spend any cash. It's not easy, but through a lot of hard work by a lot of people, We were able to secure over 200 new titles in all of these vital categories that I mentioned without spending any cash. I think it's a unique quarter in regard to the scope of that, but we'll continue to be Opportunistic when opportunities warrant. So as well as to the accounting treatment, Peter?

Speaker 3

Yes. Let me Probably the simplest thing to do is walk through kind of hypothetical example about how the content works. So imagine a scenario in which We are swapping content with a partner that's valued at the value of the content is basically $1,000,000 in each direction. When we deliver that content to our partners, we would recognize the $1,000,000 of revenue at the time the delivery is accepted in both directions. So we recognize revenue.

Speaker 3

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 $1,000,000 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 kind of an accelerated amortization for the 1st couple of months and then straight line through the balance of the life of the license. So roughly, that for most of this content, as with most of our license content, typical would be 3 years. And so over the life of because it's a swap over the life of the relationship, The revenue we would recognize and the content amortization would equal out over the life of the swap effectively.

Speaker 3

Excellent.

Speaker 4

All right. So then for my one follow-up question, I think I know the answer, but I'm going to ask anyway. So it seems like as a result of The solution to the writer's strike that content costs may be going up for some and they seem to be then Essentially raising prices result. I know you already had a price increase in place, but I don't want to assume, but I suspect that You're not going to see the cost inflation on the resolution of right respect that others might.

Speaker 2

Yes. If I can thank you for that Question, Tom. And obviously, we're really happy for all the people who were involved in that that they can go back to work now. However, I do think there is risk next year of a couple other unions associated with the production business that I could choose to strike. However, what I would see is the key point that I don't know that we can emphasize enough is A small percentage of our overall direct subscriber base has actually been exposed To our rate increase.

Speaker 2

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 ADAPT just announced it or just beginning to ADAPT it. So it will take a while. It's good news for 2024 As far as growth there goes, Peter, do you need to add?

Speaker 3

No, just to the extent that there are new terms related to the settlement of the rider strike that effectively doesn't impact

Operator

There are no further questions at this time. This concludes today's conference call. You may now disconnect.

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Key Takeaways

  • CuriosityStream reported an 11% sequential revenue increase in Q3 and improved adjusted free cash flow for a fourth straight quarter to a burn of $3 million, even while boosting marketing spend by ~20%.
  • New subscription pricing plans were introduced to both new and existing customers, with full financial impact from price increases expected by the end of 2024.
  • The company is rolling out multiple advertising initiatives—including AVOD, broadcast syndication, FAST channels, YouTube expansion, and linear pay‐TV spots—to build more predictable and durable revenue streams and reduce reliance on paid marketing.
  • Over 200 targeted titles were added through non‐cash barter deals to strengthen key factual genres without increasing cash spend, alongside premieres of originals like “History: The Interesting Bits” and “Queens of Ancient Egypt.”
  • Management approved over $15 million of additional cost cuts for 2024, lowered full‐year content spend guidance to $10–12 million, and projected Q4 revenue of $14–16 million with adjusted free cash flow of –$5.5 million to –$3.5 million.
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Earnings Conference Call
CuriosityStream Q3 2023
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