CuriosityStream Q2 2023 Earnings Call Transcript

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August 14, 2023

There are 8 speakers on the call.

Operator

Afternoon, and welcome to the Curiosity Stream Second Quarter 2023 Earnings Call. My name is Brianna, and I will be your conference operator today. Please note that this call is being recorded. At this time, all lines have been placed on listen only mode. After the speakers' remarks, There will be a question and answer session.

Operator

I would now like to turn today's call over to Denise Garcia, Investor Relations. Please go ahead.

Speaker 1

Thanks, Brianna. Welcome to CuriosityStream's discussion of its Q2 2023 financial results. Leading the discussion today are Clint Stinchcomb, CuriosityStream's Chief Executive Officer and Peter Wesley, CuriosityStream'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 the management's current views only, and the company undertakes no obligation to revise or update these statements in order 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 June 30, 2023 when filed. In addition, reference will be made to non GAAP financial measures. A reconciliation of these non GAAP financial measures to comparable GAAP measures can be found on our website at investors. Curiositystream.com. Now I'll turn the call over to Clint.

Speaker 2

Thank you, Denise. Hello, everyone. Really appreciate you all joining us today, especially as I know We are not your first earnings call this August. Also with me on the call are COO and General Counsel, Tia Cudahy and our CFO, Peter Wesley. This was a good quarter for us as we move toward profitability.

Speaker 2

We improved our adjusted free cash flow for a 3rd straight quarter and grew sequential revenue by 14%. We introduced our higher pricing to new direct customers into a small segment of our existing subscribers. We entered into meaningful and thoughtful licensing agreements Several new partners in the Middle East, the UK and Europe. We believe this ongoing expansion of our licensing partners Both by territory and platform will benefit us in the quarters to come. In addition, in order to expand the top of our marketing and promotional funnel And further monetize our content, we will be rolling out certain titles and packages into broadcast network syndication for the first time And also with top AVOD partners beginning in Q4.

Speaker 2

Further, we opportunistically locked in performance based marketing initiatives With exceptional content creators and influencers that we believe should increase awareness and subscriber acquisition, while at the same time minimizing risk. As I know we have some new people listening today, let me quickly review what we do and how we make money. Our overarching mission is constant and has never changed. Simply put, our mission is to help satisfy people's curiosity through enlightening premium factual films and programs and also through entertaining instructional talks From subject matter experts. Our efforts to be a go to content service for anyone who wants to know more about the world are anchored by our flagship subscription service Curiosity Stream.

Speaker 2

Today, anyone in more than 175 countries with a sufficient Internet connection can subscribe to standalone CuriosityStream for $4.99 per month For $39.99 per year or to our premium tier smart bundle which contains over 30,000 titles from 6 different services For $9.99 per month or $69.99 per year. As it is important to not overly rely on a single direct Subscription revenue line, we also monetize our content through 3rd party distribution relationships for our products and services in 11 different languages, Through 3rd party content licensing of distinct titles and packages and increasingly through advertising and brand partnerships. Well, Peter will discuss our financials in greater detail later in the call. I couldn't be more enthusiastic about our path to positive adjusted free cash flow, A milestone that we believe we are closing in on. On the expense side, we reduced G and A expense by approximately 25% year over year In Q2, we will continue to work to bring this spending down further.

Speaker 2

We've spoken previously to our spending reductions associated with programming and marketing. Our marketing spend for the Q2 of 2023 was down 63% year over year, while direct revenues were roughly comparable, down less than 3%. The only increasing cost projected for the second half of twenty twenty three as compared to the first half is marketing, which is 100% In our control and where increased spend is a function of meeting internal growth performance metrics. On the revenue side, our new pricing will take until late 24 to fully roll through the P and L. To be clear, it doesn't just happen in one fell swoop.

Speaker 2

All new customers are seeing our increased pricing While we are rolling it out now to most monthly cohorts, our subscribers on annual plans won't see new pricing until their plans come up for renewal over the course of the year. Further, most of our channel store and app store partners, while they have it on the near term roadmap, have not yet commercially launched their new pricing. This is why I said at the beginning of my remarks that new pricing has been launched only a small segment of our direct subscriber base. So we expect steady growth as a result of increased pricing associated with our core service and also from our premium tier smart With our core service and also from our premium tier smart bundle, a higher margin service offering that is growing in part As a result of its closer pricing proximity, CuriosityStream is a standalone service. While I've not talked much about one day university, ODU subscribers are indeed growing and ODU is also proving to be a helpful lever and offering for certain existing cohorts contemplating renewal.

Speaker 2

We believe the 3rd party demand to license and distribute our content and services is strong and growing. And in addition to traditional legacy licensing partners, Non traditional licensing partners are also emerging. As just one example, we believe we're in the infant stage of a mini broadcast digital channel renaissance Catalyzed by ATSC 3.0, which increases Station Group's need for content and services, For their existing services and for the new ones they want to create. Historically, this has not been an internal functional expertise for them. The top North American AVOD players have plenty of overall volume, but are still light in some key categories where we believe we can help.

Speaker 2

Outside the U. S, AVOD is more nascent. So while the overall AVOD licensing revenue opportunity is less than in the U. S, we believe the demand for content is greater. As I've been asked, if the current disruption to new content creation is helpful to us, I would say that We believe it provided no identifiable incremental benefit to us in the Q2 of 2023 or the first half of Q3.

Speaker 2

We also anticipate steady, sustainable long term advertising and sponsorship revenue growth and increased consumer awareness as we place certain content And to AVOD Fast and Broadcast Syndication. Moving to content. While our critical mass library of more than 15,000 programs has enabled us Reduce our year over year cash content spend also by 63%. We added hundreds of new titles in some underserved factual genres like money and finance And more in tried and true genres like modern history, tech and biographies, all within our planned content budget. As to what's on the screen now, we kicked off the quarter with the premiere of Lift the Ice, a global 6 part series that filmed 20 Expeditions across 12 Countries and 5 Continents showcasing the harshest spots on the earth And revealing surprising secrets from our planet's melting cryosphere, from ancient viruses to new clues about the location of alien life.

Speaker 2

In May, we premiered our series Giants, where world renowned naturalist Dan O'Neil tracks down the planet's biggest creatures. These are the ones that can eat you and compares them with the help of CGI to the nastiest beasts that have ever roamed our planet. On the science and tech front, we continue to produce timely deep dives into trending stories of the day with specials like Attack of the Zombie Fungus, A wild look at the true story and science behind the HBO hit series The Last of Us. Our popular breakthrough franchise premiered Jupiter's moons and the search for life, Which probes new missions that may answer astronomy's biggest question. And our new special roundup 2023: A Space Odyssey, Comprehensive look at some of the year's biggest space stories.

Speaker 2

We also continued in our quest to share compelling untold tales from the past. Our series War Gamers is the story of a small group of British women who came up with the winning tactics to defeat deadly Nazi U Boats in the Battle of the Atlantic. Unchained Mysteries is a series that places legendary homicide detective, Rod Demery, back in time to solve some of history's most notorious cold cases. Among other new premieres, we capped off the quarter with one of our most ambitious original productions to date. The 4 part series, The Real Wild West, Which tells the beautiful broad story of the emergence of the American West and at the same time tells the stories of the heroes and influencers You perhaps have never heard of.

Speaker 2

Black and Hispanic cowboys and leaders like Bass Reeves, Nat Love, Bio Pico, Female homesteaders, Chinese immigrants and Native Americans like Crazy Horse and Sacagawea. This series is presented by the Grammy Award winning artist, Dodd Clemens and based on consumer assumption and press coverage from Entertainment Weekly to Cowboys and Indians to Rolling Stone, The Real Wild West series itself seems to be emerging into the cultural zeitgeist. Let me close by sharing what we've said in the past. In a transitioning media and tech environment filled with choppy water where many companies have overspent and some are trying belatedly to course correct, We like our hand. We believe we move closer every day turning the corner and generating optimized and sustainable levels of cash.

Speaker 2

Further, at a time when content creation has slowed and large media companies scramble to rationalize product portfolios and costs, Many of their secondary and tertiary services are struggling as are many undercapitalized independents. We believe that consumers and an expanding roster of 3rd party buyers will continue to place an even higher value on existing Premium factual content and brand safe relationships. In sum, we believe that our direct subscriber base, Our Broad and Deep content library, our multi year partner agreements, our strong cash position, our public market currency And our lack of debt are uniquely favorable attributes that provide us with a firm foundation and exceptional flexibility. I'd like to now pass the baton to my friend and colleague, our CFO, Peter Wesley.

Speaker 3

Thanks, Clint. During the Q2, we believe we continue to make good progress on our path to positive adjusted free cash flow, while delivering on our near term financial commitments. We introduced our increased pricing for new direct subscribers and tested to find the most effective way to increase the prices paid by our existing subscribers. Those increases for existing subscribers are being put into full effect this quarter. On the cost side, we remain disciplined in our spending.

Speaker 3

As a result of our focused execution, 2nd quarter revenue and adjusted free cash flow were in line with our guidance ranges. Turning to our Q2 results. Revenue was $14,100,000 compared to $22,300,000 in the prior year quarter. Year over year change was primarily driven by decreases in content licensing, bundled distribution and enterprise revenues. Our largest revenue category this quarter was our direct business.

Speaker 3

Direct revenue came in at $8,300,000 a 3% decrease compared with the second As Clint mentioned, this slight decrease came despite a 63% year over year reduction in marketing expenses during the quarter. We expect direct revenues to grow sequentially in the Q3 as the impact of the price increases to new and existing subscribers begins to flow into the financial results. However, it will take a full year or more for the impact of these price increases to completely flow through our financial statements, Given the fact that the significant majority of our direct subscribers are currently on annual subscription plans, we expect this positive impact to begin to in the Q3 of 2023. Turning to Content Licensing, which was our 2nd largest revenue category this quarter, REIT generated $3,600,000 of revenue compared with $6,700,000 in the prior year quarter. The profitability of those revenues was much higher this year however as more than 80% of our content licensing revenues in the Q2 of 2022 We're 0 margin presales deals and more than 80% of our content licensing revenues in the Q2 of 2023 We're attractive margin library licensing deals.

Speaker 3

Our next largest category was bundled distribution, which Generated $1,500,000 of revenue in the quarter. If we deduct $2,600,000 of revenue from the Q2 of 2022 Related to a contract that we did not renew in the middle of last year, bundled distribution revenue would have grown 13% year over year. 2nd quarter gross margin of 29.5 percent decreased from 41.9% in the prior year quarter, driven by lower year over year revenue, But improved from 27.3% in the Q1. The sequential improvement in gross margin was primarily driven by growth in library based Content licensing deals during the Q2. Our 2nd quarter advertising and marketing expense of $4,200,000 was down $7,000,000 year over year as we remain intent on maintaining tight discipline around our marketing spend.

Speaker 3

G and A expense during the Q2 of 2023 was $8,000,000 of $8,000,000 was down $2,600,000 Or 25% year over year. We will continue to focus on looking for ways to bring this spending down going forward. Moving to profitability. Adjusted EBITDA loss of $6,500,000 was 39% less Then our $10,600,000 loss in the prior year period. 2nd quarter cash spent on content was $3,300,000 Down $5,600,000 or 63% compared with the prior year quarter as we continue to benefit from the critical mass library of content We have built.

Speaker 3

Adjusted free cash flow use of $4,300,000 improved $1,700,000 year over year And $2,000,000 sequentially. This represents our 3rd consecutive quarter of sequentially improving adjusted free cash flow And underscores our continued momentum towards positive adjusted free cash flow. We think that this metric is a particularly useful guide Investors as to the underlying economic realities of our business, which is why it's one of the financial figures we use in our forward looking guidance. At the end of the Q2, cash, cash equivalents and restricted cash totaled $44,800,000 We had no outstanding debt at the end of the quarter, and we believe our overall balance sheet remained in great shape with $133,000,000 of assets and $30,000,000 of liabilities, Translating into book value of $103,000,000 or approximately $1.94 per share. One other item worth noting is that we conducted an impairment analysis that is reflected in this quarter's financial statements.

Speaker 3

That analysis determined that the fair value of our investment in the German TB joint venture exceeded the carrying value as of June 30. And as a result, we recorded a $2,000,000 non cash impairment related to that investment during the quarter. 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. If you look at our Q2 results, you'll see that sequentially, we increased our revenues by 14%, Our gross margin by more than 200 basis points and our adjusted free cash flow by $2,000,000 We like the trajectory of the business. Moving to our Q3 guidance.

Speaker 3

We expect revenue in the range of $13,500,000 to $15,500,000 And adjusted free cash flow in the range of negative $5,500,000 to negative $3,500,000 I'd also like to revisit the guideposts that we laid out previously related to certain expense items for the year. We continue to expect that our cash spend on content for the year will be in the $10,000,000 to $15,000,000 range, but we are lowering our expected We now expect content amortization for the year to be 20 $2,000,000 to $27,000,000 which is down from our $25,000,000 to $30,000,000 prior estimate and we expect advertising and marketing expense to $22,000,000 down from our $20,000,000 to $25,000,000 prior estimate. As we look to increase our marketing spending in the second half of the year, while continuing to maintain discipline around this effort. Before turning the call over to the operator for questions, I wanted to highlight one final housekeeping item related to our options and restricted stock units. As you will see in Note 14 to our financial statements in the 10 Q We filed with the SEC this afternoon.

Speaker 3

In July, following approval by the company's Board of Directors and shareholders, We exchanged approximately 4,600,000 employee stock options for 1,600,000 restricted stock units of an equivalent fair value, A net reduction of 3,000,000 fully diluted shares for the company. With that, operator, let's open the call to questions. Thank

Operator

you. Our first question comes from Laura Martin with Needham. Your line is open.

Speaker 4

Hi. Maybe just a couple. So the margins were lovely on this content licensing. But my question is, is that really recurring? Because when you content license, Can't you only do it once and then you can't really content license again?

Speaker 4

So is it really a recurring positive for you that the margin

Speaker 2

Yes, that's a great question, Laura. And I would say that in light of If you're only a U. S.-based company or only focused on one region, I think it might be challenging. But In our case, because of the global appeal of the content, I think because of the emergence of kind of non traditional licensing partners, We don't really see any end in sight there. We had, I think, 13 different licensing partners in the quarter.

Speaker 2

We Entered into those agreements and what I would say was thoughtfully and meaningfully and We don't anticipate any cannibalistic impact and really believe that in certain parts of the world, especially Just the presence of our content will be a positive for generating increased awareness.

Speaker 4

And then my second question is, could you give us an update on what's happening with the fast channels and the ad revenue stream progress, please?

Speaker 2

Yes. So we signaled to that a little bit. We will be rolling out in the 4th quarter with Large AVOD platforms and then we'll be also putting some content into a broadcast syndication and the same goes We've been encouraged obviously to do this for a while. We want to make sure that we crafted Deals that made sense because as you know, it's easy to just stick a fast channel out there. It's easy to just put AVOD content out there.

Speaker 2

But If you're not aligned with the large platforms, if you don't have any promotion, and if you don't have the right positioning, you risk yelling into the wind. So we want to be real thoughtful about this and create a revenue stream that is growing Every quarter and we think we can really build on and that we think will be really additive to what we're doing even in the subscription space through Enhancing the top of the phone.

Speaker 3

If I could add just a little bit, Laura, those revenues appear in our other revenue category. That category had $622,000 of revenues in the 2nd quarter. That was up from $274,000 in the 1st quarter And down from $1,700,000 in the Q2 of 2022, but that quarter had $1,600,000 of the $1,700,000 was related party revenue. So non related party revenue was roughly $100,000 a year ago. So that is a category that has experienced some nice growth when

Operator

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

Speaker 3

Yes. Hi. How are you guys doing? Thank you for taking the question.

Speaker 5

I guess I'd like to start, I know you haven't passed through the price increases across the entire base. And I'm I'm just kind of curious though for where you have instituted the price increases, if you can sort of discuss the response or what kind of Turn machine, people are not on annual plans. And then finally, when do you actually expect to have the price increases through the entire base? I mean, guess what percentage if you could remind us, what percentage of the base is on annual plans at this point?

Speaker 3

Yes. So What we are seeing, of our D2C customer base, The vast majority of those folks are on annual plans of the existing subscriber base, north of 90%. Our partner direct revenues is more of a monthly Cyclist subscriber rate. We are Seeing as we so we did a lot of testing this quarter about with different cohorts of our subscriber base depending on whether you are monthly or annual, what type What price point you are paying at? What type of package you are coming in at?

Speaker 3

We tested a whole bunch of different Trials to see how best to pass through price increases, what packages would generate the best outcomes for us. And so we are starting to see Some increase in that pricing start to flow through the financials now, early days. We're also seeing a slight increase In churn, which was not which was fully anticipated and what we're seeing was well within the range of what was anticipated. But as you expect and as we when we talk about this price increase to begin with, we expect That the economic benefit of the price increase given the magnitude of the increases will well offset, much more than offset any increase we see as a result Of churn that happens with existing subscriber base. Thank you.

Operator

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

Speaker 6

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

Speaker 2

Excellent questions, Jim. Thank you for asking those. In regard to localizing and languaging our content, There's a range of costs. The good news is that we believe over time that will come down considerably, particularly if we're able to take advantage Generative AI solutions that are out there. I will say that in our case, a lot of our languaging is behind us.

Speaker 2

We've as part of MVPD distribution agreements that we entered into, we had some licensing obligations. So we have most of that is in our rearview mirror. We'll continue to license kind of moderately going forward. But I think the good news is like Price has come down, which has given us and the fact that we've just done a lot has really provided us A lot of flexibility going forward. And again, there are 100 and 100 and 100 of licensing partners when you have, Thankfully, premium factual content that you can put anywhere into the world.

Speaker 2

So we actually like that. We like that trend and I think that I think you could really argue that we've been a little too precious about our content in the past and we have a lot of different

Speaker 3

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

Speaker 6

Okay. Thank you. And just one other thing. In terms of the price increases you were Trying to put into effect. Would you say you're getting not very much resistance from Those you're offering the service at a higher price?

Speaker 6

Or can you give any guidance as to share of individuals who are Staying with you versus declining?

Speaker 3

Yes. So I mean we've seen a slight uptick in terms of People leaving the service relative to what we had experienced before we had price increases. But again, it's Well, more than offset by the positive impact of the increases themselves and a lot of what we spent the Q2 doing with different cohorts was Looking at what would be the offers that would be most positively received and most likely to bring people Have people continue to stay on the service, but at a higher price point. So that could be, for example, bundling in ODU with the renewal of a Curiosity Stream subscription. It could be encouraging people to upgrade to Smart Bundle, which as Clint said, is no longer at such a premium price point to The now stand alone price point for CuriosityStream.

Speaker 3

So a lot of work and effort was done with different groups to figure out what the best offer for each of them was. And So we are seeing some slight upticks in some of the metrics in terms of people leaving, but Again, well within the range of

Speaker 2

what was anticipated. We should have increased pricing earlier, Jim. The trade will take any day.

Speaker 6

Okay. Well, that relates to never, I guess. So thank you much.

Operator

Your next question comes from Tom Forte with D. A. Davidson. Your line is open.

Speaker 7

Hi. This is Sharon Gee on for Tom Forde. Thank you so much for taking my questions. My first question is how, if at all, are you affected by the writers and actors' strikes? We would think that you are relatively well positioned versus your peers, Given that it seems to us you are less reliant on riders and actors?

Speaker 2

Thank you for asking that, Sharon Geet. I think we're better aligned than most in the industry and We've seen no impact in regard to our amassing of content either through creation and acquisition And we've seen no identifiable impact to licensing revenue. Should it continue for a long time, It could create a small tailwind, but we haven't even seen that today.

Speaker 7

Thank you. And for my second question, Disney seems more interested in partnering with companies than it has been in the past. And the best example right now is its online vetting effort with Penn Entertainment. And given its focus on content from National Geographic, is there an Do you foresee stream to work more closely with Disney, especially as it ramps its efforts to cut costs, including for content?

Speaker 2

Thank you for asking that as well, Sharon Jeet. I would say as sure as the sun will set in the West, bundling offers and alliances will increase. We've always believed that and we will leverage those opportunities appropriately. Even for our premium tier smart bundle that Peter just talked about. We're receiving new inquiries and requests every week to be a part of that.

Speaker 2

And so I won't speak specifically to Disney, But boy, what an opportunity they created for Penn's former content partner. But we will align as both an anchor and a complementary service Wherever it makes

Speaker 7

sense. Thank you.

Operator

There are no further questions at this time. With that, we will conclude the Curiosity Stream's 2nd quarter earnings call. I would like to thank everyone for joining us today. Have a great evening. You may now disconnect.

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Key Takeaways

  • CuriosityStream achieved its third straight quarter of improved adjusted free cash flow and grew sequential revenue by 14%, while cutting marketing spend by 63% year-over-year and reducing G&A expenses by 25%.
  • The company introduced higher pricing for all new direct subscribers and selectively tested raises for existing annual plans, with full P&L impact rolling through renewals into late 2024.
  • CuriosityStream expanded its content licensing footprint with over a dozen new partners across the Middle East, UK and Europe, shifting to higher-margin library deals and preparing for AVOD Fast-channel and broadcast syndication in Q4.
  • On the content front, the service premiered original series such as Lift the Ice, Giants and The Real Wild West, added hundreds of titles in finance, history and tech genres, and reduced cash content spend by 63% while staying within budget.
  • With $44.8 million in cash, no debt and a book value of $1.94 per share, the company reaffirmed Q3 guidance of $13.5–$15.5 million revenue and is on track for positive adjusted free cash flow.
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Earnings Conference Call
CuriosityStream Q2 2023
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