GAIA

Gaiam, Inc. (GAIA)

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Gaiam, Inc. (GAIA)

Q3 2007 Earnings Call

November 7, 2007 4:30 pm ET

Executives

John Mills - Integrated Corporate Relations, Inc., IR

Jirka Rysavy - Chairman and CEO

Vilia Valentine - CFO

Lynn Powers - President

Analysts

Gordon Hodge - Thomas Weisel Partners

Mark Argento - Craig-Hallum Capital

Lloyd Warmsley - Thomas Weisel Partners

Presentation

Operator

Welcome and thank you for standing by. At this time all participants are in a listen-only mode. We would like to thank you for joining us for the Third Quarter 2007 Financial Results. (Operator Instructions) Today's conference is being recorded, if you have any objections you may disconnect at this time. Now I will turn the meeting over to Mr. John Mills. Thank you sir, you may begin.

John Mills

Thank you. Good afternoon everyone and welcome to Gaiam's third quarter 2007 Earnings Call. The following constitutes the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Except for historical information contained herein, the matters discussed in this call are forward-looking statements that involve risks and uncertainties, including, but not limited to, general business conditions, integration of acquisitions, the timely development of new businesses, the impact of competition, and other risks detailed from time-to-time in the company's SEC reports.

The company does not undertake any obligation to update forward-looking statements. On the call today representing Gaiam, Mr. Jirka Rysavy, Chairman and CEO; Lynn Powers, President; and Vilia Valentine, CFO.

Now I'd like to turn the call over to the company's Chairman and CEO, Jirka Rysavy.

Jirka Rysavy

Thank you John, and welcome everyone to our third quarter call. And I'm very pleased again it was another very good quarter. Revenue for the quarter ended September 30, 2007 increased 36% to $70.3 million from $51.8 million in the same period of last year. This strong performance reflects internal growth rate of 34%.

Gross margin increased 260 basis points to 65.6% from 63% in the 3Q of 2006, which was on top of a 750 basis point increase from 55.5% in the third quarter of 2005. Operating expenses as a percentage of revenue decreased to 59.7% from 61.0% even this increase in expenses relates to our expanding of community business.

Net income for the third quarter increased 77% to $2.9 million from $1.7 million and with the share buyback we did early this year we have doubled EPS for the quarter to $0.12 from $0.06 in a same quarter of 2006.

Depreciation and amortization for the quarter was $3.3 million. For the nine months Gaiam revenue increased 24% to $181.1 million from $146.7 million and net income tripled to $4.3 million, or $0.17 per share, compared to $1.4 million, or $0.06 per share, for the nine months in 2006.

The record 34% internal growth for the quarter is pointing to the increasing shift in our seasonal revenue flow. We estimate that approximately $6 million to $8 million of revenue were received early as compared to the last year. So I think to normalize the kind of internal growth that it comes for the third and fourth quarters for this year should be probably viewed together.

According to Nielsen's VideoScan, Gaiam's market share in the fitness/wellness DVD category increased to 49% year-to-date from 45% in the same nine months in last year and for the third quarter Gaiam’s market share increased further to 53% up from 46% during the third quarter of last year.

And we have currently 66 titles in the top 100. During the third quarter, which is historically the most demanding period for our cash flow, we have generated $4.1 million in cash from the operations, bringing the year-to-date cash from operations to $20.6 million which is $20 million ahead of $0.6 million generated during the nine months of last year.

During the third quarter, as we announced previously we have acquired Zaadz, LIME Media, and majority ownership in Conscious Enlightenment, to strengthen our community division and create a unified solution for LOHAS.

We are also in later state with several other acquisitions. We continue to invest in our community and subscription costs. The number of paid subscribers is increasing at a pace above our expectations. You can see the better side of our community navigation and Gaia.com or at Gaiam.com at the subscription tab. Beside we'll continue to evolve as we integrate our acquisition, we expect this part of the process to be completed by the end of the year conference call and on the conference call we also start to provide some performance data for the subscriptions. We currently expect that for full year of 2007 over a 40% increase in our earnings per share as compared to 2006. We also expect that earnings per share growth will increase in 2008 as compared to 2007 and it will be closer to 50%, even if this is our plan to continue investing in our community and subscription business.

Gaiam is also entering in a strategic relationship with Care2, a social networking site with 7.5 million members were among other things, Gaiam will become an exclusive provider of paid subscription services and e-commerce for Care2. And they will promote our subscription services and pre-agreed number of newsletters and [other places]. Also as we informed you earlier during the quarter our Board of Directors authorized a share repurchase program up to 5 million shares of our common stock and also filing of shelf registration statement for the amount of shares. As we said shareholders of some of these potential acquisition they request Gaiam shares as the acquisition consideration where we obviously prefer to use cash on hand. We intent to file the shelf shortly.

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