GAIA

Gaiam, Inc. (GAIA)

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Gaiam, Inc. (GAIA)

Q1 2008 Earnings Call Transcript

May 12, 2008 4:30 pm ET

Executives

John Mills – IR, Integrated Corporate Relations Inc.

Jirka Rysavy – Chairman and CEO

Vilia Valentine – CFO and Treasurer

Lynn Powers – President

Analysts

Mark Argentino [ph]

Lloyd Walmsley – Thomas Weisel Partners

Presentation

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator instructions) Today's conference is being recorded. If you have any objects you may disconnect at this time. And now, I would like to turn the meeting over to Mr. John Mills. Thank you.

John Mills

Thank you. Good afternoon everyone and welcome to Gaiam's first quarter 2008 earnings conference call. The following constitutes the Safe Harbor statement 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 is 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, Mr. Jirka Rysavy. Go ahead, Jirka.

Jirka Rysavy

Thank you, John, and welcome everyone to our first call. And I'm very pleased to say again, it was another good quarter. Revenue for the first quarter ended March 31, this year, increased 11.5% to $65.2 million from $58.5 million in the same period of '07. Gross margin was 62.9% compared to 64.1% of revenue in the same period of last year. The change in gross margin reflects the company investment in lower-margin solar business. Excluding solar, our gross margin actually improved to 66.8%.

Operating expenses as a percentage of revenue decreased 250 basis points to 58.8% from 61.3%. Selling and operating expenses decreased 120 basis points and G&A expenses decreased 30 basis points. Operating income increased 64% or 130 basis points to 4.1% of revenue from 2.8% of revenue in the first Q of '07, which reflects the good leveragability of our infrastructure.

EPS increased 29% to $0.09 per share from $0.07 in the first Q of last year. The $0.09 EPS includes $0.03 loss from our community business during the quarter, which is $0.01 improvement from $0.04 loss than in the fourth quarter. Depreciation and amortization for the quarter was $2.5 million.

During the first quarter, we acquired SPRI, Carlson Solar and the remaining 49% ownership in Conscious Enlightenment, and also our non-LOHAS publication which were part of a previous acquisition. Also during the quarter, we sold our ownership in UK subsidiary, which completed our strategy to change how we operate in international markets. We expect that the transition from sales of products to licensing arrangement will improve our profitability, reduce complexity of the operations, lower capital requirements and limit the impact to the weak U.S. currency.

Because of the impact of reporting change of international revenue, we will provide this time some additional revenue information and some guidance. So the change in international strategy to licensing is expected to reduce reported international revenue by approximately $25.7 million from $33.7 million recognized in 2007 to approximately $8 million in 2008. Our international licenses fees average between 20% and 25% of the product sales.

The companies we acquired during the first Q of 2008, net of the divestiture of the publication, represent approximately $12.5 million in 2007 revenues. The companies we acquired through the last year, 2007, if we would acquire all of them as of January 1, 2007, would increase on pro forma basis Gaiam '07 revenues by $10.9 million.

Including this conversion of international product sales to licensing, acquisitions and divestitures, Gaiam expects the revenue for 2007 to be approximately $300 million, which very, very strong internal growth. With all the first Q activities, including acquisition and divestitures, integration of acquisition into the Gaiam existing sales infrastructure, and also a transition in international approach, it is virtually impossible to report the first Q comps, but Lynn will provide some gross data for the quarter as we can reliably calculate.

As a guidance for second quarter, if deliver internal growth in the mid-teens, which was the recent rate and we do expect that, it would result in approximately $56 million in reported revenues in the first and second quarter.

And lastly, to capitalize on our solar strategy, we felt the best way for our solar subsidiary Real Goods solar to grow and enhance its strong 30-year-old brand would be as a standalone company. Last week, Real Goods Solar priced its IPO of Class A common stock and sold 5.5 million shares at $10 per share. Approximately $200 million of the proceeds will be paid to Gaiam for loans we provided to our solar business. Post-offering, Gaiam owns 10 million shares or approximately 65% of Real Goods.

We do not intend on this earnings call to answer question about Real Goods and ask that you defer those questions until the Real Goods call.

Now, before Vilia will provide you some details on our numbers and Lynn a business review, I'd like to talk about our consideration of changing our segment reporting and instead of two direct-to-consumer and business segments we report currently, we are evaluating creating of three segments which would be the Solar, Community and Lifestyle. We believe that such reporting might create more transparency, but I'd like to hear from you on that, if possible. And now, Vilia.

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