Earnings Call Transcript - CURI Q3 2022

Operator, Operator

Good afternoon, good evening. My name is Devin and I will be your conference operator for today. At this time, I would like to welcome everyone to the CuriosityStream Third Quarter 2022 Earnings Call. All lines have been placed on you to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Investor of Relations, Denise Garcia, you may begin your conference.

Denise Garcia, Investor Relations

Thank you, Devin. Welcome to CuriosityStream's discussion of the third quarter 2022 financial results. Leading the discussion today are Clint Stinchcomb, CuriosityStream's Chief Executive Officer; and Peter Westley, 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. 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 30, 2022, 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.

Clint Stinchcomb, CEO

Thank you, Denise. I appreciate everyone for joining our third quarter earnings call. I recognize we are not the only company reporting tonight. Along with us today are our COO and General Counsel, Tia Cudahy; our CFO, Peter Westley; and our Head of Content, Strategy and Distribution, Robert, Devin Emery, and Macquarie Davis. We achieved another strong quarter in Q3, with revenue and EBITDA surpassing the upper limits of our guidance ranges. We are making significant strides towards establishing ourselves as a sustainable and profitable company. Our CFO, Peter Westley, has already made a notable impact in his first six months, as highlighted by this quarter's impressive bottom line performance. As Peter will explain in his remarks, we exceeded EBITDA by nearly $6 million compared to our guidance midpoint due to enhanced operating efficiencies, reduced marketing costs, and improved gross margins. We are thoroughly examining all aspects of our operations to foster quality, accountability, and cost efficiencies throughout the company. Before we delve deeper into the quarter's results, I want to highlight several key points that showcase the value of our evergreen factual content and our diverse revenue stack. We have strategically positioned CuriosityStream to cater to consumers globally, maximizing our content and IP to enhance audience engagement and profitability. During the quarter, we established licensing agreements with various media companies, both domestically and internationally. We also partnered with new prominent advertising clients in the automotive, technology, and financial services sectors. Among our streaming subscribers, we are particularly pleased with the increasing popularity of our Smart bundle, indicating that many subscribers are willing to pay a premium for the service. Our subscriber retention remains exceptional, with low single-digit monthly churn. With over 85% of our DTC subscribers on annual plans, we can utilize extensive data to provide personalized service to subscribers before they even consider renewal. Despite significantly lower marketing expenses last quarter, we continued to see growth in direct subscribers on both a year-over-year and sequential basis. Regarding our third-party distribution business, we are adding new partners in Q3, including the largest MVPD in the Netherlands. Bundled distribution creates multiyear recurring revenue and offers excellent opportunities for our direct and content licensing segments. Additionally, this approach gives us significant geographical diversity. Bundled distribution remains a crucial element of our strategy and a competitive advantage. As mentioned earlier, we greatly surpassed our Q3 EBITDA guidance. In the last quarter, we committed to thoroughly analyzing our marketing, content, and G&A spending to lower our cost base and enhance our economics. These initiatives led to a reduction of over $7 million in non-core operating expenses between the second and third quarters. In line with this strategy, we decided not to renew one existing bundled agreement based on the overall value exchange. Consequently, although we increased our direct subscriber tiers, our total subscriber count decreased to approximately $23 million. We have significant options available and are concentrating on partnerships and goals that ensure long-term profitability and success. While we anticipate some fluctuations on a quarterly basis, we are pleased with the progress we've made in managing our cost structure in Q3 and are focused on maintaining operational efficiency going forward. At the same time, we provided an outstanding viewer experience, launching one of the most ambitious lineups of original programming in Curiosity's history. We began in July with 'Cracking the Code,' an eight-part series exploring high-stakes races to uncover complex and significant historical mysteries. From heroines deciphering codes to change the outcome of World War II, to the investigation of the Zodiac killer and the monumental endeavor to decode the human genome. Our collaboration with leading documentary filmmakers enabled us to explore the natural world through 'Planted Insect,' a groundbreaking three-part series utilizing custom-built cameras to reveal new insights into insects, and 'The Tracker’s Diary: Bears of Katmai,' a six-part series featuring wildlife expert Casey Anderson researching one of the globe's densest grizzly populations in Alaska. Building on the success of 'Titan's the Rise of Wall Street,' we also launched our six-part series, 'Titan's the Rise of Hollywood,' showcasing the influential figures and rivalries that shaped the entertainment industry. Other original premieres this quarter included 'Kemp, The Untold Story,' a three-part series, the five-part space thriller 'Trader Patriot,' and the second season of our popular history series, 'Engineering.' Additionally, we continued to produce and share engaging new audio content this quarter through our partnership with iHeartMedia, the leading podcast publisher with double the monthly downloads of their nearest competitor. Our one-day University podcasts are now accessible, and we recently introduced 'The Happiness Formula,' a twelve-part series featuring psychologist Barry Schwartz, a leadership expert and bestselling author. We aim to bring even more excellent Curiosity content to iHeartMedia soon, including a companion podcast for our original feature doc 'Red Elvis,' further delving into the life of the legendary Cold War cowboy, Dean REIT, and our impactful upcoming video 'CSIO Trial,' which reveals the surprising lack of scientific basis in forensic investigations and the tragic true stories of wrongfully convicted individuals. These audio projects exemplify the diverse monetization opportunities available with quality factual IP. As we look ahead with our extensive factual content library, millions of global subscribers, a strong cash position, and a positive financial outlook, we are quite optimistic about our future. While competitive challenges persist among scripted content streamers, CuriosityStream stands out as a trusted source for premium, brand-safe on-demand factual content across various categories, including history, science, nature, technology, human adventure, space, medicine, and exploration. This is an excellent position to be in, and we are excited to continue delivering quality entertainment that informs, challenges, and inspires. Before I hand the call over to Peter for a detailed financial discussion, I want to express my gratitude to our dedicated employees, partners, and shareholders for their ongoing support. I would also like to personally thank Devin Emery for his contributions and collaboration over the last three years. Devin joined us as a marketing executive and rose to meet our increasingly complex objectives. While Devin will be moving on, I’m pleased he will remain with us in an advisory role. Thank you very much, Devin.

Peter Westley, CFO

Thanks, Clint. As Clint mentioned, we were very pleased with our third quarter performance, with both revenue and EBITDA above the high end of our guidance ranges, driven by a number of factors. Q3 revenue was $23.6 million, up 26% year-over-year. Before I get into breaking that total down into our revenue categories, I do want to note that we have renamed two of those categories. First, what we previously called program sales, we're now categorizing as content licensing which we think is a more accurate reflection of that business activity since many of these transactions involve the licensing of certain rights to our content rather than the outright sales of our programs. Secondly, we are renaming corporate and associations to simply Enterprise to be more consistent with industry practice. So returning to our revenues; content licensing was our most significant category this quarter, generating $10.8 million of revenue, an increase of 60% year-over-year. It's notable that this quarter saw both what we refer to as presales and content library licensing transactions. Those library licensing deals tend to have particularly attractive margin characteristics. Our second largest category this quarter was our direct business which includes our direct-to-consumer and partner direct categories. Direct revenue came in at a combined $8.6 million, an increase of 16% compared with Q3 2021. It's worth pointing out that the significant majority of our subscribers in these combined categories are direct customers of ours, which is not the case for many other streaming services. Our next largest category this quarter was bundled distribution which saw $2.6 million of revenue in the quarter. This category was down 27% year-over-year in Q3 as a result of our non-renewal of a single distribution partnership. While that partnership accounted for a meaningful amount of revenue, the overall economics for renewing the partnership were not compelling. As Clint mentioned earlier, and I mentioned last quarter, we're extremely focused on improving the overall economics and bottom line performance of CuriosityStream at this time and in the coming quarters. And as such, we'll only enter into commercial relationships that meet our long-term revenue and subscriber expectations. Our next largest category was enterprise which saw $1.4 million of revenue in the quarter compared to less than $50,000 of revenue in the prior year quarter. Finally, we had approximately $200,000 of other revenue in the quarter which was down from approximately $900,000 in the prior year's third quarter. Third quarter gross margin was 42.4%, up slightly from the second quarter. One of the big stories of the quarter was clearly a reduction in marketing expense which was 40% lower year-over-year and a major driver of our substantial EBITDA outperformance. We're also seeing meaningful progress in our efforts to reduce our G&A expense which declined nearly $2 million sequentially. We believe that we have the opportunity to further reduce these G&A expenses in the coming quarters. EBITDA for the quarter was a loss of $4.2 million, substantially better than our guidance range as a result of the factors I just described. This was the best EBITDA performance since the company went public in 2020. I would also point out that this figure includes approximately $1.7 million of stock-based compensation. Going forward, we plan on discussing an adjusted EBITDA figure during our quarterly reports as do many of our peers in the media and technology sectors. We also reduced our third-quarter cash content spend by more than $4 million on a sequential basis and by greater than 65% compared to the prior year quarter. This was enabled by the aggressive investments in content that we've made over the past couple of years. At the end of the third quarter, cash, restricted cash, and available-for-sale investments totaled $64.3 million. Part of my philosophy when it comes to guidance is that it's only truly useful to provide in cases where there's a meaningfully tight range of expected results to share with investors. As we head into the end of this year, though, we're seeing a wide range of potential outcomes for the quarter and we do not anticipate the kind of Q4 sequential revenue growth that we've experienced in the past. As you know, part of our business tends to involve lumpy large transactions, particularly in the fourth quarter that are inherently somewhat unpredictable and this year, that unpredictability is particularly notable. Also, as a reminder, last year, we generated over $10 million in fourth-quarter content licensing revenue. In addition, last year's fourth-quarter revenue included $2.6 million from the distribution agreement that we elected not to renew this quarter. Finally, we are pleased to reaffirm our expectation that we will end the year with at least $50 million of cash, restricted cash, and available-for-sale investments. With that, operator, let's open the call to questions.

Operator, Operator

First question comes from Tom Forte with D.A. Davidson.

Tom Forte, Analyst

Great. And Peter, congrats on the quarter and the progress you're making towards free cash flow generation. I want to ask you, Clint, how you got the 100 Days of Curiosity promotions going. I think it's still ongoing. I think you launched it towards the end of September. And if it's driving the success you hoped for in highlighting the differentiated content on the platform? And then I have a follow-up...

Clint Stinchcomb, CEO

Thank you for asking, Tom. We've been particularly excited about and encouraged by the 100 Days promotion. I think it's emblematic of the range of quality content on Curiosity. I think it underscores the evergreen nature of factual content broadly. And I think what we found is emphasizing this whole 100 Days approach has had a positive impact on engagement. It's had a positive impact on the duration of viewing. And it's something that's easy for people to understand and it's a great way for us to reposition our content and rehighlight what is so great about CuriosityStream. So thank you for asking. It's been great and you can expect that we will do things like this on a continuous basis going forward.

Tom Forte, Analyst

Great. And then when I think about the OTT industry in general, I feel like there's kind of two big things that are going on. One is the advancements of ad-supported services, Netflix rolling out a $6.99 a month ad-supported effort. And two, live sports moving to OTT? And then the thought there is that the live sports moving to OTT may accelerate cord-cutting. So I'd love to get your thoughts, Clint, both to the extent that you're seeing the industry move toward advertising and then maybe your own FAST channel efforts there? And then if you stand to benefit from perhaps acceleration of cord-cutting with live sports moving to OTT?

Clint Stinchcomb, CEO

In light of both dynamics, it's really important to have a pure brand like ours. We lead in the factual space with an extensive collection of factual content across key categories such as science, technology, history, natural history, society, and lifestyle, which is crucial given the various programming options available. Regarding FAST, we do have a FAST channel and are continuing to roll it out. It's part of our overall audience-building and advertising strategy. However, FAST offers more than just monetization benefits; it also allows us to promote our direct subscription tiers and is becoming increasingly useful in broader third-party distribution discussions. I believe FAST will keep growing, and people will continue to consume that content. The biggest winners will likely be platforms and companies with numerous SaaS services. For our company, it's a key component. As for the acceleration of cord-cutting, it seems likely when considering overall consumption trends. Looking at long-term trends, it's possible that some FAST platforms may develop subscription services in the future. We're currently active in both areas and aim to meet consumers where they are. Building a subscription service poses significant challenges for new entrants, making our position favorable. Our strategy has been to maintain a pure factual brand and monetize content through various avenues, including FAST, advertising, content licensing, courses, subscription tiers, and possibly other initiatives moving forward. Thank you for your question.

Operator, Operator

Our next question comes from Peter Henderson with Bank of America.

Peter Henderson, Analyst

Yes. So I guess I'm just curious on this partnership deal that ended, when did it end? I guess is the first question. And then what sort of efforts are you guys making to attract those partnership subs that you may have lost as direct-to-consumer subs? And what type of success have you had in recapturing some of those subs potentially as direct-to-consumer subs?

Clint Stinchcomb, CEO

Great question, Peter. What I'll say is it ended in the third quarter and we've attracted thousands of customers as direct subs as a result of that. And for that particular deal, not to get into who it was with, but the marketing was heavily focused on a strategically important but concentrated DMA for us which exposed Curiosity to some key constituencies, really important to other parts of our business. And again, as a result of that, we have added thousands of subscribers to our direct service and anticipate adding more. So thank you, good question.

Peter Westley, CFO

One thing I would add is that, that ended roughly midway through the third quarter.

Operator, Operator

Our next question comes from Darren Aftahi with ROTH Capital Partners.

Unidentified Analyst, Analyst

This is Austin on for Darren. Clint, I'm curious if you can discuss how you're thinking about trimming marketing expense to that degree while still balancing top-line growth and subscriber traction? And then also how we should think about that moving forward? I know you touched on that with G&A. I'm not sure if you mentioned marketing as well.

Clint Stinchcomb, CEO

I'll take the top part and I'll hand it over to Peter. Thank you for the question. So as it relates to marketing, one of the things we're really excited about is as we go into 2023, in 2023, we won't have the same marketing obligations that we've had in previous years, namely partner marketing obligations. So our marketing will move to virtually 100% performance-based market. And based on what we've learned up to this point, and as we look over what's possible, we're really excited about that transition. So I'll leave it at that and then hand it over to Peter to talk about marketing and perhaps even more broadly cash flow this quarter.

Peter Westley, CFO

I want to make a few points regarding marketing. As Clint mentioned, we managed to grow our subscriber base even without renewing a significant distribution agreement. Furthermore, this growth occurred with a considerably lower marketing spend. We anticipate that next year, after fulfilling some major contractual obligations in marketing, we will shift to entirely performance-based marketing spending. We believe this approach will provide us with a greater return on investment than what we've experienced this year. Additionally, in the fourth quarter, we expect an increase in marketing expenditure, with a contractual commitment of $6 million and an expectation that total spend will exceed that amount. Looking forward, we are confident that we can continue to grow the business with a lower overall marketing budget as we move towards a fully performance-based marketing model next year.

Operator, Operator

There are no further questions at this time. With that said, this concludes today's conference. Thank you for attending today's presentation. You may now disconnect.