Earnings Call Transcript - CURI Q4 2020

Denise Garcia, Investor Relations

Thanks David. Welcome to CuriosityStream’s discussion of its fourth quarter and full year 2020 financial results. Leading the discussion today are Clint Stinchcomb, CuriosityStream’s Chief Executive Officer; and Jason Eustace, 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 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 annual report on Form 10-K for the year ended December 31, 2020, when filed. In addition, reference will be made to non-GAAP financial measures. Now, I’ll turn the call over to Clint.

Clint Stinchcomb, CEO

Thank you, Denise. I’d like to thank everyone for joining our fourth quarter and full year 2020 earnings call. I’m delighted to have with us today, our COO and General Counsel, Tia Cudahy; our CFO, Jason Eustace; and our Chief Product Officer and EVP of Content Strategy, Devin Emery. After my comments, I will turn the call over to our CFO, Jason Eustace, to review the financials. CuriosityStream’s mission is to provide premium factual entertainment that informs, enchants and inspires. As a pure-play streaming service, we are capitalizing on current and emerging worldwide trends favoring on-demand content. Our security and robust business model with multiple avenues of content monetization and our differentiated content offering provides us with several key competitive advantages. And our focus on factual content, which has longevity and engaging appeal across multiple demographics and geographies, is key to our success. Let me talk about our success in 2020. I’m pleased to report that we had a record end to the year and fourth quarter. Our year-end 2020 revenue was more than double our 2019 annual revenue and more than four times our 2018 annual revenue. Revenue in the fourth quarter grew 70% year-over-year to $11.4 million, driven by continued strength in direct subscription revenue with program sales and sponsorship also contributing to our success in the quarter. Our team produced these results through a pandemic while also crossing several milestones during the year. I couldn’t be prouder of what we’ve accomplished. I’ll start with the fourth quarter. On a year-over-year basis, paying subscribers grew 50% to approximately 15 million, with continued strength in subscribers on annual plans and international subscribers. We continue to build up our content library and increase our distribution partnerships worldwide. I’ll share more details about each of these highlights, starting with growth in subscribers. A couple of factors contributed to these results. First, Q4 is typically our most active time for new subscribers, which in turn can produce a high churn rate. But this year, we reduced our already low monthly churn by more than 25% year-over-year. We attribute this churn decrease to improvements in marketing, content and product that we implemented throughout the year and that we continue to implement. Our mix of targeted investments and awareness, marketing tactics and direct response efforts aimed at keeping our customer acquisition cost-efficient also contributed to results. We continue to optimize our business to our North Star metrics, revenue and paying subscribers. Compared to 2019, at the end of the fourth quarter 2020, we increased our direct subscriber count by nearly 100% and increased our LTV by 48%, both while decreasing our total overall marketing budget year-over-year. This demonstrates the impact of the efficiency-focused and agile marketing strategy we continually employ. We continue to deliver unique, relevant and current perspectives through groundbreaking new content. During the quarter, we premiered original series like ENGINEERING THE FUTURE, narrated by the renowned Patrick Stewart, which explores the new era of green and mega machines, focused on wind, aviation and fusion. And the Landmark original franchise BEYOND THE SPOTLIGHT, executive produced by Leonardo DiCaprio and his team at Appian Way, which reveals how celebrities like Shaquille O’Neal, Kristen Bell, and Samuel Jackson are channeling their personal passions to help change the world. During the election cycle, we also premiered our special Fighting for Lincoln: The Wide Awakes, which explores the powerful but long forgotten paramilitary movement that many believe delivered Abraham Lincoln to the presidency, and the companion three-part mid-form series Electing Lincoln, which reveals the key events in the run-up of the 1860 election that sparked America’s civil war. We also greenlit our largest and most ambitious slate of original programming yet for 2021, including notable projects like The Rescued Chimpanzees of the Congo with Jane Goodall, the Royals in Color, The History of Wall Street, CEO of Sinaloa, The Year that Rocked the World, and many others. We’ll make more announcements about our new program franchises in the coming weeks and months. We continue to invest in the distinct content that defines us: nature, history, science, travel, and every category in the factual genre. We will see more new originals this year than any time in our history. Our acquisition strategy will continue to expand the library that is already largely unrivaled and goes deeper than others in the topics that our viewers already care about or have yet to discover. Also during the quarter, we entered an international distribution partnership with Tata Sky, one of India’s largest content distribution and pay-TV platforms, and grew our distributed subscribers via partnerships with Russian operators. Not surprisingly, an increasing number of brands have an interest in the premium factual SVOD space, especially as it relates to telling factual stories about the marketplace in which they operate. We began recognizing revenue from sponsorship and brand partnerships in the fourth quarter with brand partners from the financial services and health and wellness categories. As an example, one was interested in sponsoring content we developed about the perils and promise of blockchain. Blockchain, Bitcoin and crypto is a story they wanted to own, and they trust CuriosityStream’s partnership team to get it right. Another brand we worked with is becoming a global leader in connected fitness. Their business, like many in their space, has experienced a boom in growth as a result of COVID-19. They were interested in creating content that explores the phenomenon in connected fitness. So, CuriosityStream created The World Interrupted: Evolution of Fitness for this partner and promoted it across several platforms. It also has been very well received by our audience, both behind and in front of the paywall. Moving on to the year, we crossed significant milestones in every area of the business. We grew revenue to a record $40 million. We generated approximately 15 million paying subscribers with notable strength in direct-to-consumer and international. We improved the features and functionality of our product during the year by adding multi-language support for audio tracks and captions, launching our on-now linear app, experience significantly improving search and discovery within our apps and improving our quality of service infrastructure to allow us to better proactively improve customer experience. We significantly strengthened our management team with strong leadership hires in the area of third-party U.S. distribution, international distribution, brand partnerships, audience development, and finance. We increased the quantity and quality of our content library and continue to have one of the largest streaming factual content libraries in the world. A few highlights in this area for 2020 included the Landmark 90-minute special POMPEII: DISASTER STREET, featuring exclusive access to the first excavation of Pompeii in more than 70 years. The Epic 3-part series HISTORY OF HOME, narrated by renowned woodworker, Parks and Recreation’s Director of Parks, Nick Offerman. And the 8-part series 4th AND FOREVER: MUCK CITY, compelling portrait of an iconic South Florida community on the banks of Lake Okeechobee that has produced some of the NFL’s biggest stars. And in October, we became the first publicly traded media company focused on streaming factual content. More recently, in the first quarter of 2021, we completed the follow-on offering, raising approximately $100 million in proceeds, which we intend to invest in programming and marketing. This process also enables us to strengthen our investor base with blue chip long-term institutional holders. Put another way, we plugged $125 million redemption gap through the secondary initiative and through warrant exercises. I can’t emphasize enough the importance and value of being able to focus on running the business without the additional responsibility of raising money. We are entering 2021 in a position of strength, strong balance sheet and a leading factual content library streaming. And as we have more than 80% of our year-end revenue target committed, over 80%, we’re off to a strong start and on track to achieve our year-end revenue goal for 2021. I’d now like to turn the presentation over to the architect and engineer of our fortress balance sheet, our talented CFO, Jason Eustace.

Jason Eustace, CFO

Thanks, Clint. I’m also excited about our strength entering 2021 and our 2020 accomplishments. Before I review our fourth quarter financials, I’ll note that we have included our unaudited financial statements of operations for the fourth quarter and the full year of 2020 as well as our net loss to EBITDA reconciliation in today’s press release. Our audited financials will be included in our 10-K filing, which we’ll be filing next week. Now, let’s review fourth quarter financials. So, CuriosityStream’s Q4 2020 revenues grew 70% to $11.4 million, up from $6.7 million in Q4 2019. This was led by direct-to-consumer and distribution subscription revenue. We continue to increase all of our revenue lines year-over-year with new contributions from sponsorship and advertising. Cost of revenue was $4.7 million or 41% of revenue compared to 36% of revenue in Q4 of 2019, primarily due to an increase in the content amortization as a result of timing and the number of titles released in Q4 2020 compared to the same quarter the prior year. As a result, the Q4 gross margin was 59% compared to about 64% in Q4 of 2019. Advertising and marketing expenses was $13.3 million, a 14% decrease year-over-year and a sequential increase of approximately $5 million, as we noted last quarter. CuriosityStream’s overall operating expenses increased 16% to $22.2 million from $19.1 million in the fourth quarter of 2019. Fourth quarter EBITDA remained relatively flat compared to the fourth quarter of 2019 at a loss of $15.5 million compared to an EBITDA loss of $14.8 million last year. CuriosityStream’s ending cash and investment balances on December 31, 2020, totaled $42.4 million compared with $60 million at the end of 2019. On October 15th, at the closing of our business combination with Software Acquisition Group, we received $49 million. And more recently, in February of this year, we closed an additional public offering of approximately $101 million. We are on track with our plans for 2021 to deliver $71 million in revenue, which is consistent with our disclosure during the business combination. We have good visibility on our revenue and over 80% of our 2021 revenue goal is committed at this point. We expect some lumpy quarters as our new lines of business such as program sales and sponsorships ramp up and create an outsized second half of the year. And now, I’ll turn it back over to David to open the line for questions.

Operator, Operator

Our first question comes from Dan Kurnos with The Benchmark Company. Your line is open.

Dan Kurnos, Analyst

Great. Thanks. Good evening, everyone. Could you discuss the trends in direct-to-consumer subscriptions? You finished the year strong, and I’m curious if you reached 1 million in direct-to-consumer on the domestic front. Can you help us understand what to expect for the remainder of the year, including some of the factors at play? There's talk about stimulus driving an increase in that area. Additionally, you have the annual pricing changes, which will reduce some of the positive effects later in the year. In terms of potential upside to your targets, where do you see that heading? Also, on the corporate side, how do you perceive the progress and the influence of reopening on that segment? Thank you.

Clint Stinchcomb, CEO

Thank you, Dan. I'll take it from here and then pass it over to Jason. I believe the initial trends are very encouraging for us, particularly regarding our third-party businesses. As you noted, we experienced significant growth in our direct services over the past year, and based on our observations so far this year, we don't anticipate that slowing down. However, we do see an opportunity with the world reopening. Personally, I'm traveling to South Florida later this week, which has a vibrant media community in Miami, and then I'll be heading to Los Angeles next week where things are also opening up. I think this overall trend of being able to meet and communicate with people to share our story regarding our third-party partners is a very positive development for us. As more international locations open up, that will further enhance our momentum. Therefore, this is a great trend for us, and we are hopeful it will positively influence our direct business as well.

Jason Eustace, CFO

The only thing I’d add there is that we continue to see the growth that we saw coming out of third quarter, continuing into fourth quarter and then continuing into the first part of 2021. It’s strong continued growth on that direct side of our business. So, nothing’s really changed. And so, even with the overall larger economic profile changing, things opening up, it has not negatively impacted our business.

Dan Kurnos, Analyst

Great. You might notice some benefits from the upcoming stimulus funding. Regarding program sales and advertising, it still seems to make sense. You mentioned the trends for the latter half of the year. Perhaps you could share some insights from your discussions, as the stimulus will likely have an important influence. I understand you are working on your go-to-market strategy and how this will unfold. There is definitely a strong demand for content and advertising, which is expected to increase as the year progresses. Any additional information you could provide on how you anticipate this developing throughout the year would be appreciated. Thank you.

Clint Stinchcomb, CEO

Yes. On the brand side, I would say that we hired a great leader for our brand partnerships business last year, Nate Stamos, who spent the majority of his career at Time Inc. I think he’s sold a lot of deals since he started. And all of those conversations and meetings that he’s had, will begin to bear fruit as he executes on a lot of what is Devin Emery’s vision for how we maximize brand partnerships. So, we definitely see that business growing. And then, as it relates to program sales, the nice thing about that business is, we conduct it two ways. One is through some modest library programming sales in parts of the world where it can be promotional for us or not going to cause any heartburn to our other businesses. And then, we also engage in presales constructs, which gives us a lot of visibility into revenue that is going to hit 6 to 9 to 12 months down the line just because of the nature of production. But, the fact that we’re in the factual space has enabled us to continue to produce content right through the pandemic. We haven’t had any of the issues that many of the scripted companies have faced. So, we’ve got some great partners there, meaningful media companies who are excited to work with us over the long term as well.

Operator, Operator

Your next question comes from the line of Laura Martin with Needham. Your line is open.

Laura Martin, Analyst

Hi, there. Can you hear me okay, guys?

Clint Stinchcomb, CEO

Perfectly, Laura.

Laura Martin, Analyst

Great. So, you said that sub growth was driven by international. So, I’m curious as to what international revenue was as a percent in Q4? And when you gave us the projection for next year, can you give us a size, the international component of that? Is that growing, or is it staying the same in terms of percent of total revenue contribution?

Clint Stinchcomb, CEO

So, our international business experienced significant growth. The majority of our direct subscribers are from the U.S., while most of our bundle subscribers are from international markets. Year-over-year, our international revenue increased by 7 percentage points, indicating a positive trend. Currently, most of our direct subscribers are in the U.S., and a slight majority of our bundled subscribers are located outside the U.S., but we anticipate that over time, international revenue and subscribers will take the lead.

Laura Martin, Analyst

Okay, cool. And then, my recollection is about 30% of your library hours are owned by you 100%, and then 70% is licensed. So, were those numbers stable in Q4? And when you look out to Q4 of next year, do you expect any shift to that given your aggressive content creation planning for 2021?

Clint Stinchcomb, CEO

We like that mix, and we’ll continue to do more and better great originals. At the same time, we have a lot of excellent relationships around the world and we see a lot of great content that’s available for acquisition that we can acquire at a very palatable and efficient rate, sometimes as part of broader deals. So, we anticipate that mix to stay about the same.

Laura Martin, Analyst

And also, how long are those deals, are they five-year deals?

Clint Stinchcomb, CEO

Three to five-year deals, typically, when it comes to acquisitions.

Operator, Operator

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

Jim Goss, Analyst

Thanks. You mentioned a couple of the key programming areas you’ve developed, such as POMPEII. And I’m wondering how you are planning to use this unique programming to build subscribers, and in which areas do you think they would focus in relative to DTC and bundled and program sales, et cetera?

Clint Stinchcomb, CEO

The short answer is, as we’re in the content monetization business, we look to monetize across multiple platforms of businesses. But, I think, it’s a great question that you asked, Jim. And I’m going to have Devin speak to it a little bit more as it relates to the direct business.

Devin Emery, Chief Product Officer

The tent pole program is a crucial aspect of our overall marketing strategy, complementing our conceptual marketing efforts. We are actively informing people about what CuriosityStream offers, and these tent pole programs help attract viewers specifically for targeted content. You will notice promotions across all our channels, particularly on platforms where we can direct users straight to some of our tent pole offerings, encouraging them to sign up and remain with us. Most of our marketing is centered on defining CuriosityStream, conveying the value of our extensive library. Additionally, we leverage POMPEII and other significant tent poles like HISTORY OF HOME for more focused and interest-based marketing initiatives.

Jim Goss, Analyst

But, I know you are trying to build visibility. And are there ways you can promote this programming to attract the attention, aside from the bundled distribution that you’re looking at and say the corporate and educational subscriptions that you’re using to create some of that visibility? Are there certain areas where you think you can do that especially with this higher profile of content that I think you’re drawing attention to? And you also mentioned the blockchain and connected fitness, very interesting, a unique take on things that occurred. How might those tie into all these processes as well?

Devin Emery, Chief Product Officer

Yes. So, that’s a good point. And yes, we are doing that. A good example of that is what we did with HISTORY OF HOME, right? So, we had Nick Offerman attached to that. It made for a really great opportunity to use him, use the show to specifically market that show. And he has a lot of love; right? People really like Nick Offerman, they like everything that he’s in. So, we’re able to use that to hit that group of people; right? So, you heard his voice on the radio, and you saw him and heard him on television slots as well as social. So, yes, when we have shows like that, which we have more and more of, we do create show-specific campaigns that leverage the talent involved and the strength of the programming. So, we’re absolutely doing that. We’ll continue to do more and more of that. Clint, do you want to take the second part?

Clint Stinchcomb, CEO

Well, I would say we actually have a feature documentary this year that we’ll put marketing resources behind it. But, we also want to premiere it there, just to give you a sense of the scope and scale of some of the projects that we’re working on. So, we recognize, we’re not a hit reliant service or hit reliant business. But obviously, if we can find more and bigger content that resonates culturally, that will only have a positive impact on the business.

Jim Goss, Analyst

Okay. And maybe one last one. Maybe this is way off base. But, we look at the theatrical exhibitors and studios also. And with the changes in windows, it’s creating a focus on blockbusters, which could create some void on the smaller end of the film releases. Do you think there’s any of the content you’re creating that could play a role in filling some of that void that you could release theatrically, especially since you’re creating it in very high quality?

Clint Stinchcomb, CEO

I think the answer is we have the quality to be able to do that. And what it would come down to is the business case there.

Operator, Operator

Your next question comes from the line of Logan Thomas with Stifel. Your line is open.

Logan Thomas, Analyst

The first question relates to the pace of investments, specifically how you plan to prioritize investment across various growth areas and revenue streams over the next 12 months. It would be helpful to understand how investors should view the pace of these investments and how aggressively you plan to pursue these opportunities.

Clint Stinchcomb, CEO

Yes, that’s a great question. We are seeing strong growth with our direct service, and we are very confident that by increasing our marketing and promotional resources, we can achieve significant growth in that area. We are consistently discussing with the Board whether it makes sense to accelerate our efforts beyond our current plans. Our focus is on reaching our year-end targets, and we are confident in our ability to do so. We would certainly like to invest a bit more in marketing and promotions to expand our direct business, especially since we believe we have some flexibility in pricing. This is an area we continuously evaluate and monitor.

Logan Thomas, Analyst

That makes sense. I have one more question regarding the 80% committed. Jason touched on this briefly, but I want to clarify. The 80% committed comes from direct annual subscribers, active life agreements with distributors, and committed program sales. Are there any additional significant factors that investors should consider to reach that 80% level from the current run rate?

Jason Eustace, CFO

Yes. I think, the one thing that you have to take into consideration is that we do have the two newer lines of revenue with that program sales and the brand sponsorship side, which is going to create a little bit more of a lumpy quarter-to-quarter cadence. So, you’re going to have potentially down quarters and some that can have big swings after the one following the next as well just because some of those program sales deals can be quite substantial or some of the brand sponsorships can be. And so, as those mature, we’ll get to a more run-rate business. But, we’ll definitely hit our full year numbers of $71 million. We definitely are 80% committed. Certain lines of business, we do have a greater line of visibility, like the direct, like you articulated on the direct, the partner direct, the recurring contracts we have on the distribution side. But, there still remains the go get on top of that within certain of those lines of business as well.

Operator, Operator

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

Tom Forte, Analyst

Great. Thanks for taking my question. And congrats on the quarter. I had one question and one follow-up. So the first question is, you talked about the reopening of basically everything. So, to what extent, if at all, was your production negatively impacted by COVID, and if it was impacted, where do things stand today?

Clint Stinchcomb, CEO

The good news, Tom, is that we produced right through COVID and we premiered new programming right through COVID. Now, you need to get a little creative in certain cases. And so, some of the productions that we were in, the pacing extended a little bit. We did some interviews over Zoom as compared to doing them in person as people weren’t comfortable, sitting with the camera crew. And so, I would say that we learned a lot. And we even got a little bit more efficient in certain cases. And so, I would say that going forward, it’s only getting better. That said, there are a few pockets, a few places internationally, where it’s still a little bit difficult. But, in light of the flexibility that we have around production schedules and in light of the fact that, again, we’re in the factual space and not the scripted space, we’re confident that everything that we’re working on will continue to go according to plan and deliver around the times that we’re anticipating to deliver. Does that answer your question, Tom?

Tom Forte, Analyst

It does. I knew that you had some advantages as far as you weren’t dependent on large numbers of actors and things of that nature that work in your favor. I just wasn’t sure to what extent you were still disrupted. Okay. So, the second question I had was as more subscription video-on-demand or hybrid subscription video-on-demand, advertising video-on-demand services come online, do you think that’s had any impact at all on your viewership?

Clint Stinchcomb, CEO

Yes, I believe we are focusing on our own path. There's an increasing amount of content available on various platforms daily. Regarding the AVOD platforms you mentioned, if you dive into those, the companies that own them, like Fox or Viacom or Samsung, are earning significant revenue, and some programming partners are benefiting as well. However, much of the content on those platforms receives minimal viewership and doesn’t perform well in terms of ratings. For us, there will always be more content created—that’s just part of the industry and a current trend. This is why we are dedicated to maintaining a premium brand position as the top factual content provider. We believe we are achieving this and by continuing to focus on our strategy and execute our plan, everything will ultimately turn out positively.

Tom Forte, Analyst

Great. If I have time, I want to ask one more question. So, anecdotally, I’ve enjoyed a lot of the content on the platform. You talked about the Lincoln material you had. It was excellent. You have great stuff on big cats that my children enjoy. Is it still the case that your viewership is widely spread out, meaning no one individual title or a handful of titles represents a dominant portion of your viewership?

Devin Emery, Chief Product Officer

That’s correct. Our product overall is very widely accessible, very widely loved. And then, what we find is that people use it in different ways, right? So, by being very broad, we can capture a large percentage of the market. But, what we are focused on here, from a content and product perspective as well, is that people use it in kind of their own individualized way and as different cohorts use it in different ways, we can also adjust our products to be able to make it easier to do so, right? So, an easy example of this is CuriosityKIDS. So, kids are using our product; we can make it feel and look that interacts slightly different with different programming than if their parents are, so even in the same household. So to answer your question, yes, it’s still very broad-based. But we can continually do more and more to engage each different demographic exactly based on the behavior that they’re displaying on our platform.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.