Earnings Call Transcript - CURI Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the CuriosityStream First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Thank you. I’ll now turn the conference over to Denise Garcia with Investor Relations. Please go ahead.

Denise Garcia, Investor Relations

Thank you. Welcome to CuriosityStream’s discussion of its first quarter 2021 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 quarterly report on Form 10-Q for the three months ended March 31, 2021 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 first quarter 2021 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 the first quarter. I’m pleased to report robust growth in our direct subscription businesses, where we grew subscribers over 80% year-over-year during the quarter as our high-value subscribers and we are adding them at a rapid pace. We will continue to delight our customers through high-quality content additions and product innovations, which you will see from us in the coming quarters. We're also pleased to announce that we have acquired One Day University, the founder-led company, which shares our core value of providing inspiring, engaging and informative content for people who want to know more. One Day University features over 500 unique talks and lectures from the best professors from over 150 colleges and universities in the United States. This milestone acquisition for our company will fortify and enhance our long-term direct-to-consumer digital proposition to a broader factual audience, and also enable us to leverage the promotional power and reach of their enchanting live events as the world opens up. I'll provide more details later in the call. Revenue in the first quarter grew 33% year-over-year to $9.9 million driven by continued strength in direct subscription revenue. Program sales and sponsorship also contributed to our success in the quarter. As we noted on previous earnings calls, third party revenue growth can be lumpy and difficult to forecast precisely due to deal timing. We continue to expect a robust second half and now have 90% of our full-year revenue goals of $71 million committed, up from 80% at the end of last year. With over $178 million of cash and investments on our balance sheet at the end of the quarter, we are in an excellent position to invest in growth. We've always been opportunistic in our pursuit of profitable growth, and we see a great deal of opportunity in the current environment. We will take advantage of our low customer acquisition costs, continuing to invest in marketing. And according to our plan, we will pursue strategic opportunities such as the One Day University acquisition we announced today. One Day University's direct consumer services include live stream and Q&A events five days per week, premium multipart courses, and access to a proprietary library of hundreds of entertaining and informative lectures in science, history, art, politics, and more. Think of One Day University as a MasterClass for academia, which appeals to an interested and curious customer base. The digital education and edutainment industries are growing at an accelerated rate following the pandemic, which expanded market awareness and engagement. As an example, Coursera's U.S. registered learner base grew by 65% in 2020, up from 24% growth in 2019. One Day University was founded as a location-based entertainment company, which prior to COVID would hold 60 to 70 live events per year. One Day University pivoted to streaming following the COVID outbreak and launched its subscription video-on-demand service in April of last year. A year later, this service has experienced similar tailwinds from COVID that many have and is growing as the use of content is highly complementary to our existing library. With our more advanced technology platform and marketing resources, we see a tremendous opportunity to accelerate subscriber growth. We're really excited to work with the company's brilliant visionary founder Steven Schragis after this acquisition to accelerate One Day University's growth and enhance the value proposition of our direct services. They're always looking for creative ways to grow our business and enhance our service offerings. So when we identify a strategic growth opportunity, like One Day University, we will aggressively pursue it. We have other opportunities in our pipeline, which would improve our value proposition, expand our distribution and accelerate subscriber growth, which we look forward to announcing in the coming months. We continue to optimize our business around our North Star Metrics: revenue and paying subscribers. At the end of the first quarter, we increased total subscribers by 28% compared to the first quarter of 2020, to approximately 16 million, with direct subscribers increasing 80%. We continue to deliver unique, relevant, insightful perspectives on our world through groundbreaking new content. During the quarter, we premiered the three-part original series 'Ancient Yellowstone,' which reveals the stunning array of past and present life that's been discovered beneath the hot springs and snowcapped mountains of Yellowstone National Park. The series was shot entirely during the pandemic and had more viewers during its first week than any other program to date. In March, we premiered 'Nature Through Her Eyes,' a beautiful four-part series about some of the world's greatest female natural history photographers and cinematographers. It opened on International Women's Day during a special Jackson Wild Film Festival event that highlighted the enormous challenges female filmmakers face and the unique perspective they bring to capturing the natural world. At the end of the quarter, we also premiered the first five episodes of our 10-part landmark original series 'Ancient Engineering,' which reveals how major advances in design gave rise to some of the greatest structures in history and how these century-old building techniques continue to shape our world to this day. Production is also well underway on some of our most ambitious feature documentaries including a biopic on groundbreaking Black American aviator Bessie Coleman and a gripping story of why Hollywood actor Michael Enright gave up everything to fight alongside Kurdish forces in Syria during their long and brutal war against ISIS. We continue to invest in the distinct content that defines us in nature, history, science, and travel in every category in the factual genre. We will offer more new originals this year than any time in our history. We're exploring all options to expand a library that is already unrivaled and goes deeper than anyone into the topics our viewers already care about or have yet to discover. We're extremely well capitalized at the end of the first quarter with over $178 million of cash and investments on our balance sheet. Cash flow during the quarter benefited from our follow-on offering, which raised approximately $94 million in proceeds. We also received $55 million during the quarter from warrant exercises. With our strong balance sheet, robust direct subscriber growth, and leading factual content library in streaming, we are excited about our prospects for the remainder of the year and beyond. As we have 90% of our year-end revenue target committed, we're on track to achieve our year-end revenue goal for 2021. I'd like now to turn the presentation over to our CFO Jason Eustace.

Jason Eustace, CFO

Thanks, Clint. I'm also excited about our increased visibility into our 2021 revenue goal and the exciting business development activities we announced this quarter. With over $178 million of cash and investments on our balance sheet at the end of the quarter, we're in the strongest position in our history to execute our multifaceted growth strategy. Before reviewing the first quarter financials, I'll give a brief update on the 10-K we refiled earlier this month. The SEC recently required companies that have completed a SPAC transaction to reclassify private placement warrants as liabilities. As a result of the reclassification, we recognized incremental non-operating expense of $10 million for the year ended December 31, 2020. There was no material impact on our historically recorded cash and cash equivalents or cash flows from operating, investing or financing activities. During the first quarter of 2021, we recognized an incremental $3.8 million in other expense related to the change in the fair value of our warrant liability. Now let's review our first quarter financials. CuriosityStream’s Q1’21 revenues grew 33% to $9.9 million from $7.5 million in Q1 of 2020. This was driven by direct-to-consumer sales, partner direct sales, and higher program sales. Cost of revenue was about $4.2 million, or 42% of revenue, compared to 36% of revenue in Q1 2020, primarily due to an increase in our content amortization as a result of timing and the number of titles released in Q1 2021 compared to the same quarter the prior year. As a result, the Q1 gross margin was 58%, compared to 64% in Q1 of '20. Advertising and marketing expenses were a little over $12 million, a 4% decrease year-over-year, and a sequential decrease of about $1.1 million. CuriosityStream's overall operating expenses increased 22% to $20.8 million, up from $17.1 million in Q1’20. First quarter EBITDA loss was $15.5 million, compared to an EBITDA loss of $12.3 million last year, due to higher G&A costs associated with being a public company and higher personnel costs related to key executive hires we announced last quarter, as well as other great talent we added to our team during the quarter. CuriosityStream ending cash and investment balances on March 31, 2021 totaled $178.1 million, which is up from $42.4 million at the end of last year. We successfully raised $94 million in our follow-on offering and received $55 million from warrant exercises during the quarter. We are on track with our plans for 2021 to deliver $71 million in revenue with over 90% of our 2021 revenue committed to date, up from 80% at the end of last year. We continue to expect an outsized second half of the year as our new lines of business such as program sales and sponsorships ramp up and we pursue additional business development opportunities such as the One Day University deal we announced today. And now I'll turn it back over to Clint to open up the line for questions.

Operator, Operator

And your first question comes from Tom Forte with D.A. Davidson & Company.

Tom Forte, Analyst

Great, thanks for taking my questions. I had three questions in total. So the first one I have, Clint, previous calls you talked about the opportunity to advance your sponsorship efforts when pandemic-related restrictions ease and you get the opportunity to meet with companies once again. Can you give us an update on these efforts?

Clint Stinchcomb, CEO

Yes, thank you for the question, Tom. I'd say that things are still not quite as open as we'd like. But we did recently add some strong brands to our advertising roster in the consumer technology and financial services space. Our team is like coiled springs; they are ready to meet with anyone in person, virtually, anywhere, anytime in the world. And so if things open up, this roster of brand partners will only increase.

Tom Forte, Analyst

Great. And then my second question is, I was wondering if CuriosityStream gets a halo effect when one of your content providers shows another channel as David Attenborough did on Earth Day with a show on Apple TV Plus?

Clint Stinchcomb, CEO

Yes, definitely. We think it's actually additive to CuriosityStream, additive to the category when Netflix offers a program or a series like that, or when Apple TV offers a program or a series like that. For us, as we've said in the past, we want to be the most reliable destination for factual entertainment, and provided we continue to mark our territory in that way, we will benefit from the halo effect of that type of content and from other services.

Tom Forte, Analyst

Excellent. Alright. And then my third question, thank you for taking my question. On the One Day University acquisition, it really looks like a great acquisition at first blush. But we're particularly intrigued with the notion of live. It reminds us a little of what Clubhouse is doing. Clubhouse is only focused on audio and video elements as well. How can we think about your live content strategy in general? And for One Day University in particular?

Clint Stinchcomb, CEO

Well, audio was actually built on live in-person events started by entrepreneur Steven Schragis more than 10 years ago. He wanted a place where curious people could spend a fun and engaging day or half-day in community with other curious people, listening to our country's greatest minds. What attracted people is that Steven built a roster of top instructional talent, the best in the country, from Catherine Sanderson at Danvers, known for her work on the Science of Happiness, to great American historian Louis Masur from Rutgers, and Anatole Enza from Georgetown, and Scott Galloway from NYU. Steven has created the best collection of professors that you can find anywhere in the world. We believe that as the world opens back up, we will work closely with Steven and his team to increase the number of live events that are conducted every year. Over time, the most successful digital media companies whether they have an online or offline presence, include a passionate offline presence, meaning live in-person engagement. In the long run, this will deliver new direct subscribers, new brand partners, and ultimately reduce our customer acquisition costs.

Tom Forte, Analyst

Great. Thanks, Clint, for taking my question.

Clint Stinchcomb, CEO

Thank you, Tom.

Unidentified Analyst, Analyst

Thanks for the question. I just had a follow-up on the One Day University acquisition. Could you talk about the financial profile and potential synergies from the acquisition and just how you're thinking about the integration of that asset? And how you could potentially bundle the services together and utilize content or how you're going to integrate the two businesses?

Clint Stinchcomb, CEO

Yes, so. Steven and his head of operations, Kevin Brennan, run a great company right now; it’s small, about 9 to 10 people. We will need some time to properly integrate One Day University into our tech stack and marketing operations and to identify and pursue optimal pricing and packaging scenarios. They will continue to operate One Day University as a standalone business. In the next few months, we'll work closely with Steven and the rest of the team to leverage as many synergies as possible. There will be a lot more details to come, but we're really excited about what we can do together.

Jason Eustace, CFO

No, I was going to say, I think the point that we want to make is that with the acquisition, we hope to amplify their presence in the marketplace and propel their growth going forward.

Unidentified Analyst, Analyst

And you talked about some lumpiness in revenue for the year, particularly related to third-party revenues. Could you provide a little bit more color just on your expectations for growth for the year? Do you expect revenue trends to accelerate each quarter throughout the year? And do you think you were impacted at all on the subscription side, due to tough COVID comps in the first half? Or is that not much of a factor?

Clint Stinchcomb, CEO

It has not been much of a factor. I mean, churn might pick up a little bit as we enter Q2, but we're not expecting a major increase there as those COVID subscriptions kind of anniversary. While that could go up a bit, overall, we're expecting the next three quarters to be obviously bigger than the one we just had because we have to hit that $71 million target. So they will need to be much larger in order to achieve that for the full year.

Dan Kurnos, Analyst

Hi, thanks. Good evening. Jason, just to be clear, the $71 million is inclusive of the acquisition, right?

Jason Eustace, CFO

Inclusive.

Dan Kurnos, Analyst

Okay. And then Clint, also just some color. I know you talked about offline and online presence. So I'm just curious if you're viewing this as not really a pivot. This is ancillary, synergistic, with the potential for you to take some of your own talents and pipeline and potentially drive it offline, as well as getting more of their talent online. Is that the right way to view this?

Clint Stinchcomb, CEO

Yes.

Dan Kurnos, Analyst

Okay. And then maybe if you can just give us an update on the international push? Obviously, there's been a lot of noise in Asia due to COVID. But just in general, kind of the international MVPD expansion strategy, where we are there?

Clint Stinchcomb, CEO

Yes, we continue to meet with international distribution partners, obviously, not in person. I think you'll see the fruits of our labor in the second, third, and fourth quarter this year as it relates to those conversations. We have a great team; we have a strong team that's out there in lots of conversations. As things open up more, that's only a tailwind for us. We're excited about the opportunity to meet more in person, but conversations are good and strong. Some of these third-party deals take a while to actually get across the finish line. Many deals are available to us, but we're trying to strike the right long-term partnerships with the right distributors of scale.

Dan Kurnos, Analyst

Got it. And last one just on pricing. I know that's probably not now; you're still building up a library. I know historically, you've talked about your ability to set prices. Just wonder, as you layer this acquisition in, when do you start to have those conversations?

Clint Stinchcomb, CEO

That's referring to price elasticity with distributors or on the direct side. I'm sorry?

Dan Kurnos, Analyst

No, on the direct-to-consumer side.

Clint Stinchcomb, CEO

Yes, on the direct-to-consumer side. We believe that we have considerable price elasticity, providing great value at $3 a month or $20 per year. We are testing some premium tier options, where we're providing people with additional features, benefits, and even additional content for those who subscribe to our premium tier, which we previously referred to as our 4K tier. Over the next few months, you'll see some interesting developments there.

Darren Aftahi, Analyst

Hey, guys. Good afternoon. Thanks for my questions. The million incremental subs sequentially, what was kind of a mix of direct versus bundled?

Clint Stinchcomb, CEO

Yes, it follows the same mixture that we've typically seen. It's skewed toward the bundle side of the house, but definitely we're seeing greater growth or greater pickup on the stronger ARPU side on the direct side.

Darren Aftahi, Analyst

Got it. And then the improvement in visibility is directly related to what from last quarter's call?

Jason Eustace, CFO

Third-party distribution agreements.

Darren Aftahi, Analyst

And I guess my last one following up on the lumpiness. With advertising revenue typically being down in the first quarter, is that kind of what was contributory or program sales? I know you guys emphasized the second half of the year in terms of that being much faster growth. But how do we think about sponsorship and program sales as they move quarter-to-quarter?

Clint Stinchcomb, CEO

It's a really hard thing to predict, quite honestly, because with program sales, it's dependent on when that production is actually finished. If the production we anticipated to be ready at the end of June gets delayed, then it could flip into July or August. We're going to wait to figure out the best time to take delivery of the product so that we can recognize the revenues. That sometimes can cause some of that lumpiness in our quarter-to-quarter program sales. Similarly, with the sponsorship side, it takes a while to get those deals going. While we expect them to fall within specific quarters, we're much more focused on what the full-year number is going to be. We have high confidence we will hit that $71 million. It's just that we're not fine-tuning it down to each quarter as far as when it will fall.

Jason Eustace, CFO

That's 52 on a fully diluted basis and then 66 on a fully diluted basis.

Logan Thomas, Analyst

Hi, there. Thanks for taking the question. I think this has been asked a couple of different times. But I'll go ahead and just ask it maybe in a slightly different way on the guidance for the year. I'm wondering if you can just talk about how much of the incremental growth from here implied in the guide is from the program sales versus subscription and affiliate licensing. And then trying to extrapolate that up to a higher-level question. How are you thinking about the scalability of the program sales revenue streams, either as a source of income for subsidizing content costs and just the more mid- to longer-term picture on program sales in general would be helpful?

Jason Eustace, CFO

No, program sales are still going to continue to be a key part of our revenue stack. Our program strategy allows us access to high-quality content, where we can subsidize it with a third-party distributor where we're currently not present. It’s a great business model for us. As long as the content is there, it will remain a significant part of our revenue stack going forward. Regarding the lumpiness for the quarters, we're much more focused on the long-term; it's a $71 million marathon, not a quarter-to-quarter sprint. That's how we look at it. We continue to have strong growth in our strongest ARPU section of the business on the partner direct and direct sides, and we continue to sign up long-term distribution, third-party bundled distribution partners. Those are the positive impacts we're seeing, with a high probability that we will hit that $71 million for the next year.

Clint Stinchcomb, CEO

As Jason said, it's sometimes hard to predict quarter-to-quarter on when content will deliver. However, we like the program sales business as it de-risks our overall business and it is annual multi-annual obligations with contractual revenue.

Logan Thomas, Analyst

Got it. Thanks for the detailed answers. And the last one; apologies if I missed this, but the 80% year-over-year on the direct subscribers. Was there an update on the size of the direct subscriber base? And then with that, just anything to call out on new content or the marketing strategy that's moving the needle or worth calling out on acquisition and retention?

Clint Stinchcomb, CEO

Yes, on the direct side, we're still within the range of 1 million or 2 million direct DTC subscribers as of the first quarter. It's a broader range, but we continue to see rapid growth. I don't know if there's anything else; Devin, do you want to add anything on customer acquisition, if there are certain channels that are working better?

Devin Emery, Chief Product Officer

All of our channels continue to work well as they have. We anticipate a very strong second half of the year in terms of content going onto the subscription service. We're excited for the word of mouth this will generate and help catalyze our marketing activities. As discussed earlier in the call, we are now at the anniversary of when we onboarded several people last year when quarantine was starting. The renewal rates are in line with our typical levels, which are industry-best. Those who signed up at discounted rates during the quarantine are now renewing at standard rates, which are 70% higher than they initially paid. Obviously, that's not reflected in Q1, but as they renew, they'll transition to standard pricing, which is a significant increase. We're seeing a lot of good developments right now on the direct business front, and we plan to continue leveraging that strong engagement to fuel ongoing growth on the direct subscriber side.

Clint Stinchcomb, CEO

Thank you, Logan.

Operator, Operator

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