Q1 2024 CuriosityStream Inc Earnings Call

Participants

Andrew Lata; Director, IR & FP&A; CuriosityStream Inc

Clinton Stinchcomb; President, Chief Executive Officer, Director; CuriosityStream Inc

Peter Westley; Chief Financial Officer; CuriosityStream Inc

Jim Goss; Analyst; Barrington Research

Presentation

Operator

Thank you for standing by. My name is Krista, and I will be your conference operator today. Time. I would like to welcome everyone to the curiosity Stream's First Quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) Thank you.
I would now like to turn the conference over to Andrew Lata, Director of FP&A and Director of Investor Relations. You may begin your conference.

Andrew Lata

Thank you and welcome to your curiosity Stream's discussion of its first quarter of 2024 financial results. Leading the discussion today are Clint Stein from curiosity streams, Chief Executive Officer. I'm Peter Westlie, curiosity Stream'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 also 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 or 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 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 March 31st, 2024, when filed. In addition, reference will be made to non-GAAP financial measures measures. A reconciliation of these non-GAAP measures to comparable GAAP measures can be found on our website at investors dot curiosity, stream.com. Now I'll turn the call over to Clint.

Clinton Stinchcomb

Thank you very much, Andrew. I appreciate everyone joining us today for this milestone report for the first quarter in Company history. And we achieved a positive quarter. We generated over $1 million in adjusted free cash flow in the first quarter, a year-over-year improvement of over $7 million. Our top line revenue was roughly equivalent to Q1 2023. We believe we are well positioned to improve upon both of these critical metrics.
In Q2. Q1, we increased our direct subscription revenue sequentially and year over year in June, we will begin to benefit from the fact that all of our new subscribers in the United States will finally be under the new pricing we introduced last year.
In regard to partnerships. In Q1, we rolled out our subscription services with multinational global partners in 25 countries, and we added seven new content licensing partners with an eye toward greater cash flow, higher margins and overall revenue, we revised some of our Pay TV agreements. While these revisions will result in a near term revenue decrease in the bundle distribution category, we're confident that the midterm and long term upside from these adjustments far outweighs the minor near term decrease. Moreover, we believe the current chaotic disruption where MVPDs are dropping legacy services and even entire network groups, along with their license fee entitlement demands create some meaningful opportunities that we believe we are uniquely suited to help solve and leverage.
As a reminder, we have channels operating around the world today and from our deep and vast library, we are well equipped to create additional factual catagory channels in areas like science, space and natural history to meet distributor demand. As an example of this just last week, Samsung announced that they will launch three of our Hispanic channels in June.
Curiosity has been your curiosity, animal and curiosity motors in regard to advertising, we now have commercial relationships with over 20 key partners and platforms for our ad supported content in Pay TV, fast and enabled. And we anticipate roughly roughly doubling this roster of advertising platform partners in 2024, while the bulk of our advertising oriented revenue to date has been categorized as licensing revenue in light of the advances in minimum guarantees we negotiated as our existing ad partners publish our content and as our new partners publish and promote curiosity, content will begin to generate increasing and more predictable revenues from our ad-supported content.
Additionally, as we generate more impressions in front of the paywall, we will benefit from the expansion at the top of our marketing funnel, which we believe will be helpful in moderating our paid marketing allocations. We've accomplished these objectives while simultaneously rationalizing our cost base. Excluding the non-cash expense inherent in content amortization, we cut our cost of revenue and half from Q1 23 to Q1 24, and we reduced G&A expense by about 30%.
To reiterate, we believe we are now solidly situated to generate increasing positive cash flow and sturdy sustainable revenues that are increasingly predictable and reliable. In addition to guiding to greater positive cash flow and revenue in the second quarter, we believe our dividend program which is being paid from surplus cash, further underscores our positive trajectory for 2024 and beyond.
At the core of curiosity is, of course, the creation and distribution of premium factual programming that both inspires and informs. In Q1, we released original series and specials across a range of genres and formats, including science for evil, geniuses and irreverent real world test of super villains science starring Game of Thrones actor, Paul Kay. Fourth season of fourth AND forever following the De Soto Eagles quest to recapture another Texas State title, the invention of surgery, an unflinching look at the pioneers who transform medicine from a permit of ART into a sophisticated and successful science, the artist production and expos, they have the secret powers some of history's most influential characters and believe a beautiful look at the origins, traditions and festivals of the world's five biggest religions and the challenges they face today, we celebrated the Ancient World with Asian Egyptian weeks. And on May ninth, we kick off jaws and Claus weak animals that could lead us are interesting to nearly all of us and interesting that people everywhere as are dinosaurs and the compelling creatures that preceded us.
In closing, I'm happy to reinforce that we ended the quarter with $39 million in cash and equivalents, $1.2 million in adjusted free cash flow, and zero debt. We believe our strong balance sheet and projected 2024 positive cash flow are major competitive advantages in the current environment Moreover, we continue to believe that our global appeal, our direct subscriber base and direct platforms, our broad and deep content library of over 17,000 evergreen titles, our multiyear third party agreements or public company currency in our rationalized cost structure, our uniquely favorable attributes that provide us with sustainable long-term strength and exceptional flexibility.
I'd now like to pass the baton to my good friend and colleague, Peter, about whom I will have more to say at the conclusion of his remarks.

Peter Westley

Thanks, Clent. As Clint said, our Q1 performance was a true milestone event for the company driven by strong execution. Our first quarter revenue came in within our guidance range, and our adjusted free cash flow came in above the high end of our guidance range. Our adjusted free cash flow of positive $1.2 million, which represented our sixth straight quarter of sequential improvement in this metric, was the first positive quarterly adjusted free cash flow in the Company's history. This accomplishment is particularly noteworthy given the cash flow losses experienced by so many other companies in the video streaming sector, first quarter adjusted EBITDA improved by $3.5 million, compared with the prior year quarter, while adjusted free cash flow improved by $7.5 million year over year.
Getting into the details, revenue for the first quarter of 2024 was $12 million, compared to $12.4 million in the prior year quarter. The year-over-year change was primarily driven by decreases in content licensing and bundled distribution. Despite this decline in revenue, we were able to improve our adjusted free cash flow from negative $6.3 million in the prior year quarter to positive $1.2 million in this year's first quarter as a result of our intense focus on the bottom line.
Turning to the breakout of revenues, our largest revenue category, this quarter was our direct business. Direct revenue came in at $9.5 million, up 11% year over year and 4%, sequentially as we continue to see the benefits of the price increases we put in place last year.
Content licensing, which was our second largest revenue category this quarter generated $1.2 million of revenue compared with $2 million in the prior year quarter. I'd like to make a couple of comments about this comparison. First, it's worth noting that last year's content licensing figure included $1.2 million of pre-sales transactions compared with $0.3 million of presales in this year's first quarter. As I've mentioned in prior calls, presales are 0% gross margin transactions for us so this decline in revenue does not reduce our profitability.
Second, our main focus in content licensing is on our positive gross margin library related transactions in Q1 of 2024 we had approximately $900,000 of these transactions, an increase of 6% compared with the first quarter of 2023.
Our next largest revenue category in Q1 of 2024 was bundled distribution, which generated $1.1 million of revenue, down from $1.5 million in the prior year's first quarter. Bundle distribution is a challenging revenue stream for us right now, which is reflective of the pressures being felt in the linear pay television business worldwide.
While we do continue to add new partners, we also occasionally have situations where we do not renew agreements or where our affiliate fees are revised as contracts come up for renewal in response to the financial pressures that our distribution partners face. Our total barter revenue in each of the first quarter of 2023 and the first quarter of 2024 was approximately $200,000.
Turning to our expenses, content amortization in the first quarter was $5.2 million, an 11% decline from the $5.9 million we recorded in the prior year quarter. We expect content amortization expense, the largest component of our cost of revenues to continue to decline going forward and ultimately converge with the lower level, have new content investment that we require now that we've achieved critical mass in our content library. First quarter gross margin of 43.8% increased from 27.3% in the prior year quarter, driven by significant reductions in our cash-based cost of revenues, which are a result of our ongoing cost reduction efforts.
One other metric that we find useful in assessing our profitability is our gross margin, excluding content amortization. This metric really gets at the cash cost of delivering our services across all of our revenue streams. That figure was 87.2% in Q1 2024, which compares very favorably with 74.6% in the prior year quarter and 80.2% in the most recent quarter, Q4 of 2023.
Our first quarter advertising and marketing expense of $3.1 million was essentially flat year over year, and we continued to exercise discipline and analytical rigor in deploying our customer acquisition. G&A expense during the first quarter of 2024 was $5.8 million -- of $5.8 million was down $2.3 million or 28% year over year as we're seeing the benefits of our planned spending reductions and workforce optimization efforts.
Moving back to profitability. Adjusted EBITDA loss was $2.8 million compared to an adjusted EBITDA loss of $6.4 million in the prior year quarter. Adjusted free cash flow in the quarter was positive $1.2 million compared with negative $6.3 million in the prior year quarter. We believe our overall balance sheet remained in great shape with $95 million of assets, $28 million of liabilities and book value of $67 million or approximately $1.26 per share. We ended the quarter with total cash, cash equivalents and restricted cash of $38.9 million and no outstanding debt.
Moving to our second quarter guidance, we expect revenue in the range of $12 million to $13 million and adjusted free cash flow in the range of $1.5 million to $2.5 million.
Finally, as you may have seen in our press release, I would note that this is my last earnings call as CFO. The Board has named BRADY Hayden CFO, effective May 31st. Brady has been with us since last June and the role of controller, and I'm confident in his abilities to step up into the CFO position. We will work together to ensure a smooth transition. And I'll return to my prior role as a senior adviser to the management team of curiosity stream beginning in June.
As I look back. I'm tremendously proud of all that we've achieved over the last over the last two years. It's been a real pleasure to work with my good friend, Clint, Tia Rob and the rest of the team at the Company.
With that, I'll turn the call over to Clint for some closing comments.

Clinton Stinchcomb

Appreciate that, Peter. I first met Peter. In 1986 when he was an undergraduate advisor to one of my closest friends in a freshman dorm at our alma mater, the maturity leadership qualities that were requisite for Peter Wesley, the UGA. are the same that we have called upon and appreciated here at curiosity stream. Most everyone else here met Peter in 2018 when he invested alongside our former board member of late and great Dick loan and became a Board observer in his capacity as an adviser to deck Peter's deep innate curiosity as well as his affection for our business naturally led us to engage more formally as a consultant and then to enlist him as our CFO about two years ago, during these two years, Perer loan, the steadiness and co-tenancy I've always enjoyed through our finance function and to our leadership team. I want to thank him for both his service in that capacity. It's been a privilege working shoulder to shoulder with Peter on the day-to-day work of our getting to cash flow positive.
And on behalf of our Board and the entire team, thank him for the maturity, the leadership and the dedication he has offered us and say we look forward to more of the same as Peter returns to consulting status with the company, offering us continued access to mighty brain and collegial demeanor since Peter's arrival in May of 2024, comparing the 12 months we just completed in March with the comparable period two years ago, we've grown our direct revenue by 17%, while moderating our overall marketing spend. Cut our annual G&A expenses by more than 25%, improved our cash flow from operations by more than 85%, enjoyed six straight quarters of sequentially improving adjusted free cash flow, and we began paying a dividend.
In closing, let me not forget to thank Peter for bringing us BRADY, Hayden, who currently serves as Controller in whom the Board has named CFO upon Peter's departure May 31st. It's such a pleasure for me getting to know and work with Brady over the past year, and I know you'll feel the same Brady's experienced and the day-to-day operational and other requirements of a public company finance function is also roll up the sleeves hard working get it done right professional with the collaborative style that we his colleagues have already come to respect appreciate and rely on. So thank you, Peter, and thank you, Brady. I'm really excited for the chapter ahead.
With that, operator, let's open the call to questions.

Question and Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Jim Goss, Barrington Research. Please go ahead.

Jim Goss

Thanks. I was wondering if program programmatic gives you the opportunity to consider an ad light option and core subscription services where you might not be able to have an ad sales there, be able to do it on your own?

Clinton Stinchcomb

I think it's a great question, Jim, and I really appreciate it. And we've certainly looked at that and it's something that it is always under consideration, but we've made that. We made the calculation today that, but we believe without that by you putting our content to work on the larger AVA platforms, putting our content to work on the larger SaaS platforms and putting our content to work, but unlocking advertising with our pay TV channels. We think that in the aggregate, that will be a better and higher revenue and higher margin approach and without without disrupting our continued subscription growth. But you make a great point about about product about programmatic. It is it's a way to get into the advertising business without having a massive staff same time.
Another way to get into it is through working with our good partners. And so in regard to advertising, earlier this year, we began working on a commercial partnership with Australian media, one of the largest Hispanic U.S. media companies straight owns and operates TV stations, radio stations, TV broadcast networks for fast channels and local and syndicated radio shows that Samsung announced last week, Samsung, one of the largest fast platforms in the world, they're going to launch three of our Hispanic U.S. FastChannel. Curiosity has been your curiosity, animals and curiosity motors.
And the beauty of this relationship is that Australia as an expert in the spin, the Hispanic ecosystem. They'll manage the ad sales. They've got a robust ad sales organization tightly enmeshed in the U.S. Hispanic brand and agency world. They've got a track record of selling the channel inventory that they have, Jim, at CPMs that are three to four times greater than the CPM. Fast enabled platforms generally generate from programmatic sales so this type of relationships is an absolute no-brainer, makes sense for all the parties. And I think it's just another really good example of the broad appeal of our content and the opportunities for brand extension, promotion and content monetization that aren't always obvious.

Jim Goss

Okay. And then one other about with Warner Brothers discovery blending the Discovery Networks increasingly IndyMac's, does that open up any further opportunity for you competitively?

Clinton Stinchcomb

I had another great question, Jim, thank you for asking that. And I think so you probably saw just last week some of that big announcements of Comcast launched, all the buttons dropped all of the valley sports from RS. and fubo dropped all of the discovery and Turner Networks. So yes, these do create opportunities for us that create opportunities for us because one, we have factual channels that are operating directly in and around the world today and through our 17,000-plus titles that we have in our library, we're able to put channels together pretty quickly to meet to meet distributor needs. So as you look out over the rest of the rest of this year, you'll see channels emerge from us like a curiosity Science Channel. It's like curiosity, History Channel. And again, we we announced the last week with Samsung three U.S. Hispanic channels that obviously we have the same content in on the English language side, Panama's natural history, and then motor, which largely automotive cars, boats, bikes and planes.

Jim Goss

Okay. And one final one with the and with the pricing change that you made, that seemed to go over well enough until August, you increased the revenue base. Do you think you might now be in a position to add prices higher overtime and the subscription service on a more gradual basis, maybe less aggressively than the first one was, but maybe set a pattern that might give you that upward bias?

Clinton Stinchcomb

I'll take an initial shot at that and then I'm I'd like to defer the second part to my good friend, Peter. I think we continue to believe, Jim, that we have that we're in a incredible value exchange curiosity stream flagship channel to subscribe to it for $4.99 a month or $39.99 a year. That's a heck of a value. At the same time, we're learning more because we also have a what we call smart bundle, which includes some additional factual, tight networks includes One Day University, which we own, of course, includes some TV, which our line includes a kid's stream, which is incredible kids channel that feature some of the best and most well-known kids, educational heroes and that that's that's priced at $999 a month or $6,999 a year. So through that, we're we're definitely learning a lot, and we do think that we have we do that while we're at incredible value exchange today that overtime, if indeed we need to raise our rates, we have a lot of value to give in exchange for that. But if I could -- Peter spent a lot of time on this, and I'd love to give Peter a chance to talk about it as well.

Peter Westley

Yes, I think it's something that we'll continue to look at is as the competitors continue to kind of raise the pricing ceiling. I think that does open up opportunities for us to think about it Clint's point, we did not raise the pricing on the smart bundle at the time we raised it on the core service. So I would think that the most likely next price increase to the extent that there was one would probably be on that smart bundle package kind of depending on on what's going on what's included in the mix there. But we think both the core service and smart bundle package remain can just tremendous values in the marketplace, given what you get for the low price that you're currently buying so we do think there is long-term opportunity there.

Operator

That concludes our question-and-answer session, and I will now turn the call back over to Clint Stinchcomb for closing remarks.

Clinton Stinchcomb

Thank you, everybody, for attending.

Operator

And this concludes today's conference call. Thank you for your participation, and you may now disconnect.