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spk09: Good day, and thank you for standing by. Welcome to the CuriosityStream Q3 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Please be advised that today's conference call is being recorded. Thank you. I would now like to hand the conference over to your speaker today, Denise Garcia, Investor Relations. Please go ahead.
spk01: Thanks, Josh. Hi, welcome to CuriosityStream's discussion of its third quarter 2021 financial results. Leading the discussion today are Clint Finchcombe, 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 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 three months ended September 30, 2021, 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.
spk04: Thank you, Denise. I'd like to thank everyone for joining our third 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'll turn the call over to our CFO, Jason Eustace, to review the financials. At the close of Jason's remarks, we will open up the call for questions. Curiosity is the global factual entertainment brand for people who want to know more. Our flagship subscription video-on-demand service continues to gain traction in the marketplace as we produce, acquire, and distribute compelling content across every genre of the factual category. In light of our deliberate and opportunistic approach to content creation and acquisition, we now as a company have more than 5,000 titles under license or ownership, up from 3,000 a year ago. Not only is our subscription service firing in all cylinders, but we continue to deliver balanced growth across our unique, multifaceted revenue stack. Let me talk about the third quarter. I'm pleased to report another strong quarter, with a year-over-year revenue growth of 114%. With slightly more than seven weeks left in the year, we're delighted to announce that 100% of our full year 2021 revenue guidance of $71 million is committed. Our ability to deliver these results in the midst of the worst global pandemic in a century underscores the resiliency of our business and our leadership in the factual entertainment category. Our 2021 revenue number reflects a nearly eightfold increase over a three-year period. nearly eightfold, truly remarkable achievement. This wouldn't have been possible without the exceedingly talented and hardworking team we have assembled at CuriosityStream. And I would like to thank everyone personally at this moment for their commitment. Our revenue more than doubled in the third quarter, driven by broad-based growth, including strong gains in our direct-to-consumer and licensing businesses. Our success in licensing is a testament to our expertise in content creation, and the global appeal of the factual entertainment category. CuriosityStream's content strategy has always been flexible and opportunistic, with the ultimate objective of providing our subscribers with the best and broadest range of factual content. Our business development initiatives, including our recent acquisition of One Day University and the investment in Nebula we announced last quarter, are consistent with this objective. As the world's largest creator-owned streaming platform, Nebula is in the pole position to capitalize on the rapid growth in creator content, and our investment will help Nebula accelerate its growth while enabling our shareholders to directly participate in the company's success. I'll provide more detail on our enhanced strategic partnership and investment in Nebula later in the call. Revenue in the third quarter grew 114% year-over-year to $18.7 million, driven by continued strength in direct subscription revenue and an anticipated step-up in licensing revenue. Our licensing business are difficult to predict on a quarterly basis, and this quarter is a good example. There's a few programs that could have delivered in Q3 delivered in Q4 due to editorial enhancements we chose to make. Three such films representing over $1.5 million of combined revenue closed during the first week of the fourth quarter. With 100% of revenue committed, we are thrilled to reaffirm our 2021 annual revenue guidance of $71 million, which represents, again, approximately 80% year-over-year growth. We reported another great quarter in our direct consumer business with a 50% year-over-year increase in DTC subscribers, marking the 11th straight quarter of at least 50% DTC subscriber growth. The fundamentals of our direct consumer business remained exceptionally strong during the third quarter, with the lowest churn in the company's history, and a second consecutive quarter-over-quarter increase in average revenue per user. The sequential improvement in ARPU was driven by a lower percentage of subscribers on promotional pricing plans. We see potential for accelerated ARPU growth driven by additional innovative service tiering as we expand our partnerships and deploy our unique offerings such as one-day universities, lectures, and events. With more subscribers adopting standard and premium tier subscriptions, In these service line extensions, we expect ARPU growth to become an increasingly significant driver of our top line growth. Our content licensing business was another highlight of the quarter, with sales of nearly 6 million, up from less than 50,000 a year ago. Factual content travels well internationally, and these agreements allow us to capitalize on the demand in markets where we have yet to establish a significant direct consumer offering. The rights we sublicense to third parties and foreign territories under presales contracts revert back to us after the term of the contract. And due to the largely evergreen nature of factual content, we expect the titles we license under presales agreements to retain significant economic value at the end of the contract period, which is not reflected under GAAP accounting. Our pipeline of presales agreements is strong and provides a solid foundation of revenue in the coming quarters. During the quarter, we entered into a number and variety of distribution partnerships, including a multi-year distribution agreement for CuriosityStream with FuboTV, to which their subscribers gained access to our linear channel and DOD service. During the quarter, we premiered more of our growing slate of tentpole originals. We started investing in these projects more heavily last year, and our investments are beginning to bear real fruit. In July, we premiered Rescued Chimpanzees of the Congo with Jane Goodall. a groundbreaking five-part series filmed over several years that offered unprecedented access to the rehabilitation of orphan chimpanzees struggling to return to the wild. That was followed by the global premiere of Secrets to Civilization, an epic three-part original series about the astonishing new links scientists have uncovered between our planet's ever-changing climate and the fortunes and misfortunes of humankind from the Bronze Age to the collapse of the Roman Empire. and the premier of our acclaimed feature doc of all, the gripping 90-minute profile of Hollywood actor-turned-soldier Michael Enright, who gave up everything to join Kurdish forces in their brutal struggle to defeat ISIS in Syria. Throughout the quarter, we also continued to deliver a strong slate of cutting-edge science and technology programming, including the three-part miniseries Becoming Martian, which chronicles humanity's long and surprising journey to the cusp of reaching Mars. and multiple new episodes of our timely and highly successful science and tech strand, Breakthrough, including Egypt's Lost City, Voyage to Venus, and Secrets of the Dog's Nose. We also premiered four more episodes of Faster, our quirky and irreverent original series that explores the elaborate tools such as the barcode, dishwasher, disposable cup, and microwave that humans have developed to try to save time and the mind-boggling repercussions those inventions end up having on our everyday existence. And we've premiered Season 4 of Butterfly Effect, which uses spectacular reenactments and mind-blowing video game-inspired CGI to show how some of the tiniest events in human history have transformed the entire course of human history, from the invention of electricity to the discovery of quantum physics. We're always looking for creative ways to further extend our leadership in the factual category, which is why we were thrilled last quarter to announce a landmark agreement with Nebula, the world's largest creator-owned streaming and technology platform. We and Nebula share a focus on entertaining, informative, highly engaging content and have partnered in strategic and marketing arrangements since Nebula's inception. With over 140 active creators who together have over 120 million collective YouTube subscribers, Nebula's grown to more than 350,000 paying subscribers in less than two years. This landmark deal enhances our long-standing strategic partnership while affording us the opportunity to help accelerate Nebula's growth through a financial investment in the company. The investment will enable Nebula to more rapidly build new product features, launch new business lines for creators, and market the Nebula platform to new audiences. We believe additional opportunities like accelerated subscription growth, new and larger sponsorship agreements, and meaningful commerce are possible because of the authenticity, credibility, and legitimacy of the Nebula creators. Through our investment, which values Nebula in excess of $50 million, we will attain a significant minority position as well as board representation. Nebula will continue to be run by Dave Wiskus, CEO of Parent Company Standard. We believe Nebula has only scratched the surface of its long-term growth potential, and as CuriosityStream shareholders, we're thrilled by the opportunity to share Nebula's success through our ownership position in the company. In summary, we're pleased to announce another strong quarter with 100% visibility into our full-year revenue guidance of $71 million. The right strategy, the right people in place, we look forward to continued success now and in the coming years. I'd like to turn the presentation over to our CFO, Jason Eustace, for some financial highlights.
spk03: Thanks, Clint. I'm also excited to announce another strong quarter with 100% of our fiscal 21 revenue guidance of $71 million now committed. Our subscription businesses grew at strong double-digit rates during the quarter, and we delivered nearly $6 million of licensing revenue. Our investments in growth are paying off, and we continue to find attractive opportunities to prudently deploy our shareholders' capital. Now let's review the third quarter financials. CuriosityStream's Q321 revenues grew 114% to $18.7 million, up from $8.7 million in Q3 of 2020. The revenue increase was led by program sales licensing and direct-to-consumer sales, which grew over 50% at stable customer acquisition costs. As Clint mentioned, we recognized $1.5 million of revenue during the first week of the fourth quarter from pre-sales agreements we had expected to close during the third quarter. The timing of film productions can be difficult to predict and it's not uncommon for final delivery dates to shift by a week or two. We provide annual guidance rather than quarterly guidance in part to limit time and constraints that could pose a risk to production quality. That being said, we have only included in our full year 21 revenue guidance pre-sales agreements with expected delivery dates no later than mid-December to limit the potential for ordinary course of production delays to impact our ability to meet or exceed our guidance. Advertising and marketing expenses were $9.3 million compared to $7.8 million in Q3 of 20. Advertising and marketing came in at approximately $3 million below budget for the quarter. While we continue to find opportunities to invest in advertising and marketing dollars at attractive customer acquisition costs during the third quarter, we reallocated a portion of our third quarter budget into the fourth quarter, a time when our marketing activity has traditionally been most active. We now expect to invest $18 million in advertising and marketing during the fourth quarter as we believe the holiday season will afford us the opportunity to drive subscriber growth. Cost of revenue was $9.6 million, or 51% of revenue, compared to 39% of revenue in Q3 of 2020, an increase of 12 percentage points on a year-over-year basis. As a result, Q3 gross margin was 49% compared to 61% in Q3 of 2020. While lower on a year-over-year basis, gross margin exceeded our expectations due to a higher-than-expected mix of content licensing deals relative to pre-sales agreements within program sales. Due to some pre-sale deliveries slipping into Q4, we now expect full-year gross margins in the mid-40s. CuriosityStream's overall operating expenses were about $17.4 million compared with $12.1 and Q3 of 20. Third quarter EBITDA loss of $8 million compared to an EBITDA loss of $6.7 last year was due to higher G&A costs associated with being a public company, increased investment in human capital, particularly in the product and technology, and increased marketing investment. We are on track with our plans for 2021 to deliver $71 million in revenue, with 100% of the revenue committed. And now I'll turn it back over to Clint and open the line up for questions.
spk09: At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from Tom Forte with DA Davidson. Your line is open.
spk07: Great. One question and one follow-up. On the production side, Disney talked a lot about how the Delta variant or the COVID variants have slowed their production. I know you talked about the lumpiness and you talked about something falling into the fourth quarter versus the third quarter. But generally speaking, can you talk about your production and if you're at all slowed by the Delta variant or COVID variants?
spk04: It's a great question, Tom. Thank you for asking that. And yes, I would say that throughout COVID, we premiered programming nearly every week. And we have some of our best ever original content coming out now and through the end of the year. Content like Evolved with Patrick Eyrie, who we believe to be the next David Attenborough. And that was a series that was shot on multiple continents and obviously multiple countries as well. And so we were able to navigate through that. Recently launched a beautiful series called the Royals, and, you know, we were able to use, I think, extraordinary historical footage in there and weave stories that had never been told in a way that I think kind of demonstrates one way to kind of navigate COVID and, you know, some of the challenges around shooting. But, you know, we'll end the year with, you know, more content than we've ever had. As I mentioned, we have, you know, now 5,000 titles under contractor license, not all of which are on CuriosityStream today. So we have volume and we have quality, and we're delighted that we were able to, you know, maintain that through this period. And, you know, we're long-term focused. We recognize the long term as a series of short terms, but as it relates to content, you know, our intent is always to create the best possible programming that we can create. And, you know, If it means that something might slip from second quarter to third quarter or third quarter to fourth quarter, we're going to side on the side of editorial quality, which is why we have great comfort in our annual guidance and our quarters can be a little bit lumpy in light of that. Does that answer your question, Tom?
spk07: Yeah, thanks, Clint. All right, so I'm trying to draw a trend from one acquisition, one day university, and one investment in Nebula to businesses that have subscription models and content. How would you describe your overall M&A strategy, and how do you look at additional opportunities going forward?
spk04: Yeah, I think our M&A strategy today has been to acquire companies with complementary factual content. companies that can enable us to grow revenue and grow subscribers. So in the case of Nebula, I mean, that is right at the center of the creator economy. I think, you know, we've seen a number of, we've seen a fair bit of M&A activity there recently, right, with, you know, Moonbug as an example that was recently valued at $3 billion, $3 billion in this last round. And so It can be a challenge to align with a creator organization for a variety of reasons. Jason Keillor found that out when he tried to do that with Vessel. But as it relates to Nebula, they're an excellent marketing partner of ours because they give us a straight line into a younger demographic. And then, you know, the case of One Day You, that area is a little bit older, complements our traditional entertainment with courses, you know, of the highest quality from the highest professors around the country, around North America. And then, you know, look, we just love Nebula, and we had, you know, like One Day You, we had experience in working with them, whether it was, you know, with Wendover or Real Life Lore or you know, Mustard or Legal Eagle or, you know, Marques Brownlee. These are, you know, great creators in what they call kind of the, you know, education-y area, science, technology, history, food. You know, it's plump smack in, you know, in our category, but, you know, obviously it's highly engaging content that's produced by, you know, a younger group.
spk08: Great. Your next question comes from Peter Henderson with Bank of America.
spk09: Your line is open.
spk06: Hi. Thank you for taking the question. So I just want to touch on subscriber growth a little bit. It appears that there was very little subscriber growth in the third quarter, and it seems to extend a trend coming in from the second quarter, which I guess benefited from the Spiegel deal. On the DTC side, I'm just curious, like, what do you think you can do? I mean, obviously, I know you're going to increase marketing spend, but what do you think you can do to really reignite that sort of growth? And also curious on the marketing spend, you know, was the decision to reduce marketing spend in 3Q a result of trends you saw during that quarter and just made a calculation that, you know, it would be better to spend that, you know, in the holiday period or not? And I just have one quick follow-up with DTC.
spk04: Let me take the first part of that, and then I'll yield to Jason and Devin. So total direct subscribers grew significantly in third quarter. Well, the total paying remained at the $20 million level. That was due to rounding. It's also due to sort of dynamics around some of our larger bundled international partners. So we have certain international partners, lots of video subscribers who actually lost video customers in Q3. But as our revenue demonstrates, we're largely insulated from those swings as most of our agreements are fixed or fixed fee plus. I just think if you look at it as an industry example, we've seen U.S. distributors in the last few weeks report video sub-losses as high as 400,000 to 500,000 subscribers for the last quarter. We don't have bundled agreements with these U.S. distributors, but I'm just kind of citing them to illustrate the point, Peter. We have international partners who are experiencing similar losses to their video tiers, which impacts our total reported number. But despite this dynamic, we're on pace to report meaningful increases to all of our sub-buckets by year-end. That includes direct, bundled, and bulk. And yes, as to the marketing decision, we know what's possible in fourth quarter. And based on our experience and based on work that we're doing with certain partners, I think it makes a lot more sense to put more money to work in fourth quarter.
spk06: That's great. I mean, I guess, can you just talk a little bit about trends you're seeing thus far in fourth quarter? I know it's obviously going to be very back half-weighted, but any color you can provide on sort of trends through October, early November, on the subscriber side.
spk04: Yeah, I mean, look, we're expecting quarter-over-quarter revenue increases across, you know, all of our lines. And obviously that includes subscribers, includes licensing, includes, you know, bulk subscription, and even includes, you know, a meaningful quarter of sponsorship. As it relates to, you know, different dynamics that we're seeing in Q4?
spk03: It's just, I mean, it continues strong DTC growth quarter over quarter, just like we said earlier in the call. The DTC side of the business has been growing quarter over quarter for the last seven years consecutively. So that continues to not... continues to grow very strongly for us. And we don't see that slowing down in fourth quarter.
spk08: Okay, great. Thank you.
spk09: As a reminder, if you would like to ask a question at this time, please press star followed by the number one on your telephone keypad. And your next question comes from Zilu Pan with JP Morgan. Your line is open.
spk02: Hi, thank you. I just had a quick follow-up on the bundle subscribers. I was wondering if you could talk a little bit about the pace of those negotiations with your partners? Do you still see more opportunity to grow the bundle subscriber base both in the US and internationally? And just my second question would be, I know it might be too early to guide 2022, but I was wondering, you know, out of your revenue streams, what would you think the biggest growth drivers would be? Thank you.
spk04: Thank you. I'll take the first part. This is Clint. As it relates to the pacing of our bundle distribution agreements, you know, pacing has suffered really due to, you know, our inability to travel internationally. It's just, it's hard to get around that when you have a relatively new service like ours, you need to communicate it in person. And, you know, it's extraordinarily difficult today to do that with COVID. So I think the pacing is absolutely slowed as a result of that. We have a, great confidence in our ability to grow, uh, bundled, uh, subscribers. And, you know, we think based on, you know, a lot of success stories that we've developed, you know, over this year and, you know, and, uh, the back half of last year, we like our hand, you know, going into next year with those, with those partners. And, you know, there are a lot of deals that are available to us. Uh, you know, it's important to us to do the right deals and, you know, those that are, sustainable and that will lead to really meaningful, engaged subscriber growth.
spk03: Second part? Yeah, the second part of your question, the DTC would probably be the biggest piece as far as what we see the strongest growth coming out of this year going into next year. And then we'll provide guidance on 22 at the first part of 22 when we have a fourth quarter call.
spk08: Thank you. Yeah.
spk09: Again, if you would like to ask a question at this time, please press star followed by the number one on your telephone keypad. We'll pause for just a few moments to compile any remaining questions. And we do have a question from Tim Forte with TA Davidson. Please go ahead.
spk07: Great, thanks. I had a follow-up question. So, Clint, you talked before about examples of content you've had on the platform that wasn't necessarily exclusive, but the way you presented it drove a lot of audience views. I'm thinking of Crash Course Biology as an example. I don't know if that is an example. But can you give a couple examples like that where you've had content that isn't necessarily exclusive to your platform, but you're able to draw a lot of audience views for it?
spk04: I'd be happy to. And the good news is I have Devin here, and I'll have him supplement, Tom. But, yeah, Crash Course has, you know, been a gift that keeps on giving. So, you know, beyond... Crash Course Biology, you know, we have Crash Course Literature, we have Crash Course World History, Crash Course European History continues to deliver in a really, really meaningful way. And so, you know, when we can find content like that that has some recognition and that has an audience, you know, we'll be, you know, aggressive in kind of curating that for CuriosityStream. Do you have any of some other examples you'd like to point to?
spk05: Yeah, I think the thing to keep in mind is that we're building a product that becomes the default when you want factual content, right? And so obviously we have our tentpole original programming that you can only get on our service, but then we're also building in the best ways to watch content that might not be exclusive to our service, but is a better way to watch it. So, you know, I'll just say Crash Course again, right? If you want to get that, you can get that on YouTube. It is a hassle to watch all of that, right? You know, obviously the YouTube ad load is extremely high. the playlisting and being able to find the next episode is quite difficult. And if you watch our CuriosityStream, none of those are issues for us. So there's plenty of content that, you know, there's the Dave Rubenstein talks, there's European Inventor Awards. There's a lot of content that we can create a much better experience around viewing than you can get on other platforms where they might be available. So that is a strong strategy for us. It's going to be a continued strategy for us. It's very complementary to our original exclusive content.
spk08: Great. Thanks for taking my follow-up questions. Thank you, Tom. There are no further questions at this time. This does conclude today's conference call.
spk09: Thank you for your participation, and you may now disconnect.
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