CuriosityStream Inc.

Hello and welcome to the CuriosityStream Q3 2023 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, please press star 1 on your telephone keypad. If you would like to withdraw your question, again press the star 1. I'll now turn the conference over to Denise Garcia, Investor Relations. Please go ahead.

Thanks, JL. Welcome to CuriosityStream's discussion of its third quarter 2023 financial results. Leading the discussion today are Clint Finchcombe, CuriosityStream's Chief Executive Officer, and Peter Wesley, 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 guaranteed for future performance, but rather are subject to a variety of risks, uncertainties, and assumptions. Our actual results could differ materially from expectations reflected in any forward-looking statements. Please be aware that any forward-looking statements reflect management's current views only, and the company undertakes no obligation to revise or update these statements, nor to make additional forward-looking statements in the future. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC website and on our Investor Relations website, as well as the risks and other important factors discussed in today's press release. Additional information will also be set forth in our quarterly report on Form 10-Q for the quarter ended September 30, 2023, 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.

Thank you, Denise, and good afternoon. I appreciate you all joining us today. Also with me on this call are our COO and General Counsel, Tia Cudahy, and our CFO, Peter Wesley. This was another good quarter for us as we moved closer to sustained profitability. We grew sequential revenue by 11%. We improved our adjusted free cash flow for a fourth straight quarter as we cut our cash burn to $3 million. Well, actually increasing our marketing spend by approximately 20% in the second quarter. We introduced our new pricing plans to new direct customers and to a cohort of our existing subscribers. As most of our annual subscribers have not come up for renewal, and as our channel store partners are just now beginning to adopt or announce our increased pricing, we anticipate it will take through the end of 2024 for the price increase to fully roll through the financials. We entered into long-term licensing agreements with several new partners in Europe and North America. And as follow-up to my Q2 remarks, in order to expand the top of our marketing and promotional funnel and further monetize our content, we leaned into two of our advertising initiatives as we launched into broadcast syndication for the first time in September with two seasons of Fourth and Forever. Also in September, we began rolling out an AVOD package with the top U.S. AVOD distributors. And we are delighted with the week-over-week growth to date. We have a large, evergreen, globally appealing library of content, thousands of hours that we are now putting to work across new platforms that we believe will both increase and enhance the reliability, durability, and predictability of our revenues going forward. In regard to revenue, I'm delighted to report that our direct revenue services, CuriosityStream, ODU, our smart bundle, grew in a quarter where real growth was a real challenge for most streaming services. ARPU is up, and our channel store partners are helping us grow more in that environment than we have in previous years. Traditional content licensing, an inherently lumpy area, increased significantly from Q2. As we work to add revenue that is less lumpy, that is more predictable, reliable, durable, and substantial, we're moving more aggressively into advertising vehicles that we believe we are uniquely suited to leverage and which require no additional cash investment. I mentioned AVOD and broadcast syndication as two of our ad initiatives. We've also prepared 12 channels for fast and free-to-air distribution in the factual genres of science, history, nature, motors, kids, and additional categories where we hold a leadership position. Additionally, we will be working with a terrific team to help grow our YouTube and audience-first channels, a very small piece of our business today that we believe offers significant upside. The last ad initiative I will mention is linear pay TV advertising. We currently run spot advertising with a small subset of our pay TV distributors. We plan to light up several more in 2024. All of these initiatives are tied to simple metrics, impressions, ratings, and CPMs. None of these require significant additional costs, and cumulatively, we believe they will help ensure that we improve the overall durability and growth of our company. Lastly, our heightened presence across these platforms should play a key role in reducing our reliance on paid marketing in the long run. While Peter will discuss certain non-cash impairments in our broader third quarter financials in greater detail later in the call, I couldn't be more enthusiastic about our march toward positive adjusted free cash flow, an important milestone within our reach. Through additional cost reductions within cost of revenue and G&A expense lines, We are reducing our cost to a level that will drive both flexibility and profitability. And while we have a strong, critical mass library that has enabled us to significantly reduce our annual content spend, we further fortified our content war chest by adding over 200 targeted genre titles in Q3 through a variety of strategic, opportunistic, and cost-effective acquisition initiatives. As to content, top highlights from the quarter include the premiere of our eight-part original series, History, the interesting bits, a fast-paced journey into the weird, wild, and salacious details behind history's biggest events, a three-part series, Nature's Hidden Miracles, a look at the surprising ways many different species secretly collaborate to survive, which was co-produced with our terrific partners at the NHK, and a three-part series, Queens of Ancient Egypt, a brand-definitional original that sheds new light on some of the most mysterious and powerful women in history. In August, We also premiered a second season of Rescued Chimpanzees of the Congo with the iconic Jane Goodall, which captures the final steps in a decades-long effort to rehabilitate and release an amazing cast of orphaned chimpanzees at Jane's Chimpunga Sanctuary back into the wild. In addition to our collaborative commissioning work with great factual producers, Curiosity Studios released its own slate of originals, including the dramatic little-known story of the hunt for the first Nazi jet and new episodes of our cutting-edge science and tech strand, Breakthrough, covering everything from the latest advances in AI to predictions of where and when the next big earthquake will strike and the first U.S. mission to recover a sample from an asteroid. Looking forward, we're all really excited about today's premiere of Connections, a modernized reboot of the historic series hosted by James Burke, who many consider the world's smartest man. and by our upcoming celebration of all things Dinosaur and Dino Week, anchored by the premiere of Amazing Dino World 2. Let me close by sharing what we've said in the past. In a transitioning media environment where many companies have overspent, some are trying to lazily course correct, we like our position. In light of the production slowdowns that have adversely affected the 2024 film business and possibly additional workforce instability next year, We believe that consumers and expanding roster of third-party buyers will place an even higher value on existing premium factual content and brand-safe relationships. In sum, we continue to believe that our direct subscriber base and direct platform, our broad and deep content library, our multi-year partner agreements, our strong cash position, our public currency, and our lack of debt are uniquely favorable attributes that provide us with a firm foundation and exceptional flexibility. I'd like to now pass the baton to my friend and colleague, Peter, who, like James Burke, many consider the smartest man in our room. Over to you, Peter.

Thanks very much, Glenn. We continue to make good progress on our path to a positive adjusted free cash flow while delivering on our near-term financial commitments during the third quarter. As a result of our strong execution, third quarter revenue and adjusted free cash flow both came in above the high end of our guidance ranges. We continued to tightly control expenses while remaining disciplined in our customer acquisition investments. Turning to our third quarter results, revenue was $15.6 million compared to $23.6 million in the prior year quarter. The year-over-year change was primarily driven by decreases in content licensing, enterprise, and bundle distribution revenues. Despite this decline in revenue, we were able to improve our adjusted free cash flow from negative 12.6 million in the prior year quarter to negative 3 million in this year's third quarter as a result of our intense focus on the bottom line. This was our fourth straight quarter of sequential improvement in our adjusted free cash flow. Our largest revenue category this quarter was our direct business. Direct revenue came in at 8.6 million, dollars, up 3% sequentially, as we're starting to see the impact of our price increases put in place earlier this year. On a year-over-year basis, direct revenue was relatively flat. Turning to content licensing, which was our second largest revenue category this quarter, we generated $5.1 million of revenue, compared with $10.8 million in the prior year quarter. Content licensing is an inherently lumpy part of the business, And we faced a tough comparison this quarter as Q3 of 2022 was an exceptional quarter for us in this revenue category. One thing that should be pointed out about this quarter is that $4.9 million of our Q3 2023 content licensing revenue related to barter deals we entered into during the quarter. Content swaps like these, which are common in the media industry, allow us to bring fresh content to our services without spending cash and to raise awareness of CuriosityStream through additional non-competitive distribution channels. In these transactions, we generally recognize revenue based on the value of the content delivered at the time we deliver our content to our partners with a corresponding increase in content assets on our balance sheet related to the content that we receive from those partners. Our next largest revenue category in the third quarter was bundled distribution, which generated $1.5 million of revenue in the quarter. If we deduct $1.2 million of revenue from the third quarter of 2020-22 related to a contract that we did not renew in the third quarter last year, bundled distribution revenue would have grown 7% year over year. Third quarter gross margin of 45.7% increased from 42.4% in the prior year quarter, driven by stronger content licensing margins. Our third quarter advertising and marketing expense of $5.1 million was down 9% year over year, and we continue to exercise discipline and analytical rigor in deploying our customer acquisition dollars. G&A expense during the third quarter of 2023 of $7 million was down $1.8 million, or 21% year over year. Also included in our third quarter operating expenses was a $19 million non-cash charge related to the impairment of our content assets, which I will discuss later in my comments. As a result of this charge, our upcoming amortization expense will be lower than would have otherwise been the case, which we expect to benefit adjusted EBITDA and income moving forward. Moving to profitability, adjusted EBITDA loss was $3.9 million, the calculation of which excludes the $19 million non-cash impairment charge, compared to an adjusted EBITDA loss of $2.6 million in the prior year quarter. Third quarter cash spend on content was $3.9 million, down $3.5 million, or 47%, compared with the prior year quarter. as we continue to benefit from the critical mass library of content that we have built. Year-to-date, we spent $9.7 million of cash on content, which excludes all content added through barter transactions. That compares with $36.4 million of cash spent on content in the first three quarters of 2022, a reduction of $26.8 million, or 73%. Adjusted free cash flow use of $3 million improved $9.6 million year-over-year. As I mentioned previously, this represents our fourth consecutive quarter of sequentially improving adjusted free cash flow and underscores our continued momentum toward positive adjusted free cash flow. In order to demonstrate our seriousness about achieving this objective, management has identified more than $15 million of additional planned reductions in expenses and cash spending for 2024 relative to our expected spending levels for 2023. This plan has been approved by our board of directors and we will begin implementing these changes this quarter. Due to the decline in our share price during the third quarter, which resulted in a market capitalization that was less than our cash balance at quarter end, we identified indicators of asset impairments. That led us to assess the value of our assets including content assets and equity method investments under the respective accounting guidance for each asset in consultation with outside valuation experts and our accountants. That analysis led to non-cash impairments of our content assets by $19 million and of our equity method investment in Nebula by $2.3 million. The non-cash impairment of our investment in Nebula was primarily due to the official non-renewal of the marketing partnership between Nebula and CuriosityStream. Change in our business relationship does not impact Curiosity's ownership position in Nebula, which was 16.875% as of September 30, 2023. After these adjustments, we believe our overall balance sheet remained in great shape with $106 million of assets, $29 million of liabilities, and book value of $77 million, or approximately $1.45 per share. We ended the quarter with total cash, cash equivalents, and restricted cash of $40.8 million and no outstanding debt. Before I turn to our guidance, I thought it would be worth taking a moment to revisit our prior comment that Q1 2023 would be a trough for us as we look to build from there. We believe our second and third quarter results reflect solid execution as we delivered significant sequential improvements in both revenue and adjusted free cash flow. Moving to our fourth quarter guidance, we expect revenue in the range of 14 to 16 million dollars and adjusted free cash flow in the range of negative five and a half to negative three and a half million dollars. Relative to the third quarter, we expect fourth quarter adjusted free cash flow to decrease slightly due primarily to seasonal factors. I'd also like to revisit the guidelines, guideposts that we laid out previously related to certain expense items for the year. We now expect that our cash spend on content for the year will be in the $10 to $12 million range as compared to $10 to $15 million range we previously communicated. In addition, we expect content amortization for the year to be $21 to $23 million, excluding the impairment of content assets we took in the third quarter. as compared to $22 to $27 million range we discussed last quarter. We expect full-year advertising and marketing expenses to be in the $18 to $20 million range, which is a tightening of the $17 to $22 million range provided previously. With that, operator, let's open the call to questions.

Thank you. If you have a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, simply press star 1 again. One moment, please, for your first question. Your first question comes from the line of Tom Forte of DA Davidson. Your line is open.

Great. So one question, one follow-up. So you talked a little bit in the prepared remarks, but can you talk more about when you decide to end in, sorry, when you decide whether or not to enter into barter agreements? Are you not intending to do that on a go-forward basis? And then when you do, what's the relative margin of those versus, I guess, just, I don't want to say regular sales, sales outside of barter agreements?

I'm really glad you asked that question, Tom. Let me take the why, and Peter can speak to some of the specifics. Summary answer is that we needed to obtain new content and to much lesser extent tap into marketing opportunities without spending cash, because we're trying to get to profitability as quickly as possible. As I'm sure you're well aware, Tom, the direct consumer subscription streaming business has only become more challenging. Outside of Netflix, the losses are pretty staggering. Disney's lost over $12 billion from their streaming initiatives. NBCU has lost over $6 billion since 2020. Paramount is in the same ballpark as NBCU and happy because they may only lose $2 billion this year. WBD hasn't spent nearly as much as their counterparts, but they've reported losses of over $2 million in the second quarter and just under $1 million in the third. And some significant players who are trying to grow in the space, maybe going to zero or some form of bankruptcy and Certainly some other subscale streaming services will probably go under altogether. So it's a tough time, it's a tough market, but we're on top of it. And so the first key is to rationalize your cost base, as Peter said. So like many others, we're doing that. We know what costs we can take out of G&A and core and programming, and we're doing it. Our most variable costs, of course, you know, marketing and programming, both of which are important in the direct subscription business. So we know today about what we need to spend annually to maintain our direct revenues. For the overwhelming majority of companies in the direct-to-consumer subscription business, paid marketing is a requirement. I mean, you just have to do it. There's no real non-cash solve at scale today for acquisition marketing. However, provided one has a critical mass content library and other assets, there are creative ways to amass content that don't require hard cash. We need to offer new content every week to hold, serve, and grow direct revenues. and to monetize in other areas. So in our case, specifically, we needed to top off some key genres within factual in order to enhance our direct proposition and in order to provide us the ability to launch up to 12 fast and free-to-air channels. Specifically, we wanted more host-driven content. We wanted proven true crime. We wanted auto and aviation. And we wanted to try scripted historical, which is much, much more costly the standard nonfiction fair. We want to do all of this and not spend any cash. It's not easy, but through a lot of hard work by a lot of people, we're able to secure over 200 new titles in all of these vital categories that I mentioned without spending any cash. I think it's a unique quarter in regard to the scope of that, but we'll continue to be opportunistic when opportunities warrant. as well as to the accounting treatment theater?

Yeah, let me, probably the simplest thing to do is walk through a kind of hypothetical example about how the content works. So imagine a scenario in which we are swapping content with a partner that's valued at, the value of the content is basically a million dollars in each direction. When we deliver that content to our partners, we would recognize the million dollars of revenue at the time the delivery is accepted in both directions. So we recognize revenue. We would not have expense associated with that revenue at that time. What we would do is also book on our balance sheet in addition to our content assets of a million dollars for the content that's coming back to us. When we publish that content, we would amortize the content just like we would with any other licensed content. So we do kind of an accelerated amortization for the first couple of months and then straight line through the balance of the life of the license. So roughly, for most of this content, as with most of our license content, typical would be three years. And so over the life of, because it's a swap, over the life of the relationship, the revenue we would recognize and the content amortization would equal out over the life of the over the life of the swap effectively.

Excellent. All right, so then for my one follow-up question, I think I know the answer we're going to ask anyway. So it seems like as a result of the solution to the redder strike that content costs may be going up for some, and they seem to be then essentially raising prices as a result. I know you already had a price increase in place, but I don't want to assume, but I suspect that you're not going to see the cost inflation on the resolution of writer's strike that others might.

Thank you for that question, Tom. And obviously, we're really happy for all the people who were involved in that, that they can go back to work now. However, I do think there is risk next year of a couple other unions associated with the production business that could choose to strike. However, a key point that I don't know that we can emphasize enough is a small percentage of our overall direct subscriber base has actually been exposed to our rate increase. So when you think about it, we have a lot of annual customers, well over 80%, as we've said in the past. So most of them have not seen the rate increase. And then as it relates to our channel store partners, all of them are either just just announced it or are just beginning to adopt it. So it will take a while. It's good news for 2024 as far as growth there goes. Peter, do you have anything to add?

No, just that, you know, to the extent that, you know, there are new terms related to the settlement of the rider strike, that effectively doesn't impact us.

I mean, obviously, 2024 is gone. Thank you. Thank you, Tom. Thank you.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.