CuriosityStream Inc
NASDAQ:CURI
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CuriosityStream Inc
Earnings Call Analysis
Summary
Q2-2024
CuriosityStream reported $2.5 million in adjusted free cash flow for Q2 2024, marking a significant year-over-year improvement of $7 million and the seventh consecutive quarter of cash flow growth. Despite a slight dip in total revenue to $12.4 million from $14.1 million last year, direct subscription revenue increased to approximately $10 million. The company also achieved a 52% gross margin, up from 30% a year ago. Operational costs have been reduced by over 30%. For Q3, CuriosityStream anticipates revenue between $12 million and $14 million and adjusted free cash flow of $1.5 million to $3 million.
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Good afternoon. My name is Briana, and I will be your conference operator today. At this time, I'd like to welcome everyone to the CuriosityStream Second Quarter 2024 Earnings Conference Call. Please note that today's call is being recorded, [Operator Instructions] I will now turn the call over to Tia Cudahy, Chief Operating Officer and General Counsel. You may begin your conference.
Welcome to CuriosityStream's discussion of its second quarter 2024 financial results. Leading the discussion today are Clint Stinchcomb, CuriosityStream's Chief Executive Officer; and Brady Hayden, CuriosityStream's Chief Financial Officer. Following management's prepared remarks, we'll 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 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 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 June 30, 2024, 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. Unless otherwise stated, all comparisons will be against our results for the comparable 2023 period.
Now I'll turn the call over to Clint.
Thank you, Tia, and good afternoon, everyone. In addition to Tia, our COO and General Counsel, our CFO, Brady Hayden, is on our call today.
I appreciate everyone joining us today for this milestone quarterly report. In light of well-directed hard and efficient work by a tight talent-dense team of people. We generated our highest ever quarterly adjusted free cash flow. Specifically, we generated $2.5 million in adjusted free cash flow in the second quarter, a year-over-year improvement of about $7 million and an over 100% improvement from Q1 2024. This marks our seventh consecutive quarter of adjusted free cash flow improvement.
We also increased our top line revenue sequentially. And I'm happy to say, and I would like to make it abundantly clear that Curiosity is generating cash. I know that sometimes accounting terms like EBITDA and adjusted EBITDA can be confusing, which is why I'm using this very concrete language about generating cash. Even as we paid a significant dividend, our cash position from Q1 to Q2 increased. We believe we're well positioned to grow top line revenue to generate meaningful adjusted free cash flow and to continue to pay our dividend from surplus cash.
In Q2, we increased our direct subscription revenue sequentially and year-over-year. At approximately $10 million in direct revenue for the quarter, our annualized direct revenue alone now exceeds our current annualized operating expenses, including our more variable categories like content and marketing. As we have considerable flexibility around our marketing and content investments, we do have the ability to lever up our marketing and acquisition spend based on seasonality, key promotables and other relevant company and industry dynamics.
While our overall licensing and bundled revenue was up slightly sequentially, I would like to note that we did expand into some new categories of licensing partners in Q2 and granted some rights that we had never explicitly granted. As licensing can be lumpy, these new categories will not necessarily reduce spikes, but they will certainly help to increase our floor.
We are achieving new heights and critical milestones while continuing to thoughtfully rationalize our cost base. Simple way for companies to cut costs is to just slash marketing. Now that's the easy way out and that can have a damaging long-term impact on growth. We've not done that. We believe our cash marketing spend in 2024 will be roughly equivalent to what it was in 2023.
We've done the hard work in reducing annualized overall operational costs by more than 30%. We've renegotiated vendor relationships, consolidated vendors, leverage certain emerging productivity tools and like other profitable companies, properly incentivized cost containment across the organization.
On the content front, we launched several new programming initiatives, including Earth Month, anchored by the premiere of our landmark original series, The Sun; The Jaws & Claws Week, anchored by the premiere of our three-part original series Tracker's Diary: Tigers of Nepal; and our extensive new Summer Doc-busters campaign, with a premiere of groundbreaking original series Fateful Planet.
Throughout the quarter, we continued to premiere many other original series and specials across the full spectrum of factual, including original series like Taste: The Flavor of Life, a great look at the evolutionary role of deliciousness; and Wings: World War Two in the Skies, the 2-part special chronicling the air wars in Europe and the pacific, released for the 80th anniversary of D-Day.
In closing, I'm delighted to again reinforce that for the quarter, we generated $2.5 million in adjusted free cash flow, and we ended the period with nearly $40 million in cash and equivalents and zero debt. We believe our strong balance sheet and projected 2024 positive cash flow make us stand out 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 tens of thousands of licensable audio and video programs and raw footage as well as monetizable data sets like images, transcripts, code and text, our multi-third-party agreements, our public company currency and our rationalized cost structure are uniquely favorable attributes that provide us with sustainable long-term strength and exceptional flexibility.
I'd now like to pass the baton to my friend and colleague, Brady Hayden.
Thank you, Clint, and good afternoon, everyone. First of all, let me just say that I'm grateful to be taking the reins of the finance organization at such a pivotal time in the company's history. Having successfully reinforced the financial foundation of the company, we are now squarely focused on creating shareholder value through profitable growth and prudent capital allocation. We have already demonstrated clear progress on this journey. In each of the past 2 quarters, we have increased our cash balances even after returning cash to shareholders through our dividend and share repurchases. And thanks to our strong balance sheet and positive cash flow, we see a wealth of possibilities moving forward.
As Clint said, we achieved another milestone in the second quarter as adjusted free cash flow of $2.5 million came in at the high end of our guidance range. This also represented the highest quarterly adjusted free cash flow in the company's history, and our seventh straight quarter of sequential improvement in this metric.
Revenue for the second quarter was $12.4 million compared to $14.1 million a year ago and near the midpoint of our guidance range. Adjusted EBITDA improved by $5.5 million, and our adjusted free cash flow improved by $6.8 million as we continued our intense focus on the bottom line. Second quarter gross margin of 52% increased from 30% a year ago, driven by lower content amortization as well as significant reductions in our cash-based cost of revenues. Our gross margin, excluding content amortization, which really gets at the cash cost of delivering services, was 89% in the quarter compared to 75% a year ago.
Our largest revenue category in the quarter was our direct business, which generated $9.8 million, up 17% from a year ago and 3% from the first quarter as we continued to benefit from the price increase we began rolling out last year. Our additional revenue categories, content licensing, bundled distribution and other generated $2.6 million in the quarter compared to $5.7 million a year ago. This change was driven mostly by the timing of content licensing deals as this continues to be an inherently lumpy part of the business.
Turning back to second quarter expenses. G&A was $6 million, down 25% from a year ago as we continue to realize the benefits of our planned spending reductions as well as our finance transformation and workforce optimization efforts. Second quarter advertising and marketing expense of $3 million declined 29% from $4.2 million a year ago as we increased our efficiency in deploying our customer acquisition dollars.
Adjusted EBITDA loss was $1 million in the quarter compared to a loss of $6.5 million a year ago. While we don't provide guidance with regard to this metric, we believe that breakeven adjusted EBITDA is within our reach as we expect margins to continue to improve in the coming quarters. And as we mentioned earlier, adjusted free cash flow was $2.5 million in the quarter compared with a negative $4.3 million a year ago.
We, of course, paid our first dividend of $1.3 million in April, and we ended June with total cash and equivalents of $39.6 million and no outstanding debt. We believe our balance sheet remained in great shape with $91 million of assets, $26 million of liabilities and book value of $65 million or approximately $1.21 per share.
One final note on the second quarter. On June 11, we announced that our Board had approved a share repurchase plan for up to $4 million. And through the end of June, we had repurchased 22,000 shares of our common stock and we will continue to strategically buy back shares going forward.
Moving to third quarter guidance. We expect revenue in the range of $12 million to $14 million and adjusted free cash flow in the range of $1.5 million to $3 million.
With that, operator, we can open the call to questions.
[Operator Instructions] Our first question comes from the line of Laura Martin with Needham & Company.
Okay. So just you gave a long list of the assets you own. Have you thought about doing anything in trying to license the rights that you own to generative AI large language models by any chance?
Thank you for that question, Laura. And we have, I think we started reading about a lot of the publishing agreements that have been entered to over the last 3 to 5 months with -- between companies like Google and Reddit and Runway and Getty Images and Microsoft and Informa and OpenAI and Shutterstock. And clearly, there is an interest from many of the generative AI companies in licensing various data sets to train their models. And I would say that we feel really good about the position that we're in as it relates to that.
When we consider the scope of assets that we have, we have well over 100,000 hours of raw footage. We have over 10,000 finished programs. We have 7,000-plus audio programs. We have a lot of code. We have a lot of -- hundreds and hundreds of thousands of images, review questions, tech tests and a lot of content that we understand is rather appealing. So I think just as we try to negotiate fair and good value exchange with the traditional licensing partners, and we're well aware of the opportunity that exists in licensing for training purposes and I think even down the road for derivative exchanges and other exchanges.
So yes, it's certainly something that is -- that we're focused on right now, obviously, not at the exclusion of continuing to grow our direct business, but we really do see that as a meaningful opportunity. And we'll likely talk much more about that on our next call.
Okay. That's super helpful. And then really great cost control. Are you offshoring any of your FTEs?
Well, we are offshoring some of our engineering activity. They're not FTEs. But yes, we've had -- I think we've done -- our Head of Engineering has done a terrific job over the last 9 months in really reimagining what that organization should look like and leveraging just some really talented people around the world.
Okay. So they don't show up at the full-time headcount, they're like contractors basically. Is that the idea?
That's right. I mean we did -- we -- obviously, as part of sort of optimizing the workforce, there were some people who were FTEs whose functions are now replaced by offshore engineers and the like.
Our next question comes from the line of Jim Goss with Barrington Research.
All right. The first couple of quarters, your revenue comps were down at least a little bit from a year ago and third quarter guidance looks to be the same. Could you talk a little about what's driving that? Obviously, you've made up for it with the cost controls. What is behind the revenue declines?
I think if you look actually, Jim, at our cash revenue for 2024, we think that will actually exceed our cash revenue from 2023 with noncash revenue in 2023 as do all companies. And I think that the good news is, really, we've put some roots in the ground. We put some real, I think, helpful guardrails around various parts of our spending. And we're confident that we're going to continue to grow our direct revenue and continue to grow our licensing revenue. We're trying to be relatively conservative in how we project that today.
Okay. And if you look at -- well, maybe you might update a little on the VIZIO FAST channel, how that is working out and to the extent that JVs are becoming more commonplace, is that one of the areas you're focusing on getting other partnerships that you think could work for you?
Yes. Thank you for asking that, Jim. It's a great question. And yes, we launched with VIZIO in the U.S. in late June. And I will tell you that just in the last few weeks, we've rolled out our AVOD content with Tubi in the U.K., with Pluto in the U.S. and even with Samsung in several countries in Europe. So as you know, those deals take a long time to do, and then it can take a long time to get your content published or your channels launched even after an agreement is in place. So there's a bit of a lag there.
But we're excited about what's happening there and what's possible over time. We even turned on PayTV advertising recently with our PayTV channel in Australia with our partner, Fetch, there. So that advertising revenue, that will continue to grow and will be durable and certainly more predictable than it's been in the past. There's just a pretty healthy lag from getting a deal done with companies and then getting all of the content to them and then having them actually publish it on their platforms.
In regard to JVs, I mean, well, I would characterize it necessarily as a JV. We did work with -- and we are working with Estrella, excuse me, top Hispanic media organizations in the U.S. and the world, quite frankly. And Samsung is launching 3 of our channels that we've developed with them, Curiosity in Español, Curiosity Motores and Curiosity Animales. So we're excited about that. And we'll work with partners where it makes sense. We have various partners whose content we incorporate into our broader structure for exploitation on AVOD, for exploitation on FAST and even in various licensing agreements. So I think we've been quietly doing a lot of work in that area. We're quite optimistic that, that will bear fruit here over time.
Okay. One last one. The theatrical exhibitors have focused a bit more on alternative content than has historically been the case. So that might be getting pushed back as fresh content starts to come in to a greater extent. But I was curious if you think any of the content that you have might lend itself to either an alternative content series or edited to fit like 1 or 2 theatrical films. And what is the video or audio quality of the content you have, would it be applicable to a theatrical setting?
Yes. I think that as far as the quality of content that we have, I don't think anybody can take issue with that. It's, I think, by any objective standard of measurement, extremely high quality. And sort of going back to a question that Laura asked, when you talk to the large generative AI companies, what they will tell you what they are looking for is really kind of 3 things, and that is quality of the video, meaning is it 4K HD, or in our case, we have content in 5K. We have content that's in 8K. They're also looking for volume, which we have. And they're also looking for diversity of imagery, which is something that, obviously, we're blessed to have, having built a library that we do.
In regard to doing some sort of theatrical release. We've looked at a few opportunities to do that. It's been hard to figure out a way to make the money work based on the amount of time that we would have to put in. But what I will say is like we're constantly looking at new areas to license our content into. And one example from the last quarter is we did 2 licensing deals within the consignment space where I think our content is well suited. And we also licensed a new asset class of content to a partner in Q2, that being raw footage, which was interesting.
So we're looking at all those. And I guess I'll just -- the last thing I'll say there, Jim, is that we did licensing deals with 6 companies with whom we never worked with last quarter, consignment, public broadcast or tech category, we'll talk more about a couple of partners in Asia. So always looking at the best ways to display and license our content. And if we can figure out the right economic exchange there, it's something that we would take a hard look at.
Our next question comes from the line of David Marsh with Singular Research.
With regards to your revenue guidance for the next quarter, can you just talk about what the puts and takes are that would allow you to get towards the top end of the range? And can you give us a sense of your feeling in terms of how much recurring revenue might help support kind of the bottom end of the range, please?
Yes. I think that that's a great question. Thank you, and I'll let Brady fill in here. But as I mentioned at the beginning of my remarks, our direct revenue continues to grow, and we believe that it will continue to grow next quarter as well. And that in and of itself today, on an annualized basis, is at a stage where it covers our -- that alone on an annualized basis covers our annualized operating cost. And so you say, okay, everything above that is margin. And in our case, we have a robust content licensing business. It's no surprise to anybody.
We're in a number of conversations with great partners around the world, and there is just a there's a broad range of outcomes there. Like we're really enthusiastic about the ultimate outcomes of many of these, but what's a little harder to predict is, okay, which of those will close by September 30. Like that's the calculus. And so if some come in a little bit earlier, then we're at the top end and even potentially above. If they come in later, then we're maybe not at the top end, I guess, is a good way to say it. What would you say, Brady?
Yes. No. I think, Dave, you're spot on with the question. It's -- if you take just our direct business, including both DTC and partner direct, bundled distribution is pretty easy or easier to predict. And even in the other categories, some of the advertising revenue, I would certainly say has become recurring. That probably gets you near the bottom of the range, it's the content licensing and the timing of those transactions that would push it to the top of the range or perhaps even above it.
Okay. That is really super helpful. I appreciate that. And then the other question, I mean, I guess, just to echo Laura's comments, the cost control is amazing, and just looking at gross margin, I mean, this is like a super, super gross margin quarter relative to as we look back the last couple of years. Is this gross margin rate sustainable going forward? And what would be types of things that might cause it to retrench kind of back into the mid-40s?
Yes. I'll -- just having been here a little bit longer than Brady, I'll take that, Dave. But -- and then hand over to Brady for any additional color. But without a doubt, we continue to do work on the cost side. And we have a handful of vendor agreements coming up over the next 6 months that could help us improve there relatively significantly. And just as we see a really interesting revenue opportunities as it relates to the emergence of AI, we're already seeing efficiency tools that are available there, in editing, in marketing, in some other areas that can help to -- that can help enhance our margin as well. And whereas we tend to focus really hard on cash accounting internally, because we think that yields ultimately the best results. I think that you'll see, based on our content amortization levels, like you'll see our profile even from a an EBITDA standpoint just continue to improve over the next many quarters.
Yes, I would just say we would anticipate that our content amortization would continue to decline over the next few months. Obviously, it -- we will acquire and publish new content, which essentially would keep that number flat at some model, and there's a floor there at some point. But yes, certainly, both on the content amortization side and on our cash-based cost of sales, we've seen some improvements there.
Great job there, guys. Keep up the good work, and we'll talk to you again.
Thank you, Dave.
Thanks, Dave.
This will conclude our question-and-answer session. And with that, we will conclude today's conference call. Thank you all for your participation. You may now disconnect.