Q4 2023 CuriosityStream Inc Earnings Call

Participants

Andrew Lata; IR; CuriosityStream Inc

Clint Stinchcomb; President & CEO; CuriosityStream Inc

Peter Westley; Chief Financial Officer; CuriosityStream Inc

Laura Martin; Analyst; Needham & Company LLC

Jim Goss; Analyst; Barrington Research Associates

Presentation

Operator

Good afternoon. My name is Jackie, and I will be your conference operator today. I would like to welcome you to the curiosity stream Inc. Q4 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'd like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Andrew Lata, Investor Relations, you may begin your conference.

Andrew Lata

Welcome to curiosity streams discussion of its fourth quarter and full year 2023 financial results. Leading the discussion today are Clint Stein from curiosity, street streams, Chief Executive Officer, and Peter Westley, curiosity streams, 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, and 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 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 annual report on Form 10-K for the fiscal year ended December 31, 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 dot curiosity, stream.com. Now I'll turn the call over to Clint.

Clint Stinchcomb

Thank you, Andrew. Hello, everyone. I appreciate you all joining us today. Also on the call are our COO and General Counsel, Tia Kelly, our CFO, Peter Westley, and our Head of Content, ROBERT. While we will discuss Q4 in detail. I want to begin this call by congratulating the curiosity team for achieving a significant and critical milestone. I'm delighted to share that we will end Q1 2024 with more cash on hand than we had at the end of Q4 and with positive adjusted free cash flow. And importantly, we will accomplish this without reducing our paid marketing spend. Looking forward, we'll be guiding to positive adjusted free cash flow for the first quarter of 2024, and we'll be initiating a dividend program in April, which will be paid from excess cash.
Looking back, Q4 was a good quarter that we improved our adjusted free cash flow for a fifth straight quarter as we cut our cash burn to $2.4 million, while sequentially keeping our marketing spend relatively flat, our direct revenue grew both sequentially and year over year continued to roll out our new pricing plans to new direct customers into cohort of our existing subscribers. Many of our annual subscribers are only now coming up for renewal, and most of our channel store partners just began adopting or announcing the increase to our flagship service and even at a higher price point, we continue to believe our subscription services represent an extraordinary value compared to other offerings in the market we entered into new long-term licensing and distribution agreements with partners in Asia and the EU in Q4. And more recently, at the end of February, Apple TV rolled out curiosity stream in 23 countries, not a simple achievement for most U.S. based companies in light of increasingly stringent EU content requirements. Just the last two months, we've had our products and services launched in over 33rd party platforms around the world. In order to expand the top of our marketing and promotional funnel and further monetize our content, we rolled out our Avon product with key partners like Tubi, Zoom, O. and Roku in October, and we are pleased with our early progress as our millions of monthly impressions continue to grow dramatically. We have a large evergreen globally appealing library of content now over 17,000 titles that we are putting to work across new platforms that we believe will both increase and enhance the reliability durability and predictability of our revenues going forward. We reduced G&A significantly in Q4 and have continued to in 2024 as we streamlined the organization, renegotiated vendor agreements and Bard where we had advantages as the impact of new technologies is often overhyped, as we've seen with innovations like the metaverse 5G crypto, we are treading thoughtfully into the AI opportunities available to us thoughtfully immeasurably. We've just started to leverage practical generative AI catalysts in order to explore ways to work faster, cheaper and more efficiently in several areas. Some specific examples we're utilizing today include functional areas like more personalized and targeted email marketing as well as broader CRM initiatives, accelerated sequencing and the editing process, which enables us to meet a broad range of different third party platform requirements around the world and in so doing put more content to work. Our engineering team is testing and using AI to enhance software development practices such as automated code suggestions reviews, data analysis and database query assistance. Additionally, we're experimenting with a to enhance categorization of content analysis of Scripps factual analysis. We've also started using AI for understanding customer feedback through sentiment analysis and summarizing insights to improve user experiences and Content Relevance. While premium program synthetic dubbing is not quite ready for prime time, we believe it's within our sights to create a meaningful impact on the speed and volume of content we can publish across the globe in a growing number of languages in regard to premium factual content and we closed out the year in Q4 with one of our strongest programming slates to date, headlined by our brand defining reboot of connections with James Burke, six part journey through the seemingly small and unrelated events that fuel human innovation. We also had the launch of our annual Dino week stuff anchored this year by the Premier of amazing Dino world to in the release of more cutting edge science and tech specials, like AI. TippingPoint's mystery of the giant birds in a perennial fan favorite top science stories of 2023 Looking ahead, we're excited about our strong start to 2024, including the premiere of original series like science for Evil Geniuses, rebuilding Notre Dame, the invention of surgery and our reduction.
In closing, I'm happy to reinforce that we ended the year with over $38 million of cash and equivalents and zero debt zero debt. We believe our strong balance sheet and projected 2024 positive cash flow are major competitive advantages in the current environment. And 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 titles. Our multiyear third-party agreements or public company currency in our rationalized cost structure are uniquely favorable attributes that provide us with sustainable long-term strength, an exceptional flexibility. Over to you, Peter.

Peter Westley

Thanks, Clent. As Curt mentioned, we made further progress towards our positive adjusted free cash flow objective during the quarter, and we remain intensely focused on expense discipline and operating efficiency. We believe our Q4 results demonstrate the excellent progress we've made over the past year to improve profitability and cash flow. Fourth quarter adjusted EBITDA improved by $10.2 million compared with the prior year quarter, while adjusted free cash flow improved by $6.4 million year over year.
Fourth quarter revenue was in line with our guidance range for the quarter and adjusted free cash flow was above the high end of our guidance range. This was our fifth straight quarter of sequentially improving adjusted free cash flow.
Turning to our fourth quarter results, revenue was $14.8 million compared to $14.5 million in the prior year quarter. We saw year-over-year gains in all of our major revenue categories with the exception of our enterprise business, which now represents the smallest portion of our revenue.
Our largest revenue category in Q4 was again our direct business, which came in at $9.1 million, up 6% both sequentially and year over year, primarily driven by the impact of our price increases implemented earlier in 2023.
Turning to content licensing, which was our second largest category. This quarter, we generated $3.3 million of revenue compared with $3.0 million in the prior year quarter. Content licensing is an inherently lumpy business. We continue to close a number of barter transactions during the quarter with these deals accounting for $2.5 million of our content total content licensing revenue.
Our next largest category was bundled distribution, which saw $1.8 million of revenue in the quarter compared to $1.5 million in the prior year quarter. Year-over-year growth was primarily driven by new partnerships and the recognition of revenue from earlier periods due to successful collections for Q4. Our other revenue category was $0.5 million, an increase of approximately $0.5 million compared to the fourth quarter of last year when we had less than $10,000 of revenue in this category, our other revenue category includes advertising sponsorships, branded social media, promotional videos, transactions and other sources of revenue. As with our content licensing business, we engage in advertising related barter transactions in the fourth quarter, approximately $350,000 of our other revenue related to barter transactions. While our other revenue is a small part of our business right now, we believe we have significant opportunities to grow our future advertising and sponsorship revenues in our pay-TV channels and in front of the paywall in coming quarters.
Fourth quarter gross margin of 45% increased from 9.4% in the prior year quarter, driven by our cost control efforts and a significant decline in content amortization expense. Content amortization in the fourth quarter was $5.2 million, which was about half of the $9.8 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.
G&a expense during the fourth quarter of 2023 of $6.4 million was down $1.2 million or 15% year over year, driven by lower compensation and professional services costs as part of our more than $15 million in planned reductions and cash spending that we in cash spending that we discussed on our Q3 earnings call, we initiated a reduction in force in December, which resulted in a $0.8 million restructuring charge during the quarter. From an accounting standpoint, we record we recorded this charge, which mostly consists of severance costs in Q4 of 2023, although the majority of these costs will be paid in 2024 as we align our staff levels with our current business needs. We believe that our workforce optimization efforts will enable us to operate more efficiently and significantly reduce compensation costs in 2024 and beyond. Our fourth quarter. Advertising and marketing expense of $5 million was down 45% year over year. And we continue to exercise discipline and analytical rigor and in deploying our customer acquisition dollars.
Moving to profitability. Adjusted EBITDA loss was $3.4 million, the calculation of which excludes the $0.8 million restructuring charge that I discussed earlier compared to an adjusted EBITDA loss of $13.6 million in the prior year quarter. Adjusted free cash flow use of $2.4 million for the quarter improved $6.4 million year over year. As we mentioned earlier, this represents our fifth consecutive quarter of sequentially improving adjusted free cash flow and underscores our continued momentum toward positive adjusted free cash flow our overall balance sheet remained in great shape with $101 million of assets, $28.4 million of liabilities and book value of $72.6 million or approximately $1.36 per share. We ended the quarter with total cash, cash equivalents and restricted cash of $38.2 million and no outstanding debt moving to our first quarter 2024 guidance, we expect revenue in the range of $11.5 million to $12.5 million and adjusted free cash flow in the range of $250,000to $1 million. We are excited to be guiding to positive adjusted free cash flow for the first time in the Company's history. This is a major milestone for curiosity stream.
Additionally, as Clint mentioned, given our expectations regarding cash flow in the first quarter and for the balance of the year, our Board of Directors has decided to return capital to our shareholders in the form of cash dividends. Specifically, they have declared that a dividend of $0.025 per share will be paid quarterly to our shareholders. The first dividend will be paid on April 30, 2024, to holders as of the close of business on April 12, 2024.
Finally, I wanted to give an update on the notice that we received from NASDAQ. Just yesterday, we received written notification from the Listing Qualifications department of NASDAQ, granting our request for a 180 day extension to regain compliance with the minimum bid price rule. We now have until September 16, 2024, to meet the requirement to regain compliance. The closing bid price of our common stock must meet or exceed $1 per share for a minimum of 10 consecutive business days during this 180 day period.
With that, operator, let's open the call to questions.

Question and Answer Session

Operator

If you would like to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from the line of Laura Martin with Needham. Your line is open.

Laura Martin

And can you hear me okay.

Clint Stinchcomb

Began.

Peter Westley

Yes.

Laura Martin

Fantastic. So I wanted to go back to Asia and said you're doing Asia in renewables. And can you tell us about the terms of those either getting better or worse against anyone of the charters of the renewable fleet?

Clint Stinchcomb

Yes, that so the agreement that I was referencing in Asia is with a telecom provider and that was a new deal, Laurent. So we don't have a massive third-party platform presence in Asia, but this is a nice way for us to get into the territory and then we can talk about this later, but we did it. We did a few new deals there in the first quarter of 2024 as well. So perhaps I can add little opportunity for us.

Laura Martin

Yes, sorry for that as you renew anything in the year.

Clint Stinchcomb

Yes, so in the in the EU we had the we do have we do have one significant renewal coming up in third quarter of this year. But what I was referring to there were actually that new agreements leading to new rollouts, which will which we've not we've not announced today, but we will shortly.

Laura Martin

Okay, great. I'm wondering on my second question is on the M&A market. You know we filed with Apollo bid above and beyond related to that Paramount studio, could you talk about what do you think is going on in the M&A market and whether you think like anybody can exit in the market? Or is our is that attraction of smaller streaming companies are becoming more difficult?

Clint Stinchcomb

Yes, I think though, without a doubt, it's more difficult and especially for subscale streamers. I mean, look depends on depends on where you draw that line. But I would say we have some really unique advantages there. I mean, you know, Laura. That said, there's been a lot of services over the last four or five years that are either subscale or part of a larger company that have just gone completely away with drama, fever, film struck C, so Bruce duty, et cetera, like these were real services for a while. And so I think that one of the things that is unique about us and that we're really excited about is that we have we have real cash. We have increasing cash. We've taken the hard steps over the last 12 months, really to turn the ship and put us put us into positive territory. And so I think M&A is tough right now for a lot of people. I think, though that what we're focused on so on and allocating our cash toward the business toward the toward the dividend. Obviously, I think that they're going to be there's going to be they're going to be certainly many companies that that have that have real challenges. Now I will say that through our smart bundle, which includes six other services in addition to two curiosity streams, we have conversations with a lot of the smaller streaming companies that you've referenced, even some even some larger ones. And so for a lot of these for a lot of these guys, it's your growth is growth is tough. And I do think that it will be will certainly be challenging over the next year over the next 18 months. And that's why we like the fact that we have a unique and really sustainable cost base, we're not competing for costly sports or Game of Thrones or the Hobbit or hours of programming that are tens of millions of dollars per hour. I mean, I will say I'm just kind of close with this, like in this macro environment where consumer confidence is shaky where individual spending is more disciplined. We're on track to have our best month of subscriber reactivations in over two years. And that's not because consumers are jumping into watch Dexter or Love Island doors, a single seasonal series. Rather, it's a testament to quality to value into premium evergreen content with global appeal. So thank you for that question, Laura.

Laura Martin

Sure. And then, Tina, my last question is for you. You're guiding to adjusted free cash flow at $250,000 to $1 million in Q1. Can you remind us how much was severance lower the free cash flow in the first quarter, you said a lot of the assets we have.

Peter Westley

Yes. So severances actually added back in the calculation of adjusted free cash flow so that that would be effectively excluded in the calculation of that number.

Laura Martin

We are piling up on asking about the lumber process.

Peter Westley

Yes.
So the total the total severance will be about on the order of $350,000 or so.
Yes, so slightly higher than that, but somewhere in that order of magnitude.

Laura Martin

So that's exactly what I wanted to know. Thanks, guys.

Clint Stinchcomb

Yep. Thank you, Laura.

Operator

Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. And your next question comes from the line of Jim Goss with Barrington. Your line is open.

Jim Goss

Thank you. I was wondering, will the relationships, domestic relationships with the Tubi Zuma Roku? Are they all pretty similar and are they largely FastChannel driven?

Clint Stinchcomb

Yes, that's (multiple speakers) yes, great question, Jim, thank you for asking for most of them. But the business model is the same. I mean, it's a it's a typically a rev share model with the larger distributors where the rev share from the platform to the partner might be anywhere from 40% to 60% as it relates to FAST channels. We do have we do have our curiosity stream flagship FastChannel today that we recently launched with a few distributors in the U.S. And then more recently with them in EU. And then obviously, we're in and we're in a lot of conversations there. And so in light of all of the content that we have, we're trying to do the right deals as it relates to fast. And so what that concludes, sometimes, Jim, is it's deeper partnerships with either the platform leaders like you mentioned, or even category leaders in the space. And so we're in the process of being in all those conversations, but are really encouraged and excited about the opportunity to put. It's so much of our content to work on those platforms that heretofore has not been put to work.

Jim Goss

So those are also the primary candidates for year subscription services that correct.

Clint Stinchcomb

As well, they are at their place for us to promote to our subscription services. But in the case of like a Zoom or a 2B or Pluto or Roku, or those guys are Roku. Yes, good example. I mean, with Roku. We have a we have a nice holistic relationship where they offer our apps. They offer that curiosity stream in their channel store and they offer our Avon package for a certain amount of our Avon package. And the nice thing about that with Roku, where the subscription offering is if we're if we're showing a series like The history of Wall Street and you watch the first two episodes, but then you want to watch the third. Roku does a great job of upselling people to a hub to a monthly subscription. The curiosity stream in that case so.

Jim Goss

So yes, in the case of Roku, exactly as you described, you also talked about the critical mass with your library, which I think you have gotten to over the past year or more. And I'm wondering as they may have asked some of this before, but in terms of using that library and maybe keeping it fresh but making sure you take advantage of that critical mass and library.
Could you describe that process right now and like that, are you carving out like a quarter of it for Kaizen or something of that nature? How exactly are you working on.

Clint Stinchcomb

Yes, it's a great question. And so and if you came to just curiosity stream today and tried to go through and watch all of our 4,500 to 5,000 titles that we have there that protect you a few years. So it's sort of like for new customers, especially it's almost like premiere night every night on curiosity stream. So we're trying to do a great job of resurfacing the best content and serving up the right personalized genres to the right subscribers. At same time we have on our shelf right now that we have over 700 titles that we haven't even published yet. So I think I alluded to it in. I think my last answer, but I can't emphasize enough that we have a really unique cost base, and we have kind of a unique and extensive approach to amassing content. So we can actually continue to build that to build our library. And the nice thing today is we have multiple products to push out that to push that content through. And you know, as I mentioned in my script, as the translation services become less expensive and hopefully catalyzed by AI, we have an opportunity to put content in language all throughout the world, whereas we're 175 countries today, but I'm not in but not 175 different languages in our intent. So we have a we have a high volume of content. We're generating a lot more reliability and predictability around what that content will yield when we deploy it on different platforms that I also want to spend. We're on 114 different third-party platforms today with our content and growing. So we're really excited about the opportunity in front of us.

Jim Goss

Okay, unless they're the global relationships pretty similar to the domestic relationships? And are you able to grow those global relationships with the same content the way you're describing with a eye dictated to embellishment in additional languages?

Clint Stinchcomb

Yes. So we've not we've not used it just to be clear, like we've not put into commercial broadcast NAI. translated content. However, we do think that that's close. And obviously, we're open working on that. We're working with different partners on that to on a daily basis. But yes, we have global rights to a lot of our content. And a lot of it is, you know, it's just it's broadly appealing because it's in the factual genres. It's in science, it's animals, it's motors, it's crime, it's adventure. It's kids, it's a living and those categories just translate well, there's not you're not hampered by colloquial lessons that you might experience with procedural dramas in the U. S or something like that. So yes, the content travels well, and you know, you just say, okay, I think we've sort of underestimated the platform opportunities available to us going forward. We're looking to do whatever we can to enter into great partnerships and help our partners make money and obviously grow our business as well.

Jim Goss

And thank you very much.

Clint Stinchcomb

Thank you, Jim.

Operator

There are no further questions at this time. And thank you for your interest and participation. This concludes today's call. You may now disconnect.