CuriosityStream Inc. (CURI) Q3 2021 Earnings Report, Transcript and Summary

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 speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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.

Thanks Josh. Hi, and welcome to CuriosityStream's discussion of its third quarter 2021 financial results. Leading the discussion today are Clint Stinchcomb, 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.curiostystream.com. Now I'll turn the call over to Clint.

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 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 eight-fold increase over a three-year period, nearly eightfold a truly remarkable achievement. This wouldn't have been possible without the exceedingly talented and hard-working 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 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 is difficult to predict on a quarterly basis and this quarter is a good example as 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-to-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-to-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 University's lectures and events. With more subscribers adopted standard and premium tier subscriptions in these service line extensions, we expect ARPU growth to become an increasingly significant driver of our topline 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-to-consumer offering. The rights we sublicensed to third-parties in 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 multiyear distribution agreement for curiosity stream with FuboTV through which their subscribers gained access to our linear channel and VOD 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, the groundbreaking five-part series filled over several years that offer 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 premiere of our acclaimed feature doc Heval, a gripping 90-minute profile of Hollywood actor turned soldier Michael Enright who gave up everything to join Kurdish forces and their brutal struggle to the 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 Martin, which chronicle's 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 trend Breakthrough including Egypt's Lost City, Voyage to Venus, and Secrets of the Dogs 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 in our everyday existence. And we 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 on streaming and technology platform. We and Nebula share a focus on entertaining informative highly engaging content and have partnered in strategic and marketing arrangement since Nebula's inception. With over 140 active creators who together have over 120 million collective YouTube subscribers Nebula has 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 large 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 Wickes, CEO of parent company standard. We believe Nebula's only scratched the surface of its long-term growth potential and CuriosityStream shareholders were 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.

Thanks Clint. I'm also excited to announce another strong quarter with 100% of our fiscal 2021 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 Q3, 2021 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 presales 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 2. We provide annual guidance rather than quarterly guidance in part to limit timing constraints that could pose a risk to production quality. That being said, we have only included in our full year 2021 revenue guidance presales agreements with expected delivery dates no later than mid-December to limit the potential for ordinary course 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 higher-than-expected mix of content licensing deals relative to presales agreements within program sales. Due to some presale deliveries slipping into Q4 and 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 million in Q3 of '20. Third quarter EBITDA loss of $8 million compared to an EBITDA loss of $6.7 million 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.

[Operator Instructions] Your first question comes from Tom Forte with D.A. Davidson. Your line is open.

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 or COVID variants?

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 with some of our – some of our best ever original content coming out now and through the end of the year content like Evolve, with Patrick Eiry, 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. We recently launched a beautiful series called The Royals, and we were able to – we're able to use an 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 some of the challenges around shooting. But we'll end the year with more content than we've ever had as I mentioned, we have now 5,000 titles under contractor license not all, of which are on CuriosityStream today. But so we have volume and we have quality, and we're delighted that we were able to maintain that through this period. And our – we're – we recognize – we're long-term focused. We recognize the long term as a series of shares of short term. But as it relates to content, our intent is always to create the best possible programming that we can create. And if it means that something might slip from second quarter to third quarter, or third quarter to fourth quarter, we're going to side with the – we're going to side on the side of editorial quality, and which is why we have a great comfort in our annual guidance. Our quarters can be a little bit lumpy in light of that. Does that answer your question, Tom?

Yeah. Thanks, Clint. Right. So I'm trying to draw a trend from one acquisition One Day University and one investment in Nebula, two businesses that have subscription models and content. So how would you describe your overall M&A strategy? And how do you look at additional opportunities going forward?

Yeah. I think, our M&A strategy to-date has been to acquire companies with complementary factual content and 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 we've seen a number of – we've seen a fair bit of M&A activity there recently right with Moonbug as an example that was recently valued at $3 billion in this last round. So it can be a challenge to align with a creator organization for a variety of reasons, I think, Jason Kilar found that out, when he tried to do that with the 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 the case of One Day U that's – that area is a little bit older complements our traditional entertainment with courses of the highest quality, from the highest processors, around the country around North America. And then look, we just love – we love Nebula and we had – like One Day U, we had experience in working with them whether it was with Wendover, RealLifeLore, Mustard, or LegalEagle or Marques Brownlee these are great creators in what they call kind of the education area, science, technology, history, food. It's Plum smack in our category, but obviously it's highly engaging content that's produced by a younger group.

Great.

Your next question comes from Peter Henderson with Bank of America. Your line is open.

Hi. Thank you for taking the question. So, I just want to touch on subscriber growth a little bit. It appears that there was a very little subscriber growth in the third quarter and seems to extend a trend coming in from the second quarter, which I guess benefited from the Spiegel deal. But on the DTC side, I'm just curious like what 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 growth? And also curious on the marketing spend, was the decision to reduce marketing spend in 3Q result of trends you saw during that quarter? And just made a calculation that it'd be better to spend that in the holiday period or not? And then I just have one quick follow-up.

Yeah. Let me take the first part of that and then I'll deal to Jason and Devin. So total direct subscribers grew significantly in third quarter, while the total paying remained at the $20 million level that was due to rounding. It's also due to dynamics around some of our larger bundled international partners. So as our -- we have certain international partners with the 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 of -- if you look at as an industry example, we've seen US 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 US 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 the fourth quarter.

That's great. I mean, I guess could 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 trends through October, November on the subscriber side?

Yeah. I mean, look we're expecting quarter-over-quarter revenue increases across all of our lines. And, obviously, that includes subscribers, includes licensing, includes bulk subscription and even includes meaningful quarter of sponsorship, does it relates to different dynamics that we're seeing in Q4?

It's just, I mean it's continued strong DTC growth quarter-over-quarter just like we said in the -- earlier in the call. The DTC side of the business has been growing quarter-over-quarter for the last seven quarters consecutively. So that continues to not -- continues to grow very strongly for us. And we don't see that slowing down in the fourth quarter.

Okay, great. Thank you.

[Operator Instructions] And your next question comes from Zilu Pan with JPMorgan. Your line is open.

Hi, thank you. I just had a quick follow-up on the bundled 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 bundled 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 out of your revenue streams, what would you think the biggest growth drivers would be? Thank you.

Yeah. Thanks Zilu. I'll take the first part. This is Clint. As it relates to the pacing of our bundled distribution agreements, pacing has suffered really due to 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 that's extraordinarily difficult today to do that with COVID. So I think the pacing has absolutely slowed as a result of that. We have great confidence in our ability to grow bundled subscribers and we think based on a lot of success stories that we've developed over this year and to the back half of last year. We like our hand going into next year with those partners. And there are a lot of deals that are available to us. It's important to us to do the right deals and those that are sustainable and that will lead to really meaningful engaged subscriber growth.

Second part?

Yes. On the second part of your question, Zilu, that the DTC would probably be the biggest piece as far as where we see the strongest growth coming out of this year going into next year. And then we'll provide guidance on 2022 with at the first quarter of 2022 when we have our fourth quarter call.

Thank you.

Yes.

[Operator Instructions] And we do have a question from Tom Forte with D.A. Davidson. Please go ahead.

Great. I had a follow-up question. So Clint you talked before about the examples of content you've had in 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 a good example. But can you give a couple of 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?

I'd be happy to. And the good news is I have Devin here, I'll have him supplement, Tom. But yes, crash course has be a gift that keeps on giving. So beyond the crash course biology, 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 when we can find content like that that has some recognition that has an audience will be aggressive in kind of curating that for CuriosityStream. Devin, you have some other examples you'd like to point to?

Yes. I think the thing to keep in mind is that we're building a products that the default when you want on 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 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? Obviously, the YouTube ad load is extremely high. The playlisting and be able to find the next episode is quite difficult. And if you watch on CuriosityStream, none of those are issues for us. So there's plenty of content that -- there's Dave Rubenstein talks. There's European Inventor Awards. There's a lot of content that we can create a much better experience around viewing then you can get on other platforms when it might be available. So that is a strong strategy for us. It's going to be a continued strategy for us, and it's very complementary to our original exclusive content.

Great. Thanks for taking my question follow-up question.

Thank you, Tom.

There are no further questions at this time. This does conclude today's conference call. Thank you for your participation and you may now disconnect.