Gaia, Inc Q1 FY2020 Earnings Call

Good afternoon, everyone and thank you for participating in today’s conference call to discuss Gaia, Inc.’s Financial Results for the First Quarter ended March 31, 2020. Joining us today are Gaia’s CEO, Jirka Rysavy and CFO, Paul Tarell. Following some prepared remarks, we will open the call for questions. Before we get started, however, I would like to take a minute to read the Safe Harbor language. The following constitutes the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The matters discussed today include forward-looking statements that involve numerous assumptions, risks and uncertainties. These include, but are not limited to, general business conditions, historical losses, competitions, changing consumer preferences, subscriber costs and retention rates, acquisitions and other risks and uncertainties detailed from time-to-time in our filings with the Securities and Exchange Commission, including our reports on the Form 10-K and Form 10-Q. Gaia assumes no obligation to publicly update or revise any forward-looking statements. With that, I would now like to turn the call over to Gaia’s CEO, Jirka Rysavy. Please go ahead.

Thank you and good afternoon, everyone. So, revenue for the first quarter increased 16% to $14.5 million, affected by about $0.5 million due to the cancellation of the live streaming events. We ended the quarter with 605,000 members, slightly above expectation even after absorbing the impact of our price increases earlier in the quarter. As a result of the stay-at-home orders in late March, we have seen an uptick in new member growth, which continued in April. So as of today, we already have over 625,000 members. During the quarter, we not only generated positive EBITDA, adjusted EBITDA as planned, which was an improvement over $4 million, but also generated $2 million in cash flow from operations, reflecting a $6.7 million improvement. Cash used during the quarter was reduced to about $1.5 million, an 80% reduction, and we ended the quarter with $10 million in cash. We fully expect to reach our key milestone of positive earnings and free cash flow in July, as we had planned and communicated about 15 months ago. We are even more confident given the current uptick in member growth and the continued decrease in our member acquisition costs as well as our first quarter 22% improvement in our gross profit per employee, which is now at $382,000. And Paul will talk to you more about the quarter. So go ahead, Paul.

Revenues in the first quarter increased 16% to $14.5 million compared to the year-ago quarter. Gross profit in the first quarter also increased 16% to $12.6 million from $10.9 million in the year-ago quarter, with a slight decrease in gross margins to 86.9% compared to 87.2% in the year-ago quarter, but this is in line with the fourth quarter of 2019. We expect to maintain this margin level through 2020. During the quarter, we finalized and implemented price increases for all new monthly members and all annual numbers at the new pricing levels. We elected to honor legacy monthly pricing of $9.95 for approximately 95,000 members who joined prior to January 2019. We ended the quarter with 605,100 members, which reflects the loss of approximately 20,000 members during the quarter who declined to renew at the new price levels. These member losses were offset by increased interest in Gaia and our unique content offering coinciding with the stay-at-home orders that began in mid-March. The member count and revenues for Q1 do not show the impact of this momentum, as people who signed up in the final week of the quarter could not convert to paying members until early April. The increased interest has continued through April, and as Jirka mentioned, we are now over 625,000 members with momentum continuing in our favor. Selling and operating expenses, excluding marketing and member acquisition costs in the first quarter, were $6.9 million, or 47% of revenues. Corporate and G&A expenses in the first quarter were $1.4 million, or 10% of revenues. Our focus on continued operating efficiency and expense rationalization over the last 15 months has been successful. Our gross profit per employee has increased to $382,000, up from $322,000 in the year-ago quarter. We intend to grow revenues and gross profit during the rest of the year with minimal increases in headcount. Total member acquisition costs were $7.6 million, or 52% of revenues, which is down from $8.5 million, or 68% of revenues in the year-ago quarter. I am happy to report that our organic growth initiatives, including referrals from our existing members, are continuing to gain traction, which combined with reduced rates on advertising inventory during the second half of March, allowed us to improve our average CPI for the quarter to $68 from $82 in the year-ago quarter. More importantly, with the annual plan selection continuing in the 28% to 30% range for new sign-ups, we have significantly improved the cash conversion cycle on our customer acquisition efforts, reducing repayment time down to 3 to 4 months for each monthly cohort. We had another quarter of positive adjusted EBITDA margins and cash flows from operations as planned, both of which were significantly improved from the year-ago quarter. We have also improved overall cash use during the quarter to $1.5 million. This brings total cash used in the prior 6 months down to $1.6 million, an improvement of $19.4 million, or 93%, from the comparable period a year ago. With our cash balance of $10 million, our current member count, continued improvements in retention as we mature our member base’s average tenure, and ongoing efforts to scale organic growth initiatives, we are confident in our ability to achieve free cash flows and positive earnings beginning this July. The second quarter is off to a great start for Gaia. More and more people are seeking our content during this challenging time, bringing awareness of our brand and its benefits to a wider audience. Our path to free cash flow in July is tracking better than our plan, and we look forward to our next update in early August when we report our second quarter results. With that, I would like to now open the call up for questions. Operator?

Thank you. Our first question comes from Darren Aftahi of ROTH Capital Partners. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking my questions. First, just kind of clarification, Jirka, did you say there was an impact from live streaming events on revenue, did I hear that correctly?

Yes, this is Paul, and I will answer that. Yes, so we had to cancel two of our events that we had scheduled for March because of the Colorado stay-at-home orders that were put in place.

Got it. So just on that vein, more perhaps just I understand it’s live, but just on the topic of content and you heard a little bit about it from Netflix as well. But how are you guys thinking about content production live events if the current world we live in kind of drags on longer than maybe people imagine? And then second question, when you say people are attracted to the platform, I'm just kind of curious; I understand what’s driving it, but obviously there are a myriad of things, there is yoga, there is wellness, there is mental health. Are there any specific topics in particular, maybe the top three that people are really driving and then are any of your partners doing anything that’s helping kind of exposure? And is this something where if you look at the trend line of, let’s say, mid-March to kind of where we are right now? Has that peaked or is it plateauing that’s still kind of strong? Thank you.

Okay. Well, I will split it. I will answer the first one about the events and content. So the events, they impact revenue might not really hit the bottom line. They are not really designed to make money; they kind of pay for themselves, but they are kind of neutral, but it’s definitely hit the revenue because we canceled the event, which persuaded the revenue impact was $0.5 million. And as we kind of move them to the second part of the year, we will see when it’s open, but we have plenty of momentum from subscriptions, so regardless of that revenue shortfall, it will be made up by the extra members. So on the content side, we don't really have those problems like Netflix does, because we do everything in-house 100%. So we don’t have that problem. And also, we own the facilities, so we didn't have the issues like what you hear from Netflix at all. If there is an impact, we will be more like guests needing to travel here and that kind of stuff, but we have opened several series where we can do whatever we have so we don’t have an impact. So far, we don’t really plan to have those issues that Netflix has.

Yes, I will finish up that and then I will jump into your second multipart question. The reality is that in January and February, we filmed a lot of our content on our recurring shows and events, so we were pretty well positioned to be able to go through this for the next couple of months without a blip. What we have been able to do is use some of the excess editor time to actually go back to some of our library content, think about how do we resurface some of those topics to our much larger and newer member base that we have added over the last 12 to 18 months. So it’s actually been a pretty good opportunity for us to test some of the things that we have talked about doing historically and just hadn’t had time. So there is no real impact on the content side for us even if this persists through the summer. So now on...

We had, last year, as we added a lot of new content for our live streaming, so we did it with each of those people who were live streaming. We filmed 13 episodes, so we have around 60 to 70 extra episodes filmed, but we didn’t really have a place to publish. So it actually allows us to slowly publish those.

Yes. So then in terms of what’s driving the demand, it’s the predictable subjects of yoga, meditation, and mindfulness. Some of our more uniquely Gaia topics are starting to gain interest around what might be euphemistically called conspiracy theories, but people are beginning to look for information and finding Gaia. What’s interesting is that our direct Gaia search terms are actually starting to be one of our highest yielding sources of traffic right now. So that means enough people have become aware of Gaia that they are just searching for Gaia directly, rather than coming to us through one of our topics, which is pretty telling for how much brand reach we are starting to generate over this time. In terms of the other partners driving exposure, some of our cable partners have talked to us about opening up preview windows, particularly in the New York region, while everyone was sheltering in place, and we have signed off on doing that. So we will see what that does in the second half of the year. Effectively, we gave up some short-term member sign-up opportunities to gain a lot more awareness on those set-top box distribution channels. Overall, I would say the trends that we saw in the second half of March were basically the added demand for people we would be bidding against effectively evaporated. So, we were able to get a lot of impressions for not a lot of money. I would say that that’s coming back to some semblance of normal. It’s definitely not where it was in early March, but it’s getting back to some order. People have figured out how to spend their money effectively online. So we won’t get the benefit on the media side, but our conversion rates are still growing both in terms of new initial sign-ups, but then also in terms of the people who convert from trial to paid after their 7-day free trial. I think I got most of your questions. Did we miss anything?

No, no, no that’s great. Thanks guys.

Our next question comes from Eric Wold of B. Riley. Please go ahead.

Thank you. Good afternoon. A few questions as well. I know you made a decision to not increase the grandfather subscription prices on that, roughly 100,000 subscribers at the lower price; is there a timetable when you state that may happen to push them higher?

We haven’t said anything, but basically what we did is we took our cue from what was going on in the world and we said for these 95,000 people, it’s not worth giving them price shock, especially after we saw the 20,000 that we lost from bumping the annual prices. So, we will just play it by ear, but you can assume it will be for at least the rest of this year.

Yes. I think the environment changed with Disney coming in at a low price compared to Netflix, but we don’t know how long it will last. When we look back, our momentum is so positive right now that there is really no reason to do anything because we more than make up the revenue otherwise, as things are going so well.

And then obviously you brought down your subscriber acquisition costs and talked about some of the things involved there, including member referrals. How much has your average CPM seen that decline maybe since the start of the year, and are you using that decline? Are you spending the same amount you otherwise would have spent and just gaining the incremental impressions now for that same dollar amount or actually cutting back on what you spend with the lower pricing out there?

Well, so there are two parts to that question. What’s the cost of the media, and that’s driven by demand. Again, in the second half of March, we saw costs per thousand impressions, or the CPM that you referred to, go down dramatically. If you notice, when you look at the P&L for the quarter, we actually spent right up to our threshold to stay EBITDA positive, which included not spending any money in the last 7 days of March. So, we actually hit our limit and stuck to our discipline. We probably could have spent more in Q1, but we didn’t need to. Now we are redeploying that in April while still marching under that plan of saying EBITDA positive through July, but measuring how much we can spend against early quarter. In the last two weeks of March, there was nominal contribution to revenue or member counts, but there was a 100% impact to the P&L on the spend side of things. So now we have an opportunity in early April to spend a little bit more aggressively while these CPMs are still low. As of today, we are at over 625,000 members, so it’s better part of 20,000 net adds in less than a month, which is really good for us. And the quality of these numbers is maintaining, which has given us confidence that we can keep spending at these rates and it’s not going to be a flash in the pan.

Okay. And then going back to one of the questions on production, as you shared a lot, you said in January and February you were kind of working on that during the shutdown and had somewhat of a backlog of shows you wanted to shoot right now. Is that when you get the green light to reopen there will be some deferred content spending into maybe the latter part of this quarter or the second half of the year, what you would have spent already?

No, I think what we had already planned on doing in Q2 of this year was really moderating production spend to make sure that we were where we needed to be from flipping over to that free cash flow perspective in July. So from an overall strategy perspective, we are right in line with what we expected to do. It just happened a little bit earlier in the year than what we expected. But I don’t think there is any meaningful impact to Q2 spend. The summer is usually a lighter period since a lot of our talent and the people who we want to have filming are out on their speaking circuits. But now this year that may not happen, which means we might actually be able to get more people on-site here filming in the summer when normally we wouldn’t be able to fit them into their schedule. It could be positive for the second half of the year, but there are no deferred spending plans; it was always intended to be measured against what revenue and cash flow from operations are so that we can get to free cash flow in July.

Just a final question for me if I may, just maybe kind of a high-level strategy question. Obviously, you talked about spending in the quarter up to kind of the limit to stay adjusted EBITDA positive in Q1, then kind of didn’t spend anything in the final 7 days of the quarter. How should we think about the remaining quarters in this year and into next year? Is that kind of the strategy you might stick to, to maintain a certain minimal level of profitability, or are you starting to see benefits flowing through and sort of seeing EBITDA numbers move higher?

Well, I would say for the near term, until we get to where we are going in July, we are going to be sticking tightly to what we have outlined. Once we transition into July, the question will be where is the best place to spend that incremental cash flow, is it on content or continued marketing, and I think that will be really time and place dependent, because it’s unclear how the U.S. and the world are going to manage this once people get the green light to start traveling again. We will have to wait and see how it goes through the summer, but usually summer is a period of lower customer acquisition spending for us, which would give us an opportunity to spend some of that incremental money on content.

So as you are kind of – maybe your question was a little wider, so till we get to free cash flow and earnings, we will stick with that positive EBITDA. When we get there, we still haven’t made a decision on how much we will let it go to the bottom line and how much we will spend on more growth or content. However, we are content in very good shape. I think when we report the third quarter, that would be a question to ask.

That’s it. Thank you, guys.

Our next question comes from Mark Argento of Lake Street Capital Markets. Please go ahead.

Jirka and Paul, good afternoon. Just a couple of quick ones. The churn you saw in the quarter from the pricing, any type of sub, or is it more of a fitness yoga sub or is it a truth seeker sub? Any color there that you can provide?

Given when we added the majority of those subscribers, I would say that they were more skewed towards the fitness yoga side of things, not the core seeker audience. The bulk of that loss was from one cohort that was acquired back in the end of 2018 around our Black Friday promotions when we were still running those. We expected there to be some loss from this group as we bumped their price up, but it wasn’t from our core group of people who are engaging in our original content very heavily.

Yes, there was this post. It was more from the time they were still doing some kind of deals, which we don’t offer anymore for like over a year. So it was more of a final cleanup, and we expected that there would be something regardless, but we went through all of that stuff right now.

Got it. And then in terms of the acquisition channel going forward, I am assuming search, Facebook, YouTube. Where have you seen success more recently, especially with the uptick of 20,000 subs in 27 days?

Yes, I think it’s actually across all those channels. We have figured out how, now that we have consolidated our whole former marketing team into a sales team that’s focused on driving revenue growth, first subscriber growth and then maintaining spend efficiency. Now that they are all together in one team, there is a lot of synergy that happens across all of those different channels. Something about one of our YouTube partnered channels promoting Gaia allows my paid YouTube team to do some retargeting and lookalike targeting against that audience. So it just means that the money we are spending is done more effectively at different parts of the conversion funnel. Everything is rising right now, and it’s all a function of the 15 months that Jirka mentioned, where we spent the time to get there. We have just gotten the tailwind behind us that’s helping us with pretty decent momentum push that, again, based on the conversion rates and the annual plan selection tell me that these are quality members. There are just more of them than we were able to add on a given spend level.

We also, over the last 15 months, we have made tremendous improvements in the quality of the product aside, and we have also republished as much as we published to update the content and other aspects. So there is a lot more that was done behind this; it’s not just the momentum that’s apparent right now. I think it’s something we will continue with even if this lockdown stops. We have talked about something we call member-driven growth, and that’s kind of what’s driving a lot of this and will continue to in the future.

That’s helpful. One last one for me; any change in terms of the mix from like CTV or connected TV, smart TV versus say mobile or tablet? Are you seeing a shift more to CTV given people stay in home? Any color there would be great? Thanks.

Yes. It’s interesting actually; our web app, gaia.com, has actually seen a pretty significant increase in terms of overall consumption, which is not 100% intuitive, but it seems like a lot of people are using their own computer devices to engage with content versus the TV that might be in the middle of everyone being on top of each other while the kids are trying to remote learn and the parents are trying to remote work. So I think that might be part of it, but generally, we are seeing an uptick in consumption across all devices.

Thanks.

This concludes our question-and-answer session. I would now like to turn the conference call back over to Mr. Rysavy for closing remarks.

Thank you all and thanks for joining. We look forward to speaking with you when we report the second quarter, which is going to be in early August, as Paul said. Thank you very much.

Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines. Thank you for your participation.