Gaia, Inc Q4 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 fourth quarter and full year ended December 30, 2020. Joining us today are Gaia's CEO, Jirka Rysavy, and CFO, Paul Tarell. Following some prepared remarks, we'll open the call for your questions. And before we get started, however, I'd 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, competition, changing consumer preferences, subscriber costs and retention rates, acquisitions, and other risks and uncertainties detailed from the time in our filings with the Securities and Exchange Commission, including our reports on Form 10-K and Form 10-Q. Gaia assumes no obligation to publicly update or revise any forward-looking statements. And with that, I'd now like to turn the floor over to Gaia's CEO, Jirka Rysavy. Please go ahead.

Thank you, and good afternoon, everyone. So we ended 2020 on a very positive note, achieving all our goals, generating positive net income and cash flow for the year while growing revenues over 20%. Revenue for the quarter increased 27% to $18.6 million. Our gross margin increased to 87.1%. We ended the quarter with 728,000 members, representing net adds of 31,000 for the quarter and 129,000 for the year. Even with this growth, we were actually able to reduce our overall expenses even in absolute dollars to $62.8 million from $64.8 million a year ago and as a percentage of revenue to 94% from 119%, partially due to improvement of our gross profit per employee by 37% to $525,000 from $384,000. During the fourth quarter, we generated net income of $300,000 or $0.02 per share, EBITDA of $3.5 million or 18.8% of revenue and cash flow from operation of $4.5 million on 24% of revenue. For the year, we have transitioned to a positive income of $0.5 million or $0.03 per share, which is an $18.7 million improvement from last year loss of $18.2 million or $1 a share. EBITDA improved by $15 million or 22% of revenue to a positive $7.4 million from a loss of $7.6 million. Our lifetime value of the average member also improved to over $320 from $300. Our cash position at the end of the year grew to $12.6 million, reversing a year of cash use to an increase to $1.1 million for the year and $3.9 million for the quarter. While these metrics represent all-time best for Gaia since we sold the legacy Gaian-branded Yoga products in July 2016 and focused exclusively on building our direct-to-consumer digital offering. We have completed what I would call the final phase of our transition to a sustainable pure-play streaming video platform that is able to continue to grow revenue over 20% while growing profitably and generating positive cash flow. Since the sale of the Yoga products in 2016, we have grown revenue at a 46% compound annual growth rate and members at a 38% CAGR. At the same time, we are improving the EBITDA margin from negative 9.0% in 2016 to positive 11% in 2020 and 19% in the fourth quarter. Now, Paul will speak more to the results.

Revenues for 2020 increased 24% to $66.9 million, with an improvement in gross margins to 87.1%. Net revenues for the fourth quarter increased 27% to $18.6 million, with gross margins also improving to 87.1%. We expect to be able to maintain or gradually improve these margins going forward. We ended the year with 727,600 members, which represent net growth in line with our expectations for the quarter. For the year, we added 129,000 members and also crossed the threshold needed to continue to grow revenues by over 20%, while maintaining profitability and positive cash flows. Selling and operating expenses, excluding marketing and member acquisition costs, in the fourth quarter were $6.3 million or 34% of revenues, down from $6.7 million or 45% of revenues in the year-ago quarter. Corporate and G&A expenses in the fourth quarter were $1.4 million. For 2020, selling and operating expenses, excluding marketing and member acquisition costs, were $25.5 million or 38% of revenues, a meaningful improvement in both absolute dollars and as a percentage of revenues from 2019, where we spent $28.2 million or 52% of revenues. Total member acquisition costs during the quarter were $8 million or 43% of revenues. As we anticipated, the digital advertising market became very competitive starting in October and continuing through mid-December. This impacted our CPA, but we were able to maintain our discipline and still achieve our financial goals for the quarter. In October, we began renewing our first cohorts of new annual members from 2019 when our annual take rate for new members shifted from sub-10% to between 25% and 30% of new sign-ups. I'm happy to report that with almost five months of data on the first renewals of these groups, we've been retaining these numbers at a 60-plus percent rate. EBITDA improved to $3.15 million or 19% of revenues in the quarter from $0.2 million or 1% of revenues in the year-ago quarter. For 2020, EBITDA improved $15 million to $7.4 million or 11% of revenues from a negative $7.6 million or negative 14% of revenues, an improvement of almost 200%. We also improved our cash flow from operations to $4.5 million during the quarter, up sequentially from the third quarter by $1.2 million or 36%. For the full year, we generated $11.7 million in cash flows from operations, a $14.3 million improvement from cash used in operations of $2.6 million a year ago. For the full year, we were able to generate $1.1 million in cash compared to cash used of $18.5 million in 2019. We generated net income of $0.3 million or $0.02 per share in the fourth quarter of 2020 compared to a net loss of $2.8 million or $0.15 per share in the year-ago quarter. For the year, we generated net income of $0.5 million or $0.03 per share compared to a net loss of $18.2 million or $1 per share in 2019. As Jirka mentioned, we have completed our transition to a pure-play streaming video-on-demand platform capable of generating sustainable revenue growth of over 20% while maintaining profitability and generating cash going forward. We also own our content production facilities and have a world-class team of content creators devoted to our mission and vision that allows us to produce content internally for a fraction of the cost per hour that other streaming platforms incur. Our original productions represent 80% of our monthly viewership and clearly differentiate us from other offerings. As we look to 2021 and beyond, we are focused on continuing to build on the solid operational and financial foundation we have laid over the past five years. We have several initiatives that we believe will allow us to accelerate our revenue growth in 2022 and beyond, including our premium live access offering, for which we now have a solid schedule of 2021 events booked. Additionally, we are expanding into German, French, and Spanish languages, including native language original content, and finally, our Gaia community, which we recently launched in an invite-only beta program to our most engaged members. While these initiatives will take some time to pay off, we are very excited about what the future holds for Gaia. And with that, I'd like to open up the call for questions. Greg?

Congratulations on the transition and nice quarter. Can you maybe go a little deeper into some of these initiatives you mentioned, Paul, in your prepared remarks in terms of how that drives growth? And then two kind of derivative questions; one, as we start 2021, what are you seeing in terms of the mix of new subs coming on an annual rate? And then on the marketing side, I'm just kind of curious, where are you guys seeing good traction other than the channel?

The three initiatives I mentioned include the premium live access offering, which is the $299 annual subscription we launched in 2019. We didn't promote it much in 2020 due to COVID and the lack of events, but now that we can hold events again, even with smaller audiences, we’re focusing on promoting this live access subscription. It’s expected to drive revenue as we enhance our content archive and utilize upcoming events to attract new members. The second initiative is language expansion. We introduced German, French, and Spanish functionalities around late 2018 to early 2019. However, we had to pause investments in German and French to focus on achieving profitability and cash flow, so we only developed Spanish further. Now we plan to expand German and French similarly to Spanish, which will open new market opportunities as we continue to grow our content library. The final initiative is the Gaia community, which holds dual value. It enhances engagement and retention for existing members while also promoting word-of-mouth marketing through our member-driven growth channels. This encapsulates our goal from five years ago to create a global community rather than just a content platform. All three initiatives are expected to start contributing in the latter half of 2021 and hopefully make significant impacts in 2022 and beyond.

There was also a part that asked about the annual take rate. That should be about 25% to 30% of the new members.

Yes. It's been hanging in there pretty well. It just depends on what we're promoting in terms of content and messaging on whether people take the monthly or annual at that 25% to 30% range. The final pieces he asked about where we were seeing traction from a marketing perspective. We are seeing it across the board. Everything is working pretty well for us. I would say organic, member-driven, and investor-driven referrals are continuing to build nicely. With the community coming online, we expect that to continue to grow.

And just want if I could squeeze one more in. As you think about growth and reaching the profitability goals that you have, would you ever consider dipping into the EBITDA margins now to try and help accelerate growth? Or is it just a steady balance between marketing spend and keeping the growth rate where you want to be?

Yes. I think the initiatives that I outlined are meant to invest some of that free cash flow in ways that we don't have to necessarily keep flexing marketing dollars to drive growth. From the perspective of how 2021 shapes up, it will look pretty similar to how Q4 played out in terms of just managing the bottom line and cash flows while really trying to focus on top-line revenue growth. At some point, though, the model is really going to start generating more earnings and cash flows, subsequently allowing for reasonable reinvestment, which will help drive EBITDA margins higher. So to answer your question, would we dip into it? We have a plan that says we don't need to today to drive the initiatives we are looking at. But that being said, if there's another market opportunity like what happened last spring, where we can add subscribers at a really efficient rate, the prudent business decision would be to say, go while you can. But that's not how we're planning it.

Congrats on a good quarter. I just wanted to get your thoughts or updated thoughts around the channels that you currently have. How big of an addressable market do you think you have with that content or your current content? And maybe you could discuss some of your competitors, as I know Curiosity Stream has gone public and is out in the domain, offering a nice comparison for you. But maybe you could talk a little bit about how you're thinking about the total addressable market and the serviceable addressable market for your portfolio as you see it today?

The addressable market, it's kind of what we see is confirmed what we were saying four years ago. We should not have a problem reaching 2 million or 5 million or 10 million members, easy — as a market potential; I mean, getting there is a different story, considering how fast things occur and all that. But I would say it's probably somewhere around 7% of the overall addressable streaming. We can potentially go higher because it's increasing with basic health and transformation growth. Our goal is to stay this pretty unique content rather than going into the market, let's say, like Hulu and Netflix. I don't want to comment on something like Curiosity Stream; they definitely have a different model. We really believe in the way we do it and have negative working capital and a relatively good margin. So as we pursue this, we are pleased with how things went this year. We were pleasantly surprised at how our transition to profitability went. This year, we want to expand to places, which is later in the year, when we launch the community and also build a professional sales organization. That will really impact our growth in 2022 because we believe we can achieve higher growth rates starting from that point.

In terms of how we think about the current channels, we're really looking to continue refining things at a lower granularity than just those top-level channels because we understand from a consumer and audience demand perspective that we have to be much more granular in how we market it. It's really more about getting into topics and areas of interest rather than launching new channels and continuing to refine how we make people aware of Gaia and how we serve them as they become new members and ultimately engaged, stickier members over time.

Great. And then just one follow-up quick. In terms of the relationship between revenue growth and subscriber growth, I know you mentioned you can maintain 20-plus percent revenue growth. What kind of subscriber growth do you need to maintain that revenue growth? I'm assuming it's something below 20%, but maybe you can just talk about the relationship between the two if you would.

Yes. So there are two drivers of the average revenue per user. One is the number of people we can convert to the $299 premium offering. Ideally, that is all upsells of existing members, generating incremental revenue with no marketing attributed to it. The second piece involves roughly about 20% of our members who come through our third-party partnerships. Those are at net revenues, so they're less than our stated $11.99 a month. These two factors offset nicely for 2020, which kept our revenue growth generally in line with subscriber growth. Going forward, that's how I'd consider it from a mix perspective, knowing that member growth will slightly lag behind revenue as we build out the live access premium offering.

But I think for 2021, the members will pretty much align with what Paul said. Since we increased prices two years ago, we have more momentum to revenues going forward.

I think I missed the reported CPA for the quarter. So maybe you could just start there.

It was not included in my prepared remarks this time, Steve, but it was, as I mentioned, we had some headwinds in the advertising market, so it was roughly in the low 80s for Q4.

Okay. And post-election, has that advertising market changed materially? Or are you still seeing those kinds of rates today?

I think it was not a factor of the election. That's what caused it to start sooner in Q4. It was a result of the spending to capture buyer demand going into the holiday season. We saw elevated rates go until the shipping deadline right before Christmas before it dissipated. It has been returning to historical rates, but not as favorable as it was in Q2 and Q3 of 2020. My expectation is that we'll settle somewhere in the $65 to $75 range on a normalized basis going forward, and we're in line with that right now.

Yes. I think we saw, especially in April and May, there was a surprise for the market. Many advertisers pulled back because they were unsure how to respond. The opposite occurred before Christmas, when everyone was perhaps trying to spend their budget from the second and third quarters for the holiday. But overall, if you look at the balance over the year, it appears stable. Our marketing percentage of revenue has dropped dramatically from 100-plus to the low 40s. I would say the market is relatively stable. It's up to us how we want to strategically approach it.

Okay. And on the international front, what percentage of your installed base is international today? And is consumption in line with domestic subscribers? Or do you need to flesh out more content to get equivalent consumption rates?

So the international members right now are, let's call it, in the low 30s. It depends on if you're talking about overall users globally. We look at it on that basis, but also take into account how many people use, like other languages primarily because there are definitely individuals in Germany, for instance, who were subscribers before we offered German content, right? So we keep those separate. Usage, for example, attention metrics in Germany are about the same as in the U.S. However, if you look at Spanish-speaking users, it's very different. If you examine Spain compared to Argentina, the dynamics can vary significantly. Thus, it's essential to consider metrics by country rather than averaging across languages, making the answer much more complex. Generally, in countries with more developed credit card markets, numbers tend to be more similar, but once you delve into South America, things get more complicated.

Yes. So back in 2019, we transitioned away from our homegrown billing and transaction processing engine to an enterprise-grade solution to onboard new partners and payment options as we expand geographically. This is one of the areas we're looking to enhance in 2021—to provide more geographically relevant payment options now that the infrastructure supports that.

Ladies and gentlemen, that does conclude our question-and-answer session portion of the call. I'd now like to turn the call back to Mr. Rysavy for any additional or closing remarks.

Well, thank you, and thanks, everyone, for joining. We look forward to speaking with you when we report the first quarter of this year, which should be in early May. Thank you very much.

All right. Once again, ladies and gentlemen, that does conclude our call today. You may disconnect your lines at this time. We appreciate your participation.