Gaia, Inc Q2 FY2021 Earnings Call

Good afternoon, everyone. And thank you for participating in today's conference call to discuss Gaia Incorporated's Financial Results for the Second Quarter ended June 30, 2021. Joining us today are Gaia's CEO, Jirka Rysavy; and CFO, Paul Tarell. Following some prepared remarks, we will open the call for your 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, competition, 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 Form 10-K and Form 10-Q. Gaia assumes no obligation to publicly update or revise any forward-looking statements. Please note that today's call is being recorded. And with that, I would now like to turn the call over to Gaia's CEO, Jirka Rysavy. Please go ahead.

Thank you, Jenny. And good afternoon, everyone. Revenues for our second quarter increased 20% to $19.4 million with 770,000 members. Gross margin was steady at 87.1%. Even with 20% of the revenue gross, our operating expenses in dollars actually slightly decreased improving significantly as a percentage of revenue to 84% from 101% a year ago. Net income improved by $3.1 million to $600,000 or $0.03 per share from a net loss of $2.5 million and $0.13 loss. As a percentage of revenue, this represented an 18% improvement. Our EBITDA improved to $3.9 million, which is now 20% of revenue from $800,000 and 5% of revenue in the year-ago quarter. These improvements were driven by an increase in gross profit per employee of almost $100,000 or 23% to $535,000 from $436,000. And Paul will now speak to you more about the results.

Thanks, Jirka. Revenues for the second quarter increased 20% to $19.4 million with gross margin steady at 87.1%. This marks our fifth consecutive quarter of revenue growth over 20%, while generating positive income and EBITDA. We ended the quarter with 770,200 paying members. Total member acquisition costs during the quarter were $7.7 million or 40% of revenues, which improved from 52% of revenues in the year-ago quarter. The digital advertising market continued to be crowded and competitive during the quarter, which caused an uptick in our per customer acquisition cost to $74. Even with this uptick, our lifetime value to customer acquisition cost ratio is still over 4.5 to 1. Despite the challenging paid media market, we were able to drive 20,000 net adds during the quarter while staying within our overall target spend level. Our net growth for the period benefited from an annual renewal rate, north of 60%, for the large cohort of annual members we added during the lockdowns that occurred in the year-ago quarter. The strong renewal rate of the COVID cohort as the world has started to reopen and a variety of new streaming services have been launching, is a testament to the quality and size of our original content library and our focus on an underserved niche audience. We also saw the benefit of early traction in our Ambassador program that our new internal sales team has been focusing on scaling globally. Selling and operating expenses, excluding marketing and member acquisition costs in the second quarter were $7 million or 36% of revenues, which improved from 37% of revenues in the year-ago quarter. Corporate and G&A expenses in the second quarter improved to $1.5 million, down from $1.8 million in the year-ago quarter. EBITDA improved to $3.9 million or 20% of revenues in the quarter from $0.8 million or 5% of revenues in the year-ago quarter. Again, this marks our fifth consecutive quarter of generating positive EBITDA and the first quarter we have reached the 20% threshold. We generated net income of $600,000 or $0.03 per share during the second quarter of 2021, an improvement of $3.1 million from a net loss of $2.5 million or $0.13 per share in the year-ago quarter. We've been able to flow through to net income almost 100% of the incremental revenues generated in 2021 compared to the same period in the prior year. Cash flow from operations increased to $4.3 million during the quarter, an improvement of $2.4 million from the second quarter of 2020 and our seventh consecutive quarter of generating positive cash flows from operations. We increased our content investment during the quarter as planned, while also increasing our overall cash balance to $13.7 million. With 80% of our monthly viewership on original programming and our end-to-end content production fully in-house, we have continued to control the cost on a per hour basis to ensure that our new content is providing a high return on investment at our current member levels. Live events have restarted in full swing with a successful event completed in July and upcoming events each month from August to November. As we look to the second half of the year, we are putting our energy into growing the premium membership tier. We will be utilizing the upcoming events, combined with a growing Ambassador network to promote the $299 premium annual offering to new potential members, as well as a concentrated focus on educating current members on the additional value of this premium offering. This will allow us to continue to drive revenue growth and profitability, while reducing the business model's dependence on paid media spend to drive member growth. Monthly ARPU or average revenue per user for the premium offering is $25 compared to our current blended monthly ARPU of $8.50 with operating margins on the incremental revenues north of 50%. As a result of this focus starting to compound, we expect to generate higher operating margins at similar revenue levels resulting in increased profitability. With that, I'd like to open up the call for questions.

Thank you. We will now take our first question from Mark Argento of Lake Street.

Good afternoon, Paul. Good afternoon, Jirka. Nice quarter. I just wanted to drill down a little bit on the premium. Maybe just talk a little bit about what incremental content you get, is there a live component to that? And then I just wanted to also talk a little bit about the Ambassador program, if there's any updates on that as well? Thanks.

Sure. So from the premium offering perspective, the events in our Gaia Sphere Event Center are the incremental content that those members get. Because of COVID and the restrictions, we weren't able to produce any new content in 2020 or the early part of 2021. Now we've had, as I mentioned, the July event, and we have events each month from August through November. Not only do we have the catalog of the events that have already been completed, but we also have these upcoming ones. We expect to be able to roll out the 2022 preliminary calendar sometime in the fall as well. From a value perspective, it's really about getting that access to the conference-style or workshop-style content, as opposed to the kind of lean back, watch on your couch type of content. That's really the key there. And it's fundamentally intertwined with the Ambassador program because, if you think about the price point of the premium subscription tier, it's a lot more lucrative for our ambassadors to be promoting and marketing those events and that premium tier because of the way that the revenue share economics work. We had our SVP of sales start at the beginning of March. She's ramped up and starting to hire and the ambassador network is starting to grow.

Great. And then just one other quick one. In terms of the EBITDA margins look to be pretty strong. In terms of any philosophy around EBITDA, if you hit a certain threshold, accelerating growth. I know you'd been playing around. At one point you had going to plunge everything back and when the market didn't look as good, you kind of throttled that back and were able to kind of toggle on and off here. Any thoughts on now that you're generating cash, looking like your incremental margins are significant to think about reaccelerating the growth rate? Or what do you do with that extra free cash as it starts to pile up?

So as a kind of vision, we definitely said at the beginning of the year, we'd like to refocus a little bit more on growth next year, I'll be talking about 2022, while we still want EBITDA margin to grow. There is a lot of leverage when you see how much we're contributing for incremental revenue. But we'd like to absolutely refocus on growth starting next year. So it's really why the Ambassador network is going to be a main growth factor. As Paul said, you know, for us, we really focus on profitability and cash flow as well, to get more of our members to subscribe to our premium because there's a big difference, obviously, if you pay monthly $8 or $25, because the costs are very similar. We wouldn't like to also put some focus on getting more people in a premium because of profitability. You're going to see probably from now on a revenue and the subscribers kind of diverging because the revenue will grow more as more people subscribe to the $300 membership.

Great. Thanks, guys. Appreciate it.

And we will move to our next question from Eric Wold of B. Riley Securities.

Thanks. Good afternoon. So a couple of questions. I guess, Paul, you mentioned obviously the focus on the Ambassador program and the premium subscription will lessen your dependence on paid media, as that becomes more competitive during the economic restart. Maybe just give us a sense of how you - for what you are spending on paid media, how have you pivoted spend? And have you kind of shifted where your focus is to kind of get more bang for the buck or have you adapted?

Yeah, it's a good question. I think that there are a couple of things at play here. One is the reopening as you mentioned. So there's a lot more advertisers coming into the digital space than there would have been historically at this time of the year. The second piece that we have is the iOS 14 and the privacy restrictions that have rolled through there, a lot of the tools that digital advertisers historically used for performance-based marketing have started to become a bit challenging as the various app providers respond to Apple's changes in their terms of service. But for us, we really focus on using first-party information to go after our audience where they are. That means that we've been able to move pretty heavily away from paid social media over the last year plus. Now YouTube is starting to become more worthwhile for us, both in terms of the cost but also in terms of the volume that we're able to drive from it. The bread and butter paid search and SEM are really starting to build for us as we continue to grow our reach and size and scale globally.

And also, in perspective, as we took the marketing as a percentage of revenue from 52% last year to 40% this year, that's also given us a little bit of restriction, but we are trying to control that spend. So that also pushes for this kind of drive for premium members.

Okay. How should we think about over time, as you maybe get less dependent on paid media and more towards Ambassadors and how they will be compensated? How should we think about how that shifts your spend kind of philosophy in total? Is the total dollar amount kind of unchanged as moving the buckets? Or did you actually get more efficient on the lower spend?

So I think it's the way we think about it is as a percentage of revenue. Today, we're in that 40% target range. As we look at the economics of the Ambassador model, we're trying to move that closer to 30% of revenues all in. So as you get more shift to that channel, then you can bring the marketing as a percentage of revenue down while still driving the growth rates that we're targeting. In the future, that would allow us to potentially allocate more of the revenue to content. If you remember, we said 20% is our target for the near and mid-term. But ideally, I'd like to see that longer term more in balance with the marketing spend as a percentage of revenue.

Fair. Then just final question. The 60% renewal rate for the lockdown cohort of subscribers. Was that for those that joined on the annual plan? And if so, do you have any sense of how successful you were retaining those who came on a month-to-month and potentially came back?

Yeah. That was just for the annual plan. The monthly people behaved very similarly to how our monthly members behave independent of COVID, albeit in a bigger way. With our content that we're continuing to push out and promote, we do get a decent number of returning monthly members that might cancel or go away for a few months and then come back and resign up. We've implemented a product feature where a monthly member can put their account on hold for up to three months, so that we don't lose them from a churn perspective, and then they have to resign up. We're seeing some positive trends there for people that just want to take a couple of month break and then come back without losing visibility into them. That's positive for us, as well as we've seen pretty consistent monthly member behavior that shows they want the flexibility to pay as they use it, but they also have high intent of coming back.

Helpful. Thanks, Paul.

And we'll go to our next question from Darren Aftahi of ROTH Capital Partners.

Hey, guys. Good afternoon. Thanks for taking my questions. Just first, how aggressive were you in terms of marketing spend in terms of upselling subs on the premium products or just going after new growth in general?

Most of our marketing initiatives in the quarter were focused on going after subscribers in general because, if you recall, we didn't really get out of the shroud of capacity restrictions until mid-Q2. We didn’t want to put any major emphasis behind the events in case we had to pivot at all. Thankfully, in Colorado, we've been moving more and more to clear and open, which has given us more confidence in our ability to have the events and therefore, start to push on it. The primary focus was around educating and converting existing members to that higher price point and then using talent that are coming in around their events and whatever marketing they might have on their own to really drive new audience acquisition for the premium offering. We have visible talent coming in for the September event, and we expect that to be a pretty good catalyst for us, with their show launching in August and then the event in September feeding into not only members but also the upsell opportunity for premium members.

But also, over the last three to four quarters, our focus would still really make sure we stay profitable with positive cash flow. We're at a level where we can spend more time thinking about growth because, with the growth we have, we’re putting more solid weight on the profitability equation. As Paul said, now it's kind of more focused on what's the next step and trying to accelerate growth as we go to the next year.

And then on International, out of the 20,000 ads in the quarter, like what was the mix? Any markets you would kind of call out? And then as you point about accelerating growth, how pivotal or critical is international to that acceleration in growth?

Yeah. I wouldn't say it's critical, but it's definitely one of the levers that I like having at my disposal. Particularly as we see the US paid media market getting saturated and prices going up, that's not the same case around the world. With our Spanish offering and our focus on building Ambassadors, we've actually seen quite a bit of traction on the Ambassador front in Mexico, Central and South America. While that didn't contribute meaningfully to the quarter's net adds, it is building the capability for us to continue growing more in the future down there. That was a big area of opportunity for us, and we couldn't do it with our traditional marketing initiatives. This is a way to get more word-of-mouth marketing in those regional areas down in Central and South America.

And then just last one for me. Given inflation is prevalent everywhere, I know you guys run your own content house. Is there anything in the logistics of creating content that has actually increased the cost to produce that for you guys in-house, say, versus 2019 levels? Is it baseline?

No, not at all. It's actually we invested a lot of money early to try to avoid that because pretty much all our content is done with our full-time employees. We don't see that pressure at all. We might be having a little more music in all the shows and more animation. We consciously increased our production quality with the number of subscribers, but it's all internal and we have virtually zero pressure from outside on any content costs.

That’s good to hear. Thanks, guys.

And we will go to Peter Rabover of Artko Capital.

Hey, guys. Just so I was curious, you guys have been doing this for about five years, and congratulations on getting to almost 800,000 subscribers. I'm curious whether you have a better idea on your total addressable market, like what's changed in the last few years, what you've learned, whether you've discovered new potential clients or maybe some have taken off. So any color on that would be great.

Yeah. I will say, anecdotally, I see our addressable market expanding every day with the world events going on around us and now mental health and some of the challenges of separation becoming more and more prevalent. I see a lot of opportunities from that perspective to be a resource in helping people move through to the other side of this, whatever that looks like for them. We stay away from things that drive separation and really try to not use fear in any of our content. I think that will start resonating with more and more people as we move through the current situation globally. Then we also have the benefit of investing in Spanish, French, and German, which wasn't part of our original addressable market when we started with English only. We have expansion there. Additionally, we have our ability to mine our data and start to call out sub-segments of our existing audience that we can produce content for. We're able to take, if you will, niches of niches and actually start to give them some love and get them to grow and then use that to grow the audience as well. I didn't answer your question with any specific numbers, but I would say that our early targets for our total addressable market just continue to grow as more households move digital-first and get comfortable streaming, and also as people become more aware of the content and the topics Gaia covers. We're a pretty exclusive resource for the depth and breadth of content that we bring and the technology that we use to deliver it. Everything is going in the right direction from the addressable market perspective.

Great. Thanks so much for that color. I think like the media industry is kind of - I don't want to use the word turmoil more of an influx in the last few years. I'm sure that affects certain ways you guys look at from business development to content focus to customer spend to potential combinations. So I'm curious whether you guys have any thoughts or color that you would be willing to share with us, I guess, your thoughts on the current state of the media industry and where you guys think you fit into that funnel?

That's a lot of questions there.

Yes. It's definitely a wide question. Five years ago, a lot of the questions were about the validity of streaming for different markets and segments. That question has completely disappeared now. There are a lot of players who kind of launched their business, some of them struggle, and they start to combine to create a better offering. You start to see a difference in the quality of execution. Comparing Netflix with Peacock, it is night and day. Obviously, Netflix has the benefit of having done it longer and debugging it. Some players have subscription quality that still lags behind the standard, I would say, with Netflix being the current standard. There are new market entries, making it more difficult in the advertising market. On the other side, we haven’t seen new entries in our space. We want to keep staying in a niche. The defining of the market will happen and still will happen. What this offering looks like and what you expect to have and not have is changing. Overall, it does not affect us much. We didn’t see a significant shortage last year, as everybody knew how to deal with the new restrictions caused by COVID. The advertising market is much looser now, but it's tightening. I’m not sure how much impact there is, but there's probably some impact from the Olympics. However, I wouldn’t see that affecting us that much. The entire advertising market is developing. We have to always adjust to the changing landscape, but from our perspective, it's not directly impacting us. I think it's much more about what we do than what other people do.

Okay, great. I really appreciate your thorough color. I'll let somebody else take the question.

Thank you, Jenny. And thanks to everyone for joining, and we look forward to speaking with you when we report our third quarter, which will be in early November. Thank you very much.

And so ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.