Gaia, Inc Q4 FY2021 Earnings Call

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaia Incorporated, financial results for the fourth quarter and full year ended December 31, 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, future losses, competition, loss of key personnel, price changes, membership growth, brand reputation, changing consumer preferences, customer acquisition costs, member 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. 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 2021 results represent a key milestone for Gaia, as we have achieved our first year of positive operating income and free cash flows. Since the sale of our Yoga product business in 2016, we have grown revenues at a 40% compounded annual growth rate, and we improved EBITDA margins from negative 90% to positive 19%. During 2021, we grew our member count to 821,000, increasing revenue by 19% to $79.6 million. We expect to exit 2022 with a revenue run rate of over $100 million. EBITDA for 2021 improved to $15.1 million, which represents a 60% flow-through from the incremental revenues. Income from operations improved to $2 million from a loss of $4.6 million in 2020. Net income for the year increased to $3.7 million or $0.19 per share from $0.5 million or $0.03 per share last year, which included a $6 million gain on the sale of a portion of our campus. Net income for the quarter was $2.1 million or $0.10 per share compared to $0.3 million or $0.02 per share in the year-ago quarter. Cash flow from operations for the year improved 79% to $20.9 million. Our cash and balance sheet on December 31 was $10.3 million. This is after the use of $6.5 million for the acquisition of Yoga International and a French Content Library. To compare, our cash balance at the beginning of the year was $12.6 million. We improved our gross profit per employee by another $40,000 to $565,000. Gross profit per employee at Yoga International was below $200,000, but the annual price of offering to members is doubling our annual price from $1.99 to compare to $99 at Gaia. This will, for the next few quarters, decrease our overall gross profit per employee. But it will help to drive our ARPU without actually increasing Gaia pricing. Our lifetime value of the average member to Gaia improved last year to over $350 from $320 the year before. Because we achieved our goal of annual operating income and free cash flow, we are now in a good position to expand more aggressively internationally, and we can utilize our worldwide rights that we have assembled to virtually all of our content. So we can further leverage our existing operating infrastructure. And Paul will talk to the results now.

Revenues were up 19% for the year with fourth quarter revenues up to $20.8 million. Gross margins declined slightly to 85.8% for the fourth quarter and 86.8% for the year, primarily due to the impact of incremental content amortization added during the quarter. With the acquisition of Yoga International completed on December 22, 2021, adding approximately $1 million per year to our content amortization going forward, we anticipate gross margins for next year to be in line with the full year 2021 levels. Total member acquisition costs during the quarter were $8.2 million or 39% of revenues compared to $8 million or 43% of revenues in the year-ago quarter. The ongoing impact of the iOS privacy changes and a crowded holiday season paid media market, combined to create a headwind on our customer acquisition efforts during the quarter. We have continued to evolve our digital marketing strategies to adapt to the current environment and have seen some relief in early ‘22 from the per customer acquisition costs we experienced in the fourth quarter. With the addition of Yoga International, we now have an opportunity to expand our marketing efforts to reach consumers interested in the Yoga lifestyle with a higher expected ARPU. Their basic offering is priced at $19.99 or $1.99 a year, which compares to our $99 a year. They also have a premium tier at $499 a year that includes access to a wide variety of courses that were historically marketed and sold on an à-la-carte basis. The combination of the premium plan and the twofold differential on the annual plan pricing should allow us to continue to expand overall ARPU going forward. Selling and operating expenses excluding marketing and member acquisition costs in the fourth quarter were $7.6 million or 36% of revenues. Corporate and G&A expenses in the fourth quarter were $1.6 million or 8% of revenues. For the full year, we improved total operating expenses to 84% of revenues compared to 94% of revenues in the prior year. We also incurred $360,000 in non-recurring acquisition costs related to the Yoga International transaction. While Yoga International did not have a material impact on our revenues or results of operations for 2021 due to the acquisition being completed on December 22, the impact on ‘22 operating expenses will include approximately $0.8 million of incremental amortization related to acquired intangible assets, which is in addition to the $1 million of additional content amortization previously noted. In addition to the incremental amortization, we also expect a slightly higher operating expense level during the first half of ‘22 from our historical trends due to the acquisition. We are in the process of completing our integration activities and identifying operating expense synergies across the combined company, but do not expect the benefits to show up in our operating results until the third quarter of ‘22. EBITDA was $3.6 million or 17% of revenues in the quarter, which included the impact of acquisition costs. We expect EBITDA margins for the first half of the year to be in line with the fourth quarter until we realize the operating expense synergies noted previously. Adjusted EBITDA, which excludes acquisition costs and share-based compensation, increased to $4.5 million or 22% of revenues from $4 million in the year-ago quarter. We generated net income of $2.1 million or $0.10 per share during the fourth quarter of ‘21 compared to $0.3 million or $0.02 per share in the year-ago period. Year-to-date we have generated $3.7 million of net income or $0.19 per share. The 2021 results reflect an income tax benefit of $2 million as a result of a partial valuation allowance release during the fourth quarter triggered by the Yoga International acquisition. Our ability to generate cash flows from operations has continued to grow as we have scaled. This has allowed us to expand our strategic thinking regarding growth opportunities as evidenced by our acquisition of Yoga International. As we look into 2022, we are focused on driving an annual revenue growth rate similar to ‘21. We're excited about the opportunities for Gaia to benefit from our global scale and the financial discipline we have continued to demonstrate while growing revenues and maintaining profitability. With that, I would like to open up the call for questions. Operator.

Hey Jirka! Hey Paul! Just a couple of quick questions, first on Yoga International. Just wanted to better understand, are you guys going to maintain the brands? How do you think about the subscription base, the legacy Gaia subscription base in Yoga relative to the Yoga International? Do you kind of put them together or just leave them as kind of separate products?

Hi Mark! Jirka here. Strategically we want to – we don't look at it as a separate company or a separate offering kind of brand. We want to continue with the brand and keep a separate offering, which is like a premium Yoga offering. Paul can give some more insight.

Yeah, so I think one of the first components to acknowledge is the price differential between their monthly and annual prices and ours. So it strategically makes sense to leave them as separate offerings and really focus on the delineation on the Yoga consumer into aggregating more value to the Yoga International offering by supplementing it with some of Gaia’s longer form content, so that we can try to drive Yoga consumers to the Yoga International offering. As you recall, we haven't historically for the past two to three years really been focused on Yoga at the Gaia level because our price point was $12 a month compared to the majority of Yoga only offerings that are $15 to $20 a month. So we didn’t really go after it historically, and this gives us an opportunity to be able to do that. But as I mentioned in my prepared remarks, we're really trying to integrate the back office and technology as much as possible to allow for cost savings, even if the customer experience is differentiated.

Great! And you guys, can you size how many legacy subscribers and maybe how big your customer file is at Yoga International and is there any opportunity to cross-sell some of the other content to that customer file?

There is definitely an opportunity as we introduce more of our original content. One of the shows that Yoga International is particularly interested in is focused on Yoga and other lifestyle-based content that goes beyond just mat practices. This presents a chance to enhance their offerings and reach out to former members in an effort to bring them back. Over the past year and a half, Yoga International has seen a decline from the growth surge during COVID, and their member base, based on our acquisition timeframe, is roughly around 30,000. We are still in the process of reviewing the overlap between their customers and ours to ensure we apply the same metrics for counting their member base, but this is the estimate we are using for our year-end figures. After two months of analyzing transaction data with them, we feel confident in this number.

And you know they – for the basic price, they basically offer some live classes. They used to do it for the premium price of $490, but soon it will basically start to average, their regular price of $200 a year will include the live lessons which will not be Gaia.

Great! Very helpful. Thanks, guys.

You bet, Mark.

Thanks. Good afternoon, guys. Just a couple of questions. I guess one, you know Paul as you talked about the challenging advertising market out there, how did you adapt your advertising and your customer acquisition efforts around those higher costs a quarter? Were you able to spend everything you want to spend in the quarter or did you hold back somewhat into this year?

That's the timing of the spend, particularly with kind of the end of November into early December. We backed off of our spend and then redeployed it once the shipping deadline, which we've historically seen as the trigger for dissipation and the demand for paid media. The result of that though is that we incurred the expenses during the December month, but because of the seven-day free trial, not all of the members had the opportunity to convert. So a little bit of that spending was pushed into member conversions that happened in January. Normally, that wouldn't be that big of an issue from a timing perspective, but the way that we effectively held back in the first two weeks of December and then redeployed it in the last ten days, kind of messed with the timing a little bit from that customer ads compared to the spend. But it allowed us to get opportunistic in terms of how we deploy the capital for marketing.

Any estimate of how many subscribers that could possibly relate to as you think about day 21 minus a mid-30 countries from Yoga, plus kind of what might have been delayed into January?

No, we don't have that qualified and we don't speak to that level of specifics at this level. Really the key point though is that as evidenced in the macro, external environment, everyone's been talking about the cost of media increasing and the cost of customer acquisition increasing. So I’d say Q4 was the high water mark that we've seen in the past few years and January and February have already dissipated significantly from what we saw in Q4.

Yeah, you have basically a couple of things, so first you know we still don’t know exactly how we have to adjust for the overlap of the members because historically there's always some, right. And while people paid double, you cannot do it for a long time if you own it, so we would have to deal with that. So we tried to estimate that, but overall as of right now in the fourth quarter, obviously I did over 300 acquisitions in my life and it's kind of getting into a situation that buying the customer base might be cheaper than buying the individual customer on the market because of what just happened in overall marketing. We saw it in several companies. We have a lot of inbound calls from other companies asking if we would be interested in acquiring them, and because for the smaller companies' environment, it’s difficult, and you saw, we got international having negative growth for the last six months and we see it in other companies. So the prices also, it's very difficult, virtually impossible to raise money for a small company like that. So the acquisitions might be actually something we look at this year. If not, we want to make it as part of our model, but you know this time it might be better to do that than chase the market with higher dollars. You saw that the percentage of our marketing keeps declining every year and so it's kind of – I would assume this situation will solve during the year, but it might allow us this year to make some other acquisitions like that.

Got it, and then final question. You know Paul, you talked about the – Jirka talked about ending 2022 on a more than $100 million revenue run rate. You know I guess, what would you point to as the biggest driver to get into that from where you are now?

I’d say the number one driver is going to be the successful integration of Yoga International into our broader marketing mix, so that we can use the higher price point to try to grow revenues more meaningfully and decouple the subscriber growth rate from the revenue growth rate, that would be number one. And then number two, as Jirka mentioned, is the international play. Now that we have the French library that he mentioned in his prepared remarks, we are ready to start marketing French more meaningfully and have already started that, which adds to what we started doing in the second half of last year on Spanish and we expect German to come online sometime this year as well. So that gives us three new meaningful languages to market around, which will be incremental this year. And then I think the third component is now as we feel in the U.S. as if we're on the other side of some of the more strict restrictions on traveling and in-person attendance, getting the Gaia sphere of events going again and using that to build on the $299 Gaia events plus premium offering will allow us to expand ARPU again and potentially decouple that from subscriber growth rates. So I'd say those are probably the three biggest drivers that I look at right now as we look at the back half of the year and exiting it. We're going to have a little bit of headwind in the first half of the year just because of tougher comps from last year, with the way the growth rate played out over ‘21. So I’d expect it to be accelerating as we go into Q4 from the trend that we see in Q1 and Q2.

Sounds good. Thank you both.

Thank you, sir. Our next question will come from Steven Frankel from Colliers. Please go ahead.

Good afternoon. With all this focus on international, could you remind us where international subscribers of the Gaia business stood as you entered Q4 or exited the year, whichever number you’re more comfortable with?

So, if you take the total subscribers who are outside of the United States, for Gaia what we call that direct means not counting people like Amazon and Comcast, because those will be by definition U.S. and those what we call third-party revenues, we always want to keep at 20%, so that they operated in high single digits as a percentage. Excluding those, we’re probably about like mid-40’s of outside of the customers, outside of the U.S. Here the international was at 60%, at least you know as kind of the first look. We wouldn’t say that number is – absolutely we know yet. But that's kind of the number of people who pay from the outside. However, historically all of those people would still watch our English offering. So when we talk right now international, we talk actually offering in languages, and so that’s something we just started to do and those numbers are still low, except for the Spanish where you know we’ve been doing it for a while, but overall it’s going to be probably all within 100,000 members as international as a language offering.

Then if you look at it on a revenue basis for outside the U.S. compared to inside the U.S. based on billing location, it’s about 56% U.S., 44% outside the U.S., and as Jirka mentioned, that's been historically dominated by English-speaking countries where we've done historical acquisitions. So Canada, Australia, New Zealand are in the top there as well as Western Europe in aggregate. So that's been a focus for where we've spent our money historically on English, non-U.S. But now as Jirka alluded to, we have started on the Spanish side of things and as I mentioned, French and German will be coming online this year.

And we’re basically in all countries that you can name, so it's not geographical. It's going to be more as we deal with languages and, you know, obviously in the future we want to expand our language offerings as well.

Could you give us some insight into renewal rates of annual subscribers in Q4 and any other new subscriber activity in the fourth quarter? How much of that was toward annual subscriptions?

Yes, so I’ll answer the second question first, just because it's easier. The new customer sign-up rate has been generally between 20% and 25% annual as we've gone through this year, and that was a mindful shift from the 30% that we experienced historically because we wanted to start to bring some of the revenue higher because of the $99. When you do the monthly ARPU on that, it’s significantly below the $12 a month that we get from monthly members. So we've been able to through the planned selection and the way that we do the positioning of the plans, we’re able to influence that number between 20% and 30% depending on what we want to do. As it relates to renewals, we started to see the higher volume; if you recall in October 2019 is when we really shifted the mix significantly to the annual plans. So now we’re in year two renewals for the higher levels and we're seeing continued positive renewal trends on the annuals. I don't have a specific number that I'm willing to comment on, but the trends have continued to be beneficial and indicative that the right percentage of annual plans is healthy for overall cash flow dynamics and retention dynamics as well.

Okay great! Thank you.

Ladies and gentlemen, at this time, this concludes our question-and-answer session. I would like to turn the call back over to Mr. Rysavy for closing remarks.

Thank you and thanks everyone for joining, and we look forward to speaking with you when we report our first quarter results, which will be early May. Thank you very much.

And thank you everyone for joining today's call. We look forward to speaking with our investors and analysts when we report our first quarter 2022 results. You may now disconnect. Thank you for your participation.