Gaia, Inc Q4 FY2022 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 31, 2022. Joining us today are Gaia's CEO, Jirka Rysavy, and CFO, Paul Tarell. Following some prepared remarks, we will open the call up for your questions. Before we get started, however, I would like to take a minute to read the Safe Harbor language. The following constitutes a 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 like to turn the call over to Gaia's CEO, Jirka Rysavy. Please go ahead.

Thank you, and good afternoon, everyone. I'm glad that I can report some positive news. After the challenging 2022, Rainbow's revenue and adjusted EBITDA increased only in single digits due to COVID lockdown member cleanup. We have already seen overall member growth in 2023. Growth came from our direct membership while the third-party providers like Amazon were still negative in January and February. In 2022, revenue increased 3% to $82 million from $79.6 million in 2021 and member count ended December 31st at 759,000 members. Gross profit for 2022 increased to $71.1 million or 86.7% of revenue, up from $69 million in 2021. Adjusted EBITDA increased to $17.5 million from $16.8 million in the prior year. During the last few months, we have eliminated over $5 million in annualized spending, which included approximately 36 headcounts, mostly contractors that were added over the last two years to offset the reduced efficiency we experienced as a result of remote work mandates. We expect to see the benefits of the savings to begin in the second quarter. Our efforts in French and German markets started to generate meaningful results. We also signed a new agreement to launch Gaia on Amazon Mexico, and Gaia also became part of a new Google subscription venture, YouTube Primetime. By the end of the second quarter 2023, we also plan to launch a Gaia marketplace focusing on our existing member base to increase ARPU and revenue with only minimal marketing expenses. Paul will now discuss the results.

Revenues were up 30% for the year with fourth-quarter revenues up $19.6 million. Gross margins improved for the fourth quarter to 86.7% from 85.8% in the year-ago quarter. For the year, gross margins of 86.7% were relatively consistent with the prior year. As we continue to invest in and release new content, particularly to support our growing language expansion efforts, we have increased our viewership on the exclusive portion of our content library to over 85%. We expect content amortization to bring expected gross margins down to the 85% level in 2023. Total member acquisition costs during the quarter were $7.7 million or 40% of revenues compared to $8.2 million or 39% of revenues in the year-ago quarter. Despite the seasonal headwinds we typically experience during the holiday season, we were able to reduce our per customer acquisition cost by approximately 10% from the prior year quarter, which led to growth in our direct member base during the fourth quarter. We did however continue to experience net member base contraction in our larger third-party distribution partners, leading to an overall decline in our member base during the quarter. Based on third-party analysis we received, this trend is not specifically related to Gaia. Selling and operating expenses, excluding marketing and member acquisition costs in the fourth quarter were $8.2 million or 42% of revenues, which is up from the prior year due primarily to increased technology operating expenses. Corporate and G&A expenses in the fourth quarter were $1.6 million or 8% of revenues in line with the year-ago quarter. We have implemented significant cost reduction measures over the past few months, as Jirka mentioned, which we will begin to see the benefits of during the second quarter of 2023. We had a net loss of $0.9 million or $0.04 per share during the fourth quarter of 2022 compared to net income of $2.1 million or $0.11 per share in the year-ago period. The prior period reflected a tax benefit of $2 million due to a partial valuation allowance release triggered in connection with our acquisition of Yoga International. In 2022, we had a net loss of $3.1 million, which included an anticipated $2 million settlement accrual with the SEC that we announced with our third quarter 2022 results and the related legal fees. We are awaiting final approval from the commission on the proposed settlement and have no further updates at this time. With the proposed settlement, we anticipate our ongoing legal fees related to this matter will no longer be a headwind on earnings. Excluding the anticipated settlement accrual and related legal fees, we had slightly positive net income for 2022. Adjusted EBITDA was $3.9 million or 20% of revenues in the quarter compared to $4.1 million or 20% of revenues in the year-ago quarter. Adjusted EBITDA for the full year was $17.5 million or 21% of revenues compared to $16.8 million or 21% of revenues in 2021. Now that we have worked through the rapid growth and subsequent declines in our member base as a result of COVID, our working capital cycle has stabilized. We expect to begin benefitting from the negative working capital generated from our members’ upfront subscription payments. We will also benefit from the $5 million in reductions that Jirka mentioned in our expenses, and we will be in a position to begin generating cash flows from operations in excess of the cash flows we reinvest back into our content library and product enhancements. We expect this to allow us to begin generating cash flows during the year and provide flexibility for us to reinvest those cash flows for future growth or withstand a future downturn in the macroeconomic environment. We spent the past year adjusting to a rapidly evolving post-COVID environment to return to a place of financial independence, rolled out our business continuity initiative to gain technological independence, and are now focused on creating growth drivers to sustain growth in revenues and cash flows. With that, I'll hand it back to Jirka for some closing remarks.

Yes. Just to summarize, I want to say that we have no net debt and the replacement value of over 10,000 titles we fully own, with the future cash value of our customer base being well over $300 million. Our cash balance as of December 31 was $11.6 million. During 2023, we expect the business to generate about $7 million to $9 million of new cash. With that, I want to thank everyone for joining, and we look forward to speaking with you in 2023. I want to open it for questions.

Our first question comes from Mark Argento with Lake Street Capital.

Just wanted to drill down a little bit on the $7 million to $9 million in free cash or cash generated that you're anticipating for 2023. What kind of subscriber growth does that contemplate? Just wanted to better dial that number in a little bit.

Well, we are going to refocus on the kind of subscriber that stays longer, but let's say that we want to be ahead of our peak, so before we lost any COVID customers. So we expect to grow above that but also to really launch the Gaia Marketplace, which basically allows the members to purchase different, mostly non-tangible services while Gaia keeps a percentage. We did a survey of our customer base, and over half of our customers are interested in participating. So those are the two factors that will contribute to this free cash flow generation. We expect to launch the Gaia Marketplace by the end of the second quarter.

I'll jump in a little bit. Given how challenging the new customer acquisition has been with the changes that are constantly evolving in privacy and online advertising, we're really focusing on trying to increase the average revenue per user of our existing member base. This member base is now very seasoned and sticky and looks to Gaia for guidance on what content they watch. We see an opportunity to expand that into other, as Jirka mentioned, non-tangible and potentially tangible goods that fit into our ethos. We evaluated looking at an AVOD model, which is what a lot of other streaming players have moved into, but for us, it isn't interesting given our brand ethos and the majority of advertising revenue coming from brands and industries that we wouldn't want to take money from. So we've really focused on how we can add value back to our members and generate cash flow and incremental revenues without overly relying on new customer acquisition like we have in the past few years.

Also, our direct members still represent over 80% of the business. We always want to keep the third-party members below 20%. I think it's actually going to be a big advantage at this point because our direct members are starting to grow while the third-parties are still contracting. Even at the beginning of March, we saw our first growth from the third-party providers. So we might be more optimistic than we were two weeks ago about third parties. But it's our direct business that we expect to really grow this year.

So, the $7 to $9 million, does that contemplate growing the overall subscriber base or are you…

What Jirka just mentioned at the end there is important. From a member-based perspective, we understand that our direct members are at our full retail price, while our third-party members are at net revenue depending on the partner, let’s just call it, anywhere between 40% and 60% net revenue once you account for transaction processing fees, etc. So it's not necessarily about the member count and the member growth solely; it's about the revenue, net income, and cash flow generation that comes off of the direct business, which is what we're focusing on. We have less control over our third-party distribution partners. As I mentioned in our prepared remarks, we've experienced contraction with our largest partner due to their paywall required to access incremental subscription services. As we move into a questionable external macroeconomic environment, we can't control that component. Thus, we are focusing on what we can control, which is our direct business, which is actually more profitable and stickier for us in the long run.

I also mentioned that we expect to not only offset the losses during the COVID cleanup but anticipate growing above our post-COVID peak member count.

Just to clarify, so you said roughly 80% currently of your subscriber base is direct. Is that a good number to use?

We measure it in revenues. Yes, we always try to keep the direct members representing between 15% and 20% of revenue. It's currently around 18%, and it will probably decline a little bit as a percentage. The direct business will grow faster than the third-party members.

Our next question comes from Thierry Wuilloud with Water Tower Research.

Maybe first question on the savings that you mentioned. Is that basically the unwinding of inefficiencies that were caused by COVID and the inability to work in the office, or am I reading that correctly?

Yes, that’s correct. As COVID came, we implemented work-from-home mandates, requiring at least half of our employees to not be in the office, which created some inefficiencies. We have now terminated that practice, and the inefficiency associated with remote work was close to 30%. We've been able to eliminate close to 20% of the headcount, which constitutes most of our savings. There are some other related expenses with reducing headcount as well, but the majority pertains to salary and overhead.

You mentioned the COVID bump and the loss of some subscribers who signed up during COVID. I'm wondering if you look at the foreign language markets; has there been a different dynamic between your English language subscribers and the French and German subscribers you mentioned? Are you on a different trajectory with these subscribers?

Yes, we are on a different trajectory. We didn’t really launch significant marketing for those languages until this past summer, so we didn’t experience the rapid growth and decline like we did with English. As a result, we've seen consistent accretive new subs in those markets. When looking at it off a small base, the percentage growth is much higher than for the overall business. We have seen positive developments in the French and German markets. As Jirka mentioned, we have also secured interest from Amazon and other regions for rolling out Gaia.

We have indeed increased our spending in French and German markets this year, as these areas have demonstrated lower acquisition costs and churn rates. We are shifting more funds to these regions. However, there is a limit to how much we can grow there from the overall spend, yet we did see positive developments last quarter.

In these markets, do you also have a mix of direct subscribers and indirect, or are the channels somewhat comparable to English-speaking subscribers? Are they more geared towards Amazon or indirect distribution in general?

For French and German subscribers, it's all direct. There are no third-party distribution partners at this time. Spanish is similar as it stands, and the only distribution agreement we currently have for Spanish has no activity yet as it hasn't launched on Amazon Prime Video in Mexico.

You briefly mentioned YouTube. What should we focus on in terms of third-party distributors? Are we looking at YouTube efforts or Amazon efforts, and any color on that?

Yes, we've discussed Amazon at length. They have been contracting overall when we look across all their premium channels, and this has been the trend we've observed generally. Regarding YouTube, we launched them in November. However, they still have some issues to resolve on their side, meaning we aren't yet in a position to promote and market that offering as expected. We receive weekly updates, and they're making rapid progress. We'll have to see when it's ready for full marketing roll-out, but we are optimistic about its future, particularly once they expand into other countries and languages. Our agreement allows us to grow with them.

Well, some top-line growth and a reduced expense base should create a good year. Thanks for answering my questions, guys.

Thank you. And at this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Rysavy for closing remarks.

Thank you, everyone. We look forward to speaking with you in early May when we report our first quarter results. Thank you very much.

Thank you. And that concludes today's conference. All parties may disconnect. Have a great afternoon.