Gaia, Inc Q1 FY2023 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, 2023. 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 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, our ability to attract new members and retain existing members, our ability to compete effectively including for customer engagement with different modes of entertainment, maintenance and expansion of device by form of streaming, fluctuation in customer usage of service, fluctuations in quarterly operating results, service disruptions, product risks, general economic conditions, future losses, loss of key personnel, price changes, brand reputation, acquisitions, new initiatives we undertake, security and information systems, legal liabilities for website content, failure of third parties to provide adequate service, future internet-related taxes, our founders' control of us, litigation, consumer trends, the effect of government regulation and programs, the impact of public health threats, including the coronavirus COVID-19 pandemic, and our response to it 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 CEO, Jirka Rysavy. Please go ahead.

Good afternoon, everyone. And I'm glad that I can again report positive results after the challenging last year when both revenue and adjusted EBITDA increased in the single digits due to COVID lockdown and member cleanup. During the first quarter, we returned to member growth. Gross gain from our direct membership, while the third-party providers like Amazon were still negative in January and February, we added 7,500 members during the first quarter, ending with 7,666 vibrant members on March 31. With growth accelerating in April, even membership at our third-party provider started to grow again. We expect member growth rates to increase during the year. The growth is also being helped by improved retention. In April, the member losses hit an all-time low, benefiting from our marketing focused on campaigns generating higher retention, rather than mostly on cost of the trial and conversion rates. Another significant improvement has been the cost per member acquisition that decreased by 13% during the first quarter as compared to the fourth quarter. Marketing investment in non-English, especially French and German which have lower CP and less churn, is also helping. The viewing time per member started to grow again after declining since the COVID lockdown ended. A lot of small improvements we made since September also started to make a positive difference. As we mentioned previously, we have eliminated over $5 million of annualized spending, which includes approximately 36 headcounts, mostly contractors, added over the last two years to offset reduced efficiency we experienced as a result of working from home. While some tail pay arrangements will still impact second quarter costs, we expect to see the partial benefits of some savings already in the second quarter. The 20% reduction in headcount returned us to pre-COVID levels of operating efficiency, with annualized gross profit per employee reaching $600,000 in March. Now Paul will talk more about specific results.

Revenues for the first quarter were $19.6 million, a slight sequential increase for the first time in the past 12 months reflecting the return to growth in our member base during the quarter. Compared to the year-ago quarter, revenues declined 10% due primarily to Q1 2022 benefiting from the COVID-related growth of 2020 and 2021. As we continue to invest in and release new content, particularly to support our language expansion efforts, we have increased our viewership on the exclusive portion of our library to over 85%. As a result, and as expected, gross margins were 85.9% during the first quarter of 2023, and we expect them to remain at this level for the near term. Total member acquisition costs during the quarter were $7.9 million, or 40.7% of revenues, compared to $8.6 million in the year-ago quarter. We have started to realize the benefits of our focus over the past several quarters, with per customer acquisition costs down 13% sequentially, and a similar improvement compared to the year-ago period. While we continue to experience net member contraction in our larger third-party distribution partners in the first half of the quarter, we have returned to growth with our largest partner beginning in March. The return to growth on both our direct member base and third-party member base during the quarter is building our confidence that we are through the worst of the post-COVID unwinding. Selling and operating expenses, excluding marketing and member acquisition costs in the first quarter, were $8.1 million, which is down slightly from the prior year. Corporate and G&A expenses in the first quarter were $1.8 million, which is in line with the year ago quarter. We have implemented significant cost reduction measures over the past few months, and as Jirka mentioned, we will begin to see the benefits starting in the second quarter of 2023. We had a net loss of $1.1 million or $0.05 per share during the first quarter of 2023 compared to net income of $0.1 million in the year-ago period. The decline was primarily driven by the reductions in revenues between periods offset by a $0.8 million reduction in expenses. Adjusted EBITDA, as a result, was $3.2 million in the quarter compared to $4.8 million in the year-ago quarter. With our return to member base growth during the period, our working capital benefited from a sequential increase in deferred revenue of $1.4 million, with our deferred revenues ending at $15.6 million as of March 31, 2023. We took advantage of this strong growth in deferred revenues to reduce our payables balance during the period by $0.9 million from December 31. We expect to continue to benefit from the inherent negative working capital cycle in our recurring subscription business model as we continue to grow our member base and revenues. In addition, we will begin to benefit from the $5 million in reductions that Jirka mentioned during the second quarter and expect to be in a position to generate cash flows from operations in excess of the cash flows we reinvest back into our content library and product enhancements going forward. Due to our in-house production capabilities and lack of contractual commitments tied to our content production, we have significant discretion in the amount and timing of this investment. This flexibility allows us the ability to adjust our investment levels to withstand a further downturn in the macroeconomic environment, if necessary. While we're focused every day on accelerating our growth rates and getting back to positive operating margins, we have made tremendous progress over the past several quarters on key areas of the business. With continued discipline in execution and the anticipated launch of the Gaia Marketplace in July, we are well-positioned to continue growing revenues and cash flows going forward. With that, I will hand it back to Jirka for some closing remarks.

Yes, we are on track to launch the Gaia Marketplace, which focuses on existing members to increase our ARPU with minimum additional marketing expenses. The technology for it was finalized in April successfully, and the offering will start next week, with the launch planned for July. To summarize, we have more cash than we owe on our credit line, with the cash balance on March 31 being $10.8 million, and we expect the business to generate good cash flow for the remainder of the year. This concludes our remarks, so I would like to open it for questions. Operator, please.

Our first question comes from Mark Argento with Lake Street.

Hey, Jirka. Hey, Paul. Good to see a nice quarter you got. Paul, could you speak, you had mentioned deferred revenue was up, can you just walk us through kind of how that, and kind of just the mechanics there in terms of as you're doing more direct versus third-party subscribers, then what's the mix of month to month versus prepaids?

Sure, so that's a good, astute observation there as we shift the member base growth from indirect members to direct members. We get the benefit of the negative working capital versus our partners collecting the money and then remitting it to us monthly. So that's a good pick-up there. In terms of the monthly versus annual mix on our direct member base, we're about 50:50 of the existing member base between monthly and annual. When we look at our new signups, we vary between 25% and 30% of new signups that convert on the annual plan versus the monthly plan.

Got it. Then in terms of pricing, have you taken any price increases or done anything on the pricing side recently?

We have not. I think as the world unwound from COVID, we've been watching what other players in the industry are doing. We know from prior studies that we have some room. However, I think consumer preferences and comfort levels are being tested right now as people are launching AVOD models and Netflix is doing what they are doing with the password sharing crackdown. So we're keeping an eye on it. We definitely have the opportunity to increase prices based on prior studies, but I think we're just waiting to see how the macroeconomic environment plays out for the rest of this year before we make a final decision.

Then one last one, just on customer acquisition. Did you guys see better conversion as things kind of normalize a little bit out there? What do you see in terms of conversion or cost to acquire?

Yes, so I think it's, as Jirka mentioned, we're less focused on the cost of conversion; we're more focused on retention. The way we look at that is one and three-month retention of our campaigns. We're actually finding that it might make sense to pay slightly more for a given campaign based on how it retains. Conversely, it actually makes sense to cut efficiency, measured by conversion rate and CPA campaigns, because they're not retaining as well as the other campaigns. We started that about five months ago, and this quarter reflects the early benefits of that type of tweaking of what we're doing in relation to our spending.

As I said, our costs are actually for acquisition, not for conversion, but the member decrease is down 13% from the fourth to the first quarter, which is significant for us. It's definitely helping that our retention is better. As I mentioned, the losses were the lowest in the history of the company, so on a percentage basis, I'm very happy with the result. It's actually getting even better in April than in the first quarter, so it's very encouraging.

So that minus 13% per acquired customers or is that 13% total dollars spent down.

For acquired customers, the spend is flat, roughly.

What we call CPA, cost per acquisition, is how we look at the cost of the member when they enter a trial, but we're talking about the cost of a customer after they convert from the trial.

And final for me on content, what's the expectation in terms of, are you going to spend similarly to last year, how does that get moderated, if any?

Well, I think we look at it as a combination of content plus product spending that flows through the investing side of the cash flows statement, and part of the reduction that Jirka mentioned in terms of the contractor levels was on our development side, which was in that line. That number is going to come down related to the prior year. As it relates to overall content spend as a mix of that line, we're really evaluating if we can continue to see this growth in our foreign language markets; we might accelerate our spending there. But as I said in my prepared remarks, it's really up to our discretion on how we invest and at what levels. So if we keep seeing growth, we might ramp up content and if the macroeconomic environment deteriorates, we have the ability to pull back.

Yes, we generally try to align our content spend with the revenues we are generating. However, our customer viewing started to grow again because we used to grow, but due to COVID, once that ended, obviously as people started to be less enclosed, the viewing declined. But it started growing again in the first quarter, so it's a much better benchmark to look at new content. Generally, we try to peg it to the revenue.

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

Thank you. Hi, Jirka. Hi, Paul. Nice quarter. Mark covered a few issues. But maybe just a couple more, maybe a bit more color. The acquisition costs being down, is it that you're just having more success with the existing marketing strategy? Or did you change something and are able to be more effective with the marketing dollars?

I think it's a combination of being more effective with the marketing dollars and the channels that we're already spending in. As we said, looking at it from that campaign dynamic perspective, and not just what's the cost and volume of acquisition, but what's the retention. That's obviously helping as we tune that. Secondarily, we're always testing and evaluating new platforms and channels to market as we continue to try and drive growth, particularly given the privacy changes and how that's impacted marketing broadly online. This is not going to change; it's only going to continue to become more and more challenging to use targeted or hyper-targeted marketing to go after customers as people pull back on their availability to share data.

We also had several new people in marketing, especially in lead roles. They start to apply their creativity, which I think plays a role. So I think credit goes to the people.

Great. Somewhat similar question about retention; is it the new program that you've introduced? How's the breakdown between that versus maybe you lost a few members last year; now you have the hardcore members who are not going to go anywhere? What's the breakdown between actions you made versus an improvement in the quality of the existing members?

There are really two things. First, obviously, we had a very challenging microenvironment; it wasn't just us – pretty much anybody in streaming found that people we acquired during COVID started to leave, and it was industry-wide. That trend ended by the end of the year, and actually started to come down fairly dramatically. By the end of the year, most of that was over. There were some other aspects in the beginning, like with third parties like Amazon, who made pricing changes that probably added to it. That trend is gone for us at least; we don't see that anymore, so it's normalizing now. The biggest impact is that we started to focus on campaigns that have high retention. This was a new approach; we eliminated campaigns that might be efficient but didn’t lead to longer retention. That was probably the main change we implemented positively in the fall; it has paid good dividends, and I think that's the main driver behind it.

Yes, and then we're always tinkering, for lack of a better term, on our payment processing infrastructure and working to optimize the passive losses that we get from credit cards on file being unsuccessfully charged, particularly for annual members. That's kind of the bread and butter of what we focus on with our existing member base, because losing those people isn't an active cancellation; that's really just a credit card going stale. We're starting to make improvements on that line as well. When you think back to what I said about our composition of monthly versus annual members, every percentage point improvement we can make on those passive losses compounds as we increase the volume of annual memberships.

Okay, great. And, Paul, a question for you. The severance costs, were they spends in the quarter or are they spread over time?

It's spread over time. The way that they're accounted for means they have to continue to abide by the rules of the agreement. We hold the payments back and then pay them. So we didn't do an accrual. Given that the majority of these were contractors who needed time to wind down their notice periods under their underlying contracts, it's not so much severance as it is just a timing artifact of when we let people know, and then how those contracts wound down.

Yes, some of the contractors worked for companies, especially outside of the US, where we have a commitment to give them notice before we can terminate. If we give them notice, we must continue to pay them through the notice period.

Okay, maybe the last question on any incremental color on the Gaia Marketplace in terms of, are you getting a sense for the service providers, how they're responding, how they're gearing up for that? I'm wondering if you have any color around that.

I think that would be more relevant with the first quarter; we just finished, like a week ago, our technology. I'm glad that was done on time because we really wanted it to be completed in April. It's effectively live, but we didn't start selling the product. If you check the side, you basically only see Gaia-branded merchandise for now. We have something working and tested. However, I cannot say much on provider engagement yet. I see that very positively. A lot of areas are starting to get positive results, so I feel very good about our company.

Great, well, nice to see the inflection point in the member counts. That's it for me, guys. Thank you very much.

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 for joining. We look forward to speaking with you when we report our second quarter, which would be in early August. Thank you very much.

And this concludes today's conference. You may disconnect your line at this time. Thank you for your participation.