Gaia, Inc Q4 FY2023 Earnings Call

Greetings and welcome to Gaia's Fourth Quarter and Full Year 2023 Earnings Conference Call. This conference is being recorded. I will now hand the call over to your host, Jirka Rysavy. Thank you. You may begin.

Just real quick, I want to make sure, do we need any forward-looking statements to read as we get started? If not, it's covered in our 8-K and our earnings release, but I will make sure at the end to read that if it’s necessary. With that, I'll hand it over to Jirka.

Thanks, Ned, and good afternoon, everyone. We continue to build Gaia's increasing momentum. Our member count at the end of 2023 grew over 800,000, and we expect to finish our first quarter at about 838,000, which is a milestone towards our 15% revenue growth target for 2024. The annualized gross profit per employee in the fourth quarter grew to over $660,000, up from $535,000 in the last year quarter. That growth drove our $8.4 million, or 10% of revenue, cash flow improvements. Revenue for the quarter increased to $20.7 million from $19.6 million in the year ago quarter, primarily because of our growing member base. Member growth increased during the year, with an additional 16,000 in the fourth quarter, ending at 806,000, up from 759,000 on December 31, 2022. We expect the member growth to accelerate during 2024. Gross profit for the quarter increased to $17.7 million from $17 million in the fourth quarter of 2022, resulting in a gross margin of 85.4%, which was in line with the year. The net loss was $2.1 million or $0.09 per share compared to a net loss of $1.4 million or $0.07 last year due to higher marketing spend and increased amortization. However, our operating cash flow increased by $2.1 million, and our free cash flow increased from $1.7 million to a positive $1 million. The cash balance as of December 31, 2023, was $7.8 million with an unused $10 million line of credit, compared to net cash of $2.6 million, which was like $11 million in cash but with $9 million of borrowing on our line of credit at the end of last year. Revenue for the whole year was $80.4 million compared to $82 million in 2022, as the company was still recovering from the post-COVID subscriber contraction experienced by the entire industry during the second half of 2022. The loss for the year increased $2 million to $5.6 million due to increased marketing spend and amortization. However, our free cash flow improved, as I mentioned, by $8.4 million to a positive $1.1 million for the year from a loss of $7.3 million last year, even as we increased marketing spend to 41% of revenue from 37.2% in the prior year. The improvement was helped by eliminating about $5 million of annualized expenses, finalized at the beginning of the year, which included around 36 headcount reductions, which we previously needed to bring in to balance efficiency issues due to work-from-home mandates. We expect our member growth to accelerate in 2024, and we now expect to about double our net member additions from the 16,000 reported in the fourth quarter to about 32,000 in the first quarter. And now, Ned will speak to you more about the results. Go ahead, Ned.

Hello. Yes. Thank you, Jirka. Revenue for the fourth quarter of 2023 increased 6% to $20.7 million from $19.6 million in the fourth quarter of 2022, primarily driven by our growing member base. Member growth increased during the year, with an additional 16,000 members in the fourth quarter, ending the year at 806,000 members, up from 759,000 on December 31, 2022. We expect member growth to further accelerate along with continuing increases in our average revenue per user during 2024. Gross profit in the fourth quarter increased to $17.7 million from $17 million in the fourth quarter of 2022, maintaining a gross margin of 85.4%. The net loss was $1.8 million or negative $0.08 per share compared to a net loss of $1 million or negative $0.05 per share in the year-ago quarter, attributed to higher amortization, but our operating cash flow improved by $2.1 million and free cash flow improved by $1.7 million to $1 million, up from negative $0.7 million during the same quarter last year. The cash balance as of December 31, 2023, was $7.8 million with an unused $10 million line of credit, compared to net cash of $2.6 million or $11.6 million of cash with $9 million borrowed against the line of credit a year ago. Looking at the full year financial results for 2023, revenue was $80.4 million, down from $82 million in 2022 as the company recovered from the post-COVID subscriber contraction experienced industry-wide in the latter part of 2022. The loss for the year was negative $5.6 million or negative $0.27 per share compared to a loss of $3.6 million or negative $0.19 per share in 2022. Despite increased marketing spending and amortization, operating cash flow improved by $4.2 million. Free cash flow improved by $8.4 million to $1.1 million from negative $7.3 million, even as we increased marketing to 41.1% of revenue from 37.2% in the prior year. The improvement was contributed to by the elimination of $5 million in annualized spending finalized at the beginning of the year, which included the previous 36 headcount to offset reduced efficiency due to work-from-home mandates. The company has decided to restate the consolidated financial statements for 2022 and the first three quarters of 2023, making some presentation changes to align with industry standards. None of these changes or the restatement impacts our revenue or free cash flow, and we are already reflecting this in the release. We expect our member growth to accelerate during 2024, forecasting to double our net member additions from 16,000 in the fourth quarter to 32,000 in the first quarter of 2024, finishing the first quarter with about 838,000 members while continuing to generate positive free cash flow. With that, I will hand it over to James Colquhoun, Gaia's CEO.

Thank you, Ned, and thank you, Jirka, and hello, everyone. As Jirka mentioned, we have continued our trend of executing on cash flow positive growth for the final three consecutive quarters of 2023. We found continued improvements in marketing efficiency with some of our lowest customer acquisition costs since the beginning of 2021 while also executing on improving our average revenue per user on an annualized basis. Since moving into the role of CEO in December, my initial focus has been on improving marketing efficiency and the return on cash from our marketing spend. A key to this success has been the rollout of our direct-to-pay campaigns in Q4, which resulted in improving retention by incentivizing members to skip a trial period and move directly to a paid-in-full membership with a focus on our annual plan. Additionally, the continued rollout of our Gaia Marketplace Initiative offers members a curated selection of experiences, retreats, courses, and physical goods, providing exclusive member-only discounts. This project aims to support the conscious life cycle of our members while also improving cash flow and increasing the company's gross revenue, as we booked the income from sales at a 100% gross margin. In Q4, we also implemented further projects leveraging AI within the organization from improvements at a product level to building efficiencies and cost savings on a team level. Key to this was launching an AI-powered search engine trained on our exclusive categorical metadata and transcripts, unlocking the power of our transformational conscious media library of over 10,000 titles in English, Spanish, French, and German. Members can now enter search queries related to their transformational interests and quickly uncover the most relevant films, series episodes, yoga classes, or documentaries to stream. We continue to explore further ways to capitalize on our exclusive content library and data as we move forward. These projects aim to establish Gaia as the world's leading player in the conscious and transformative media space and leverage our capacity to use AI to find more efficient ways to reach our target audience and grow our community. 2023 was a landmark year for us; on the content side, we released over 1,500 titles across our four languages and produced five live events. Our top programs in 2023 included our original series releases of 'Channeling: A Bridge to the Beyond,' 'Biohacking with Dave Asprey,' 'Ancient Civilization Season 5,' and an original documentary called 'Healing Vibrations.' Moving forward into 2024, our focus will be on continuing to execute improving our marketing efficiency, the rollout of our Marketplace Initiative, a renewed focus on our Premium Membership Tier, growing improvements in average revenue per user while also maintaining cash flow positive growth. I know it's been some time since our last announcement, and we're looking forward to updating you all on our Q1 numbers shortly. As a quick sneak peek, we relaunched our premium membership tier with a new rebrand from Events+ to Gaia+ and celebrated with a sold-out immersion event at our GaiaSphere Event Center, achieving a new record of over 52,000 unique live stream attendees from across the globe. With that, I'll pass back to Jirka to close up.

Yes. So before I close out, actually, I'd like to let Ned read the forward-looking statements, which we neglected to address at the beginning, and then I will close.

Okay. I'll go through this quickly. As stated in the 8-K and the earnings release, the press release contains forward-looking statements within the meaning of federal securities laws. All statements other than statements of historical fact are forward-looking statements that involve risks and uncertainties. When used in this discussion, we intend to use the words 'anticipate,' 'believe,' 'contemplate,' 'continue,' 'could,' 'estimate,' 'expect,' 'future,' 'hope,' 'intend,' 'may,' 'might,' 'objective,' 'ongoing plan,' 'potential,' 'predict,' 'project,' 'should,' 'strive,' 'target,' 'will,' and 'would' and similar expressions as they relate to identify such forward-looking statements. Forward-looking statements include, without limitation, the company's plans related to the restatement of financial statements, our ability to attract new members and retain existing members, our ability to compete effectively including for customers with different modes of entertainment, maintenance and expansion of device platforms for streaming, fluctuations in customer usage of our service, fluctuations in quarterly operating results, service disruptions, product risks, general economic conditions, future losses, loss of key personnel, price changes, brand reputation, acquisitions, and new initiatives we undertake, security and information systems, legal liability 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 other risks and uncertainties listed in our filings with the U.S. Securities and Exchange Commission. These statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from those implied by forward-looking statements, including the outcome of the company's completion of the qualification and evaluation of the specific impact of errors identified in the company's financial results and previously issued financial statements, including the possibility of material adjustments, the discovery of additional and unanticipated information during the procedures required before the company is able to file its annual report on Form 10-K for the year ended December 31, 2023, and the application of accounting or tax principles in an unanticipated manner. Also, additional risk factors are set forth in the company's periodic filings with the SEC, including, but not limited to, those risks and uncertainties listed in the section entitled 'Risk Factors' in the company's annual report and Form 10-K filed with the SEC. We caution you that no forward-looking statement is a guarantee of future performance, and you should not place undue reliance on these forward-looking statements, which reflect our views only as of the date of the press release. We undertake no obligation to update any forward-looking information. With that, I'm going to pass it back to Jirka.

Thank you. So as a final thought, we started this year with $7.8 million in cash and $10 million of unused credit line. Our current view on our four business indicators for 2024 is that we expect revenue to grow about 15%, as stated in the last call. This is with continuing growth of average revenue per user. We also plan to increase our gross profit per employee going forward and continue to deliver positive free cash flow. This concludes our remarks, and now I'd like to open the floor to questions. Operator, please.

Our first question comes from Mark Argento with Lake Street Capital Markets. Please proceed with your question.

Hi guys. Ned, you drew the short straw there. It was a mouthful. Just wanted to dig in a little bit on the growth, 15% growth. I know you referenced ARPU growth, but maybe seeing some nice subscriber growth—what's the balance there between subscriber growth and overall ARPU growth? And just walk us through current pricing?

To start, we provided the number for the first quarter, which is about 10%, and we expect to be similar in revenue growth in the first Q as well. I didn't calculate it, but I think it will be in that ballpark. As for pricing, could you clarify that for us?

Thank you, Mark. Hello. Good afternoon. In terms of pricing, we plan to increase our USD pricing later in the year. We're also increasing our EUR and GBP pricing by the end of this quarter, Q1. This will aid in increasing ARPU. Additionally, we will continue to maintain a blend of our third-party, second-party, and direct members to achieve steady ARPU and growth for the year. The addition of Marketplace, as we scale that initiative, will also help us to increase cash flow throughout the year while contributing to our ARPU growth as we keep pushing forward with subscriber growth.

Yes, and Mark, this is Ned. The last point to add is that 2024 will get us on a more natural path. As you've modeled and others have modeled for us this past year, our member growth and revenue were not aligned, right? Moving forward, that will be more the case. I think your model for 2024 has us growing revenue higher than our actual member growth. We're excited to get back on this more predictive path, where we will discuss member growth alongside ARPU, churn, and other metrics. We're real excited for 2024 with the numbers we've already provided for Q1, and we look forward to discussing them in more detail in about five weeks with our Q1 results.

Yes. In the second half of the year, you're likely to see revenue growing faster than member growth, as we've mentioned, we plan to increase prices somewhere in the second half of the year. So I expect a bit of a decoupling there. You will see revenue grow a little faster because we expect some conversion improvements. We already have some statistics from prior experiences. We're also reverting back to our regular seasonality, which was disrupted by COVID. So you should see a noticeable increase in the first quarter. While we don't know exactly how the second quarter will look, we certainly expect to see growth relative to the fourth quarter, and we will see how price increases perform within the industry, as many have raised prices. We don't expect much pushback and will only increase prices for new members, not for existing ones.

Regarding the Marketplace, you tested a little in Q3, which generated about $100,000 worth of revenue. Any continued updates or thoughts on whether that can become a material revenue contributor in 2024? How should we be thinking about that?

Yes. Thanks, Mark. We've continued to roll out Marketplace; it's still in beta at this stage. We had a sold-out Egypt tour in November with one of our top talents from the tentpole series 'Ancient Civilization.' As we move into Q2, Q3, and beyond, we anticipate rolling this out more seriously. I will have more to report on that later in the year.

Are Marketplace and Gaia+ intertwined at all? Just refresh us on the relaunch of Gaia+?

Yes, we'll discuss that in more detail on our Q1 call. It just happened in the last week, 1.5 weeks ago. Essentially, it's a rebrand of our Events+ tier, which is our premium membership tier. These two initiatives, our premium membership tier along with Marketplace and our upcoming price increase, will be instrumental in seeing subscriber growth and ARPU rise consistently throughout the year. We're excited to have these initiatives in place so we can continue growing our subscriber base and ARPU together.

Last question from me. In terms of the cost to acquire a new subscriber, it looks like it’s flat to down. Is that a function of basically what your spending is or how you are buying keywords or Facebook or other platforms? What’s really driving your ability to acquire efficiently?

There are a few factors there, Mark. In Q4, we saw our customer acquisition costs average one of the lowest levels since the beginning of Q1 2021. A lot of these improvements are driven by various factors but primarily finding new conversion improvements on landing pages and checkout processes. Additionally, some online events where we bring selected content in front of the paywall and provide leads or prospects with a taste of Gaia before inviting them into a membership have significantly reduced acquisition costs. Moreover, we've invited subscribers to pay for a membership upfront, either monthly or through incentivized annual plans. This has been very beneficial for us as a company, and we see these improvements continuing into Q1, which we will report on in detail shortly.

Great. Appreciate the insights. Thanks, guys.

Thank you.

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

Yes. Good afternoon. I believe you've covered most of my questions, but I still want to ask about the improvement in membership for the first quarter. Is it seasonal, new strategies, or something else? I’m curious about what's driving that.

I'll start, and can see if there are further insights. First and foremost, we are witnessing continued improvements in marketing efficiency since I transitioned from the Board to COO and then COO to CEO in December. One key focus has been on improving the efficiency of our customer acquisition pathways by deeply understanding our market segment and targeting our messaging to our core avatars. This has stabilized our business further. Over time, we're seeing all of this come together, and I'm pleased to report that we are back to meaningful growth.

I believe the marketing expenses are definitely lowering costs as a result of my personal expectation when I brought James into this role. Marketing is his background, and I wanted to leverage that. You see some of the initial impact from James in marketing. A lot of the work was actually done by our President over the last part of the year to prep for this, so we are excited about the potential for accelerated growth.

I heard you mention using live events to attract new members. How does that process work? Do you invite them to attend, and then that gives you quality leads?

One of the strategies we implemented last year was to put some content in front of the paywall. This approach lets prospects experience some of the content inside Gaia before inviting them to sign up for a membership, and this has been highly effective in reducing acquisition costs. The recent event we had in March was a sold-out live event; we opened it up for a limited time to livestream attendees, and we recorded over 52,000 unique attendees. It's gratifying to see how we can leverage the technology from our GaiaSphere Event Center and reach more people, expanding our top-of-funnel efforts. Ultimately, we hope to retarget these leads and drive acquisition costs down, scaling our membership as we move forward.

That’s impressive—52,000 unique attendees for one live event. I heard you'll be providing more insights on Gaia+ during the first quarter report. Is that correct?

That is correct, and just to clarify, the relaunch only occurred within the last few weeks of the first quarter. We intend to continue scaling that throughout the year alongside our Marketplace initiatives. With the groundwork laid, we can now focus on execution as we move throughout the year.

Can you share any metrics about Gaia Marketplace? What about the number of offerings on the platform? Is it open to all members yet, or not quite?

Thierry, we are still in beta for the Marketplace. I will provide more data on our Q1 call. The testing results have been promising, and we're staging our rollout to our full membership while continuing to enhance the offering. I'll provide more details on that during the Q1 call.

Lastly, for Ned, can you provide insights into the presentation changes recently made?

Yes. As you know, I've been on board since the end of June and have talked to well over 100 investors. Many have inquired about the difficulty in tracking Gaia against others in our industry. As we close out my first fiscal year and transition to new auditors in Q4 due to our previous auditors leaving the public space, we looked at our financial statements during this opportunity. The goal was to align with industry standards. None of these changes or restatements impact our revenue or free cash flow, as reflected in this release. I'm happy to report that going forward, as I speak with existing and potential investors, we’ll be using a universal language around common factors for the business.

Thank you for addressing my questions.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to management for closing comments.

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

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.