Gaia, Inc Q2 FY2024 Earnings Call

Good afternoon, and welcome to Gaia's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Joining us today from Gaia are Jirka Rysavy, Executive Chairman; James Colquhoun, CEO; and Ned Preston, CFO. After the speakers’ presentation, there will be a question-and-answer session. Before we begin, Gaia's management team would like to remind everyone that management's prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions, including, but not limited to, statements of expectations, future events, or future financial performance. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. Although we believe these expectations are reasonable, Gaia's management undertakes no obligation to revise any statements to reflect changes that occur after this call. Actual events or results could differ materially. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of Gaia's latest Annual Report on Form 10-K filed with the SEC. All non-GAAP financial measures referenced in today's call are reconciled in the company's earnings press release to the most directly comparable GAAP measure. This call also contains time-sensitive information that is accurate only as of the time and date of this broadcast, August 5th, 2024. Finally, I would like to remind everyone that this conference call is being webcast and a recording will be made available for replay on Gaia's Investor Relations website at ir.gaia.com. I will now turn the call over to Gaia's Executive Chairman, Jirka Rysavy. Please proceed.

Good afternoon, everyone. So for the quarter, we continue to build on our increasing momentum. During the second quarter, which is actually our seasonally slowest, we grew revenue at the same rate as we did in the first quarter and by 11% to $22.1 million. We expect revenue growth to be similar during the third quarter and then to increase to about 15% in the fourth quarter. The member count during the quarter grew by 10% to 850,000 members, up from 774,000 in the year-ago quarter. Including some of the non-recurring expenses we have in the quarter, our loss was similar to last year at $0.09 per share. Free cash flow was $700,000 for the quarter and $1.6 million for the last six months, marking a $2 million improvement on top of the $8.4 million improvement we delivered during last year. In 2016, Gaia invested $10 million, and we recently raised $12 million from outside investors for our subsidiary, Igniton, with Gaia still retaining 71% of equity. Igniton used $10 million of cash to acquire exclusive worldwide licensing for Igniton health technology. This technology uses concentrated quasi-particles transmitted by the sun to improve cognition, memory, and longevity. Technology can be delivered by various means from embedded food supplements to controlled release from coded microchips, like from Gaia's connected TV device. And James will now speak more about the business advantage. Go ahead.

Hello, everyone, and thank you, Jirka. Our Q2 results reflect our ongoing commitment to delivering transformative content and growing our community. During the second quarter, traditionally our slowest, we achieved an 11% increase in revenue and a 10% growth in membership year-over-year, whilst also marking our fifth consecutive quarter of positive free cash flow. We have also implemented a price increase for new members starting in July, which we expect to positively impact our revenue by the end of the year. The timing of this increase was moved from Q2 to Q3 to strategically align with our third-party partners, ensuring minimal disruption to our members. Traditionally, we have grandfathered existing members on old pricing. However, we are currently testing a price increase for all new members in Great British pounds. Should this test be successful, we would roll out price increases for all members from Q4 onwards, which will be the first time we have done this in the history of the company. Additionally, as of today, we are excited to officially announce the public launch of Gaia Marketplace to our entire member base and community. This initiative not only strengthens our community engagement but also introduces an alternative revenue stream to the Gaia business. Gaia Marketplace offers transformative tours and experiences for Gaia members to connect with like-minded community members from across the globe; from exploring ancient civilizations in Egypt to delving into transformative healing practices in Costa Rica and awakening one's highest potential on curative retreats with leading teachers from Gaia's platform. Members will also have access to powerful courses, training programs, events, workshops, and conscious products chosen and backed by research for exceptional quality and impact. Gaia Marketplace underscores the company's continued commitment to creating a global conscious community, and you can find out more about this initiative at marketplace.gaia.com. Looking forward through the end of the year, we will continue to execute on increasing the number of members on our new higher pricing, expanding the rollout of our Marketplace initiative, scaling our member growth in our premium tier, and overall making improvements in free cash flow generation and increases in annualized ARPU. Our CFO, Ned Preston, will now provide more detailed financial insights.

Thank you, James. Turning now to our financial results for the second quarter ended June 30, 2024. Revenues for the second quarter grew by $2.2 million, or 11%, to $22.1 million from $19.8 million in the prior year-ago period. This also marked our fourth sequential period of year-over-year topline growth. Member count increased by 10% to 850,000 as of June 30, 2024, up from 774,000 members as of June 30, 2023. Gross profit in the second quarter increased to $18.7 million, up from $17 million in the year-ago quarter. Including non-recurring expenses, net loss was negative $2.1 million or negative $0.09 per share, which is the same as the year-ago quarter. Operating cash flows for the first six months finished at $3.9 million, representing a $2.6 million improvement from the first six months of 2023 and continues the momentum we've delivered in the prior four quarters. Free cash flow for the second quarter was $700,000, up from $200,000 in the year-ago period. The second quarter of 2024 was our fifth consecutive quarter of positive free cash flow. In the last six months, both revenue and member growth were stable at over 10%, with an improvement in free cash flow of $2 million on top of the $8.4 million improvement delivered during 2023. As of June 30, 2024, our cash balance was $5.5 million with an unused $10 million line of credit. That completes my summary. I'd like now to turn the call back over to Jirka for his closing comments. Jirka?

Yes. So for the summary, we expect an increasing annual revenue growth rate, with continuing growth of ARPU and increasing gross profit per employee, and we will continue to generate a positive free cash flow. And this concludes our remarks, and I would like to open the call for questions. Operator, please?

Thank you. We will now open the line for questions from the company's publishing analyst. Our first question comes from Mark Argento with Lake Street. Please proceed with your question.

Hey, guys. A few different questions here. Maybe James, we'll start off with the price increase. Can you just walk us through kind of what your plan was previously and then the new plan? It sounds like you're shifting out the taking price a little bit to align with the subscriber with some of your partners. Can you just walk us through that process and then the actual price increases? I know you talked about some about the Great Britain or British pound denominated. But just kind of walk us through that again; that would be helpful?

Sure, Mark. So first of all, we increased our pricing in Great British pounds and euros in Q2. We had intended to increase prices for new members, that is. And we had intended to increase prices for new members in USD and other world currencies in Q2 also. However, that was pushed until the start of Q3 just in terms of lining up price increases with our third-party partners. Some of them, like our biggest partner, Amazon, were not able to increase until Q3. With Great British pounds, we are testing for the first time ever increasing the price for all existing members. As a company, we have traditionally grandfathered members on existing legacy pricing. But we're currently testing an increase for all members in Great British pounds. We're anticipating that this increase will be successful and that we make a margin on the delta from the increase in relation to any losses. If that is the case, then we would anticipate considering increasing for all members in the Q4 period. So hope for more information on that as the year goes on.

And do you anticipate a similar cadence in the U.S. or just focus right now in terms of the British pound?

So after we test the Great British pound's impact on member losses, then we'll anticipate rolling out price increases in USD and other rest of the world currencies as well in remaining countries.

Yes. We're targeting about $2 in the U.S. In the U.K., it was more like £3 plus, right, because of the difference in currencies, so we try to catch it up to the dollar. So it's a higher increase in the U.K. than we would do in the U.S., but we're targeting about $2 in the U.S.

Is that roughly kind of a 20% blended average? Or how do you guys think about that?

Yes. I mean the $2 is about 17.5%. But if you consider some third parties, it probably depends on the currency; then probably 20% is probably accurate.

Great. And then just coming quickly to Marketplace. I know it's early and you just got to kind of run it, but what are your expectations in terms of what is that business? Does it incrementally generate meaningful revenue this year? Is this year more of a testing year? Think about adding incremental revenues meaningfully next year? What should we kind of expect to see in terms of those?

Sure. So we've been primarily testing Marketplace in beta up until today. So today, there was a release that went out prior to our earnings release announcing the rollout of Marketplace to our entire member base. Based on our testing with our beta groups, we're optimistic about the revenue opportunity contributed from Marketplace. We do see that growing sequentially over time, typically because of how the revenue is attributed. So we anticipate most of the revenue to come from retreats and experiences. The sales we take now and in Q3 and Q4 will largely be deferred revenue, which will hit in Q1 and Q2. So we see a stacking effect of that throughout the year. And alongside price increases, as Jirka hinted in his script, we see our growth rate increasing from double digits currently to mid-teens in Q4, and we anticipate that Marketplace will contribute to that mid-teens growth as we go into 2025 alongside the price increase attribution as well.

You should look at Marketplace as a part of the community, Mark. Our goal at Gaia is to ultimately create a conscious community worldwide. We plan to launch the actual community by the end of next year. So Marketplace is part of that. We spend no separate marketing expenses; it's purely targeting our members through email and the site. So it's a pure increase to ARPU and should breakeven pretty quickly. It hasn't broken even yet, and it contributed to some of the losses this quarter, probably being a third because we already staffed and we don't have the revenue yet. But that will get on track quickly because we just have about four people working on it. So when I look at it, I see it as the beginning of the community, a global community of like-minded people.

Great. Last one for me. You've mentioned this Igniton, I think I'm pronouncing that right, that you guys have invested some money and raised some additional capital. Is this a product at this point? Are you going to be able to commercialize this? Maybe talk through a little bit of your concept here, what it is and how over time you think you can monetize it?

We would assume that we'll get started monetizing next year. It's a technology, as I mentioned, that concentrates and stabilizes subatomic particles from the sun, which is known to the ancients but was never used that way. So we are currently embedding it in food supplements, which have been tested over the last two years. The results of the studies were published in peer-reviewed medical journals, showing an 80% to 100% improvement in memory within 30 days. So it's very significant, and there's a lot of interest. We're not monetizing it yet, but ultimately, the idea at Gaia is that we can release some kind of device connected through TV and deliver it through coded microchips using Gaia's broadcast. It's obviously a few years off, but it's very promising. The results are stunning based on the samples provided to our employees.

I would also just add to that, Jirka, and Mark, that these two use cases that Jirka mentioned, embedded food supplements and the microchip, are just two potentials for the technology. So it's very exciting that we have this announcement for this quarter.

We will also potentially launch this product in the form of supplements, one of the channels being in Gaia Marketplace.

Great. Appreciate the color, guys. I'll hop back in queue.

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

Yes. Good afternoon. Mark covered quite a few spots there. But maybe on Marketplace, is it going to be a challenge to scale it up, or how do you see that working? I mean I'm looking at maybe trips to Egypt or offerings of that kind. Can you really offer that to the whole membership base, which is obviously very large at this point?

Hello, Thierry. Good afternoon. Thank you for your questions. So with Marketplace, we anticipate building revenue slowly over time. As I mentioned in my previous answer, many sales we might be taking now would be deferred into future quarters. This is something we'll be growing over time. We tested it with beta test groups, and our results were very promising. We're excited about the opportunity, especially in helping us move towards mid-teen growth in 2025. Regarding the tours you mentioned, such as Egypt, this will appeal to a segment of our audience that is interested in one of our tentpole series, ancient civilizations. We also now have varied offerings, including retreats, tours, experiences, courses, and live events catering to many segments of our member base. We anticipate reaching these members through contextual promotion within our site and app, building momentum in revenue attribution over time.

Okay. Great. On the price increase, I was wondering if you have expectations in terms of the increase by like $2 or £3. Do you have an expectation as to what kind of attrition could be caused by that? And how do you balance the trade-off?

Well, we don't really have any benchmarks. There are no other companies that publicly published benchmarks related to price increases. However, when we've done this in the past regarding acquisition, we see that we make the delta on the increase. We anticipate doing the same as we roll out these tests into Great British pounds and further.

Yes. We have never raised money before for existing members. For new members, we did raise the price by about $2 in 2019. That time saw about a 20% price increase, and the following decrease in conversion was about 8%, resulting in a gain of about 12% overall. Right now, we have this test in Britain, but we probably wouldn't know for another 30 days.

Okay. Finally, about Igniton, you talked about food supplements. You talked about microchips. It seems the food supplement would be maybe a more straightforward way to deliver the product or the substance. How closely are you to maybe some revenue from that or from launching that?

Well, I just answered that question. We expect to begin that early next year. We're already prepared to do so effectively now. We're finalizing some more studies, and all the technologies and equipment are in place. We can potentially do it even by the fourth quarter, but our target is for next year.

And do you have a sense of what channels you're going to use to market that?

There are several different channels. One would be in our Marketplace. Second, Igniton has a network of distributors in 50 countries targeting mostly practitioners, hospitals, and research labs. We would use our existing channels in Igniton and there would be a few other channels, which will be finalized over the next 90 days.

Okay. Great. Thank you. Appreciate your time and your answers.

Thanks, Thierry.

Our next question comes from a representative of Freedom Broker. Please go ahead with your question.

Yes. Thank you. Good afternoon, everyone. My question is about your media library. Can you share your plans for expanding your media library? And what level of investments are you targeting this year and possibly next year as a percentage of your revenue? Thanks.

Okay. Sorry, I didn't quite catch your name there. It's James here, the CEO, and I'll also pass to Ned for some sort of more specifics on that. Regarding investment in our media library, one unique point is that we own over 85% of our content library. We also have over 98% worldwide rights for all our content and any licensed third-party content. Currently, we're spending around 11.5% of our revenue on content production.

I would say that’s on direct spending; we also do licensing, so the total is probably about 14%.

Like Jirka said, about 11%, 11.5% on produced content, 14% total, including third-party acquired content. We'd anticipate in 2025, potentially increasing the produced content percentage over time and adding to that media library asset. We've also spoken, Ned, Jirka, and I have discussed potentially having our media library revalued. We did have it valued a number of years ago, and we see it as a huge strength for the business, owning that much content on our balance sheet and being able to leverage it into new languages and new markets as we grow and expand.

Yes, it's Ned Preston. Thank you for the question. You may have seen information in our Investor Relations materials regarding our balance sheet. We take pride in our media library, which we value at no less than $150 million. From our recent transition with auditors in Q4, I can confirm that this figure is solid. We are considering a formal revaluation in the middle of the year and feel confident that the $150 million valuation will hold or may even increase slightly. To address James' earlier comment, we utilize extensive data to determine which content to add to our media library. Our presentation also highlights how much of our content is timeless and retains its value, ensuring that our library value does not decline; in fact, it tends to increase as we introduce new content.

And I would generally say because our content production differs, we have a significant advantage compared to other streamers. Most hire independent producers who use spot labor. The overall margins they face in booking content are more than twice what we experience. When we produce content for PBS discovery, for example, if we get a budget from them, it costs us about half of what the budget is because we primarily use full-time employees who work in our studios in Colorado. So if you consider the volume of content we have on the balance sheet compared to other streamers, we likely achieve 2x to 2.5x, maybe even 3x higher gross profit contribution given our costs.

Okay. And I have another...

Of course, go ahead. Maria, did we drop or did we lose Shahin?

I think, Shahin, are you muted?

Can you hear me now?

Yes.

Yes. As I said, I can see that your net cash flow from operating activities is negative and is quite largely negative. Can you explain it for me, please?

For Q2.

Yes. Yes. So through the first six months, our operating cash flows are positive. As you can see, free cash flows in the quarter were positive. In the second quarter, we had a number of non-recurring expenses hit us left over from a restatement that we announced at the end of Q1, as well as some of the work that went into launching Igniton. So that's the core of why operating cash flows were negative for the quarter. We expect to get that back on track in the third quarter.

Yes. As a company, we said at the beginning of the year that we would operate based on the positive free cash flow, which we expect to be positive. We generate cash every quarter for the last five quarters.

Yes. Okay. Thank you.

Thank you.

At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Rysavy for his closing remarks.

Thank you, everyone, for joining, and we look forward to speaking with you when we report our third quarter, which will be at the end of October. Thank you very much.

Thank you for joining us today for Gaia's second quarter 2024 earnings conference call. You may now disconnect.