Earnings Call Transcript - GAIA Q3 2023

Operator, Operator

Good afternoon, everyone. And thank you for participating in today’s conference call to discuss Gaia, Inc.’s Financial Results for the Third Quarter ended September 30, 2023. Joining us today are Gaia’s CEO, Jirka Rysavy; COO, James Colquhoun; and CFO, Ned Preston. 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, 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 platforms for streaming, fluctuations in customer usage of our service, fluctuations in quarterly operating results, service disruptions, production risks, general economic conditions, future losses, loss of key personnel, price changes, brand reputation, acquisitions, new initiatives that 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 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’s CEO, Jirka Rysavy. Please go ahead, sir.

Jirka Rysavy, CEO

Thank you, and good afternoon, everyone. I am glad again we can continue reporting positive results. Revenue for the third quarter increased to $20.2 million, sequentially up from $19.8 million and from last year of $19.9 million. During the quarter, our member growth doubled sequentially to about 16,000, ending with 790,500 members, which is above 776,000 we reported last year. So we more than recovered the 2022 losses, which were caused by the industry-wide post-COVID subscriber contraction. Virtually all the growth in this quarter is coming from our direct members. Our ARPU continued to grow steadily, as it did over the last five years and shall be further supplemented by our recent launch of Gaia Marketplace. We rolled out our Marketplace in September to less than 5% of our members and generated over $100,000 in sales in the first 20 days without virtually any marketing cost. Our annualized gross profit per employee improved again during the third quarter to our new all-time high of over $650,000, reflecting our increased efficiencies. Our loss improved to $600,000 or $0.03 per share, down from $2.4 million or $0.11 per share, and EBITDA increased to $3.9 million from $1.8 million during last year’s quarter. We continue to generate positive free cash flow with the cash on September 30th growing to $11.2 million from $10.9 million at the end of the last quarter. Now James will cover the Marketplace and some other new marketing initiatives, and then Ned will speak more about financial results.

James Colquhoun, COO

Thank you, Jirka. So we rolled out a beta version of Marketplace in September, initially targeting less than 5% of our members, and the results have been truly exciting. Within the first 20 days, we were able to generate over $100,000 in sales and all of this was achieved with zero paid marketing costs. This achievement is a testament to the strong connection we have with our members and the appeal of the Marketplace’s offerings. It also demonstrates the significant potential for growth that lies ahead of us as we expand our offering into 2024. The launch of Gaia Marketplace is a significant step forward for us. It’s not just a new feature; it represents strategic expansion of our platform and allows us to diversify our offerings and support the conscious life cycle of our members in a more meaningful way, whilst also improving ARPU, which is a key metric for us to focus on as we move forward. Marketplace will include a carefully curated selection of experiences, retreats, courses and products that resonate with our audience, which will be offered to members at a discount to the market to help us create a thriving ecosystem that benefits both our members and Gaia. A key passion and focus for me is improving our marketing efficiency, and I believe there are a lot of untapped opportunities for us, especially with our direct-to-consumer marketing campaigns and digital events. Marketplace will play a critical role in this, as it will contribute to free cash flow, which we will use to accelerate our growth initiatives as we focus on scaling to 900,000 subscribers as quickly as possible, whilst maintaining positive cash flow. Now, Ned will talk more on our financial results.

Ned Preston, CFO

Great. Thank you, James. Revenues for the third quarter were $20.2 million, a sequential increase for the third consecutive quarter, continuing the return to growth in our member base during the first three quarters of 2023. Compared to the year-ago quarter, revenues grew by 2% as the company recovered from the post-COVID subscriber contraction experienced industry-wide during 2022. In the quarter, we continued to invest in and release new content, particularly to support our language expansion efforts. As a result of these strategic growth investments, gross margins were 85.2% during the third quarter of 2023 and we expect them to remain at this level for the near term as we expand our language offerings and tactically support the growth of the business. Total member acquisition costs during the quarter were $8.4 million or 41% of revenues, aligned with our second quarter costs. In the third quarter, we experienced growth in our direct member base, which is a continuation from the first and second quarters. Selling and operating expenses, excluding marketing and member acquisitions costs in the third quarter were $7.9 million or 39% of revenues, which was a $0.7 million or 8% improvement from the prior year period. This decrease is due to cost reductions completed earlier in the year and employee retention tax credits filed during the quarter. Corporate and G&A expenses in the third quarter were $1.4 million, down 29% from the prior year period due to the cost improvements in the first half and the aforementioned payroll tax credit. During the third quarter of 2023, we recorded a loss of $0.6 million or negative $0.03 per share, compared to a loss of $2.4 million in the year-ago period. The improvement was primarily driven by expense reductions and the increase in revenues between periods. EBITDA was $3.9 million or 19% of revenues in the quarter, and we generated free cash. Our deferred revenues for the third quarter were $15.3 million, an increase of $0.8 million from the year-ago period. We expect to continue to benefit from the inherent negative working capital cycle in our business model as we continue to grow our member base and revenues. In addition, we expect to be in a position to continue generating cash flows from operations and 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 absence of contractual commitments tied to our content production, we have significant discretion in the amount and timing of our investments. This flexibility allows us to adjust our investment levels as needed to withstand a downturn in the macroeconomic environment if necessary. Through the company’s focus on accelerating growth and a return to positive operating margins, we have made tremendous progress over the past few quarters on numerous key areas of improvement for the business. With continued disciplined execution and the launch of the Gaia Marketplace, we are well positioned to continue growing revenues and to remain cash flow positive going forward. With that, I will hand it back to Jirka for some closing remarks.

Jirka Rysavy, CEO

Yeah. We expect our member growth to further increase in 2024 with continuing growth of ARPU. For 2024, we are targeting about 15% growth in revenues. It’s about 10% growth in our members, with the strong growth of ARPU, which should be helped by our planned price increase for new members in the second part of next year. We also expect to continue to increase our gross profit per employee benchmark, and I personally believe that Gaia is in the best place since we started our streaming business. Our goal is now simple: to grow fast to 900,000 members, while continuing to generate a positive free cash flow. I encourage you to visit ir.gaia.com and download the investor presentation to see our pro forma for how a company can look at 900,000 members annually on average. That means 900,000 in the middle of the year. We would update this probably within an hour. Over the next few months, I also plan to promote, subject to our Board approval, our CEO and CMO, James here, to the CEO position. I have known James for seven years. We merged his SVOD business FMTV into Gaia in 2019, and FMTV had the same mission as Gaia and it grew to over 600,000 subscribers without any outside funding, solely depending on James’ marketing skills. James would continue to report to me in my role as Executive Chairman. I would focus on creating the Gaia Community, which we talked about before and is the main part of our mission statement and should be the final differentiation from all other video streaming businesses. I hope to launch Gaia Community after we reach our 900,000 annual member average milestone. So this concludes our remarks. I would like to open the floor to questions.

Operator, Operator

Thank you. Our first question comes from Mark Argento with Lake Street Advisors. Please go ahead with your question.

Mark Argento, Analyst

Hey. Good afternoon, guys. Just a quick question. It looks like your actual subscriber additions were a lot stronger than what we had been modeling. Can you just touch on the environment out there from a subscriber acquisition perspective, the cost to acquire a subscriber, and what channels you are seeing that success in?

Jirka Rysavy, CEO

The environment is definitely better than it was last year, though it hasn't changed much since the second quarter. Our growth has doubled due to internal factors, and James has played a significant role in this. Without a CMO, he's been operating more in that capacity than as COO. The cost of acquisition remains similar to the second quarter, possibly a bit lower domestically, and we've seen minor improvements in regions like Latin America. There has been a slight increase in churn due to internal issues, mainly related to credit cards. However, for about 90% of our business, the outlook is positive. I anticipate that member additions will rise again next year from our current position, indicating we still have some growth potential, which I believe will be a key focus moving forward.

James Colquhoun, COO

Sure. Mark, I would also add that we are focusing a lot, especially with the growth and marketing team, on conversion rate optimization. So card conversion, guest member conversion, first 30 days, 60 days, 90 days. This is a really key focus of ours now. So with the improvements in efficiency that we are seeing in CPA costs, which have come down marginally throughout the year, especially if we compare to the start of the year until now there are improvements in CPA costs, whether that’s because of the macro environment, less competition or otherwise, but it’s still coming down for us. We are also working on our side to improve that with the conversion rate optimization. I really expect to see more improvement in that in 2024, and marketing efficiency is a very core focus of mine for the 2024 year as well.

Mark Argento, Analyst

That’s helpful. Thank you for that. And just pivoting to, I think you said you’re planning to take pricing in Q2 of next year. What do you think in terms of the pricing; how big of an impact could that have in terms of the ARPU for the latter part of that year?

Jirka Rysavy, CEO

We are not planning to increase prices in the second quarter; instead, it will likely happen in mid-third quarter, around September. We are considering a $2 increase for new members and will likely focus on encouraging monthly subscribers to switch to annual plans without raising the annual price. Currently, about 25% of our members choose the annual option. This strategy aims to improve retention, as it would prevent members from coming and going at the same price. Although I indicated we aim to grow revenue by 15% and membership by 10%, we anticipate that the price increase for new members may impact conversion rates, leading to slower membership growth compared to revenue growth. Our primary objective remains to increase revenue.

James Colquhoun, COO

I think second to what Jirka said, we would be grandfathering or grandmothering, however we say it, our existing members. So there is a retention play there in that we can promise our existing members they will stay on their existing monthly price point. By not touching our annual price point, it will create a bigger price difference between the monthly and annual membership, which we hope will encourage more conversions upfront or ongoing to annual because we see the churn rates on customer cohorts that stay longer than one year, in particular, longer than two years and three years, are much more beneficial for us as a brand, so we want to encourage more membership commitments as much as possible.

Ned Preston, CFO

And Mark, this is Ned. I think the last part of your question was around the ARPU. Of course, all of this, along with some of the other offerings that James will be spearheading around our other offerings, plus the Marketplace, the combination of all of that, plus the increase we do anticipate would take our ARPUs up, obviously, which we can outline in future meetings with you. But I think that was the last part of your question.

Mark Argento, Analyst

Yeah. No. That’s super helpful. And then in terms of the marketplace business, obviously, pretty good uptake with no marketing dollars behind it. Does that make you more encouraged in terms of the opportunity, and does that change timing or aggressiveness at all from your guys’ perspective?

Ned Preston, CFO

From our side, we plan to be as aggressive as possible in executing on Marketplace. The main focus for us internally at the minute is curating and building out our SKU offering around the three core verticals of retreats or experiences, courses, and physical products. Once we have more of that in place, we will continue to roll out wider to our membership base and as we get testing data of what offers perform best, that will inform our marketing, and we will continue to keep expanding that. Jirka has a strong background in e-commerce and retail products with the previous version of Gaiam and can see huge potential for this, given the community that we have at the moment.

Jirka Rysavy, CEO

We want to be selective with our products, primarily targeting our members. I would estimate that 90% of our offerings will be available to existing members. While non-members can purchase these products, we won't actively promote them outside of our membership base for now. Members will also receive a 10% discount, so for example, if you buy a trip costing $7,000, it's more beneficial to become a member to take advantage of that discount. I see this as the start of the Gaia Community, aiming to attract individuals who appreciate our types of offerings. The impetus for our launch came from the success of two seasons of our popular TV show, Ancient Civilization, which discusses specific historical periods. We kicked things off with tours in Egypt, which quickly saw prices rise, often reaching around $10,000 per trip. Overall, it's a very profitable venture, and we aim to be discerning to ensure we meet our customers' expectations.

Ned Preston, CFO

And I think one final thought there, Mark, from an investment community perspective to summarize the marketplace offering, it’s like a conscious version of Costco in that it’s a discount membership model. But also there is a way a QVC component because we have content that speaks to the offerings as well. So that’s a quick way to summarize the focus.

Jirka Rysavy, CEO

And also, if you model it the way we project it with these trips, we take 30%, and we provide a 10% discount. So effectively only 20% hits the revenue and the operating income. The rest we treat as outside vendors. So it’s going to be a relatively high margin.

Mark Argento, Analyst

Great. Very helpful. Good luck for the rest of the year, guys. Thanks.

Jirka Rysavy, CEO

Thank you.

James Colquhoun, COO

Thank you.

Operator, Operator

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

Thierry Wuilloud, Analyst

Yes. Thank you. Good afternoon, and James, congratulations on the new position. Jirka, you explained a little bit about revenue and for the Marketplace, and I was going to ask you, but I think I kind of got it. So the $100,000 of revenue that you say, is that your share of commission on the gross sales number that Gaia Marketplace did?

Jirka Rysavy, CEO

No.

Thierry Wuilloud, Analyst

Is that how that works?

Jirka Rysavy, CEO

No. The original one where we both basically won the tour was the sale of $100,000; from that we would report revenue about $20,000.

Thierry Wuilloud, Analyst

I understand now. You haven't mentioned third-party channels in a while. Can you provide some insight on that? Are you focusing on a specific channel, or what are your thoughts? It seems that direct member acquisition is performing well, but I'd like to hear more about the third-party channels.

James Colquhoun, COO

Thierry, hi. Thank you for your congratulations pending Board approval, of course. I will speak to third-party, that reports directly into me. It has been flatter compared to our direct membership growth. However, I am seeking to be more aggressive in our expansion with third-party while keeping it in alignment with our current balance of direct to third-party revenue contribution, making sure that it doesn’t get too high. We plan to be growing third-party in particular by rolling out new territories in 2024, especially with our largest third-party distributor, which is our partner, Amazon Prime. We have a Prime video channel within the Amazon infrastructure, and we are in the process of renewing our agreement with them to expand the term for a longer period of time. I just met with one of the Amazon executives over the weekend to confirm this and where we have already plans for Q2/Q3, sorry, Q2, correct, for Australia and New Zealand, and I will be meeting with the Australian and New Zealand representative as well. So this is very much in my court, and I am seeking to expand our international expansion with third-party.

Jirka Rysavy, CEO

Yeah. With Amazon, we actually triggered initiation or we are going to renegotiate because of our planned price increases. We had to kind of give them notice in signing a new agreement with the higher price. So that was caused this negotiation to be initiated by us. And also, when you asked the question about the $100,000 in sales, it was the first 20 days; we got $100,000.

Thierry Wuilloud, Analyst

I know.

Jirka Rysavy, CEO

The tour generated approximately $100,000 in revenue from the first trip, but it took about a month and a half to sell.

Thierry Wuilloud, Analyst

Okay. Great. We have talked about ARPU and we have also talked in previous conversations about the focus on international growth. Is there a big difference in ARPU from your international members versus U.S. members?

Jirka Rysavy, CEO

No, there isn’t. We are scaling down in some parts of Latin America where we experimented with lowering prices, but that approach didn’t yield positive results for us. The prices we set in Europe are quite similar to those in the U.S., so the ARPU is largely the same for now.

Ned Preston, CFO

And Thierry…

Thierry Wuilloud, Analyst

Okay.

Ned Preston, CFO

I would add that there are three drivers for increase in ARPU next year. One, Jirka already mentioned, which is about the planned price increase circa the middle of the year. In addition to that, what we have spoken about is the Marketplace with the revenue attribution. And then the third would be an increased focus on our premium Gaia Events+ here at $2.99 a year. That’s also something that I have my sights set on for expanding in 2024. So each of those three levers will be improving ARPU throughout the next year.

Jirka Rysavy, CEO

Yeah. The increase in ARPU was always part of our mission and we now actually want to accelerate that because now we kind of get to the place where we can generate positive cash flow continuously. So the ARPU will become a much bigger focus right now. The revenue would be definitely our focus more than the number of members. As going forward, it’s going to be our focus. That’s why the ARPU and initiatives like increasing the price, GaiaSphere, premium pricing, Events+, or the Marketplace are all effectively what we say that we are going to grow members 10% and revenue 15%. You will see that we are increasing the ARPU dramatically and we want to keep doing it.

Thierry Wuilloud, Analyst

Great. Maybe a last question, Jirka, you mentioned that you will be focused on Gaia Community. Can you tell me what that means? Is it focused on the Marketplace, is it focused on Live Events, or what did you mean when you said you will focus on Gaia Community?

Jirka Rysavy, CEO

If you go to the bottom of our gaia.com, you will see what the mission is. So that’s pretty much the community I’m talking about. We kind of look at launching it. We already built something about a year ago. By that time, we decided the way I was designing it. The Community is right now too much split between the different events in the world. So it’s not time to launch it. We restructured it a little bit. So we have now two-thirds of our people with us for more than a year and one-third for over three years, and that’s increasing; the three-year number is obviously increasing every month as a percentage. We know a lot of people are watching what they are interested in, and one of the things you hear is they would like to find people like them watching Gaia in the community. So that’s what it’s going to be focused on. We are going to use all our venues, as you mentioned, as a part of that.

Thierry Wuilloud, Analyst

Yeah.

Jirka Rysavy, CEO

I think that will be the final differentiation for us. If you look at other SVODs, we will become, in three years, we have something that nobody else in SVOD has, this really exploring niche business, and we want to keep it that way. The community will be based on that.

Ned Preston, CFO

And Thierry, if I had to say one part of that that Jirka is alluding to among many things would be some form of a decentralized town hall in a way where members can get together on forums, and like Jirka mentioned, organized watch parties and meetups.

Thierry Wuilloud, Analyst

That sounds very interesting. Great. Okay. That’s it for me. Thanks, guys.

Jirka Rysavy, CEO

Well, thank you, everyone, for joining. We look forward to speaking with you when we report our fourth-quarter results in March. Thank you very much.

Operator, Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.