Earnings Call Transcript - GAIA Q2 2023

Operator, Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaia's financial results for the second quarter ended June 30, 2023. Joining us today are Gaia's CEO, Jirka Rysavy, and CFO, Ned Preston. 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.

Jirka Rysavy, CEO

Good afternoon, everyone, and I'm glad that we can report positive results. Revenue for the second quarter increased again sequentially to $19.8 million from $19.6 million, but it's still down from the last quarter of $20.7 million due to post-COVID subscriber contraction experienced industry-wide during 2022. Member count increased during the quarter by 8,000 to 774,500; this is virtually all the growth coming from our direct subscribers. Our ARPU, which is showing steady growth, increased from $7.95 in 2019 to $8.46 in 2020, to $8.60 in 2021, and $8.75 in 2022. It now shall be further supplemented by the launches of Gaia Marketplace, which is now rolling out to a select group of our members. Total operating expenses in the quarter were about $950,000 higher than in the year-ago quarter, still including the contracts and related expenses incurred as a result of our 20% staff reduction that was completed during the first quarter. We still reported a GAAP loss, but the company has returned to net cash generation. The cash balance on June 30 was $10.9 million, and I will let Ned now speak more about our results.

Ned Preston, CFO

Thank you, Jirka. Revenues for the second quarter were $19.8 million, a slight sequential increase for the second consecutive quarter, continuing the return to growth in our member base during the first half of 2023. Compared to the year-ago quarter, revenues declined by 4% due primarily to the hard comparison against Q2 2022, which benefited from the COVID-related subscriber growth experienced in 2020 and 2021. 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 85.7% during the second quarter of 2023, and we expect them to remain at this level in 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 $8.2 million or 41% of revenues compared to $7.2 million in the year-ago quarter. In the quarter, we benefited from our efforts to optimize customer acquisition costs over the past several quarters, with per-customer acquisition costs down by 9% sequentially. In the second quarter, we experienced growth in our direct member base, which is a continuation from the first quarter. Additionally, we witnessed a return to growth among our largest third-party partners, which is a reversal of the contraction we experienced in the first quarter. The growth in both our direct member base and third-party member bases during the quarter is building our confidence that we are through the worst of the post-COVID member unwinding. Selling and operating expenses, including marketing and member acquisition costs in the second quarter, were $8.9 million or 45% of revenues, which is up slightly from the prior year period. This increase reflects the end of contracts and related expenses incurred as a result of the company's cost improvements that were completed during the first quarter. Corporate G&A and corporate expenses in the second quarter were $1.5 million or 8% of revenues, down by 15% from the prior year period. We expect to realize most of the benefits of the cost reductions undertaken in the first quarter in the second half of 2023 and anticipate the cost improvements will support the financial state of the business going forward. During the second quarter of 2023, we recorded a net loss of $1.7 million or negative $0.08 per share compared to the net income of $0.1 million in the year-ago period. The decline was primarily driven by the reductions in revenues between periods. Adjusted EBITDA was $3.1 million or 16% of revenues in the quarter, and we generated free cash flow. Our deferred revenues for the second quarter were $15.5 million, an increase of $1.4 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 in excess of the cash flows we reinvest back into our content library and production 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 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 several quarters on numerous key areas of improvement for the business. With continued disciplined execution and the launch of Gaia Marketplace, we are well positioned to continue growing revenues and remain cash flow positive going forward. With that, I will hand it back to Jirka for some closing remarks.

Jirka Rysavy, CEO

Well, this is the end of our staggering action now being gone. Our annualized gross profit per employee recently reached an all-time high of over $610,000. With the member growth in July running above the pace for the second quarter plus Gaia Marketplace beginning to be rolled out to improve our ARPU and revenue, we can look for a stronger second half of the year. And with that, that concludes our remarks, and I would like to open it for the questions. Please, Maria.

Operator, Operator

Our first question comes from Mark Argento with Lake Street.

Mark Argento, Analyst

I just wanted to drill down a little bit on the customer acquisition, subscriber acquisition cost. Are you seeing the cost to acquire in terms of going out buying keywords or other types of online ad spend? What trends are you seeing there? And do you think it's sustainable to be able to kind of cost-effectively acquire at this point?

Jirka Rysavy, CEO

Generally, we'll see right now the cost of acquisition has definitely improved from the last year when the overall environment was much more negative still as opposed to COVID. So this year, we target generally about 39% to 41% of revenue depending on efficiencies. We were on the higher end of it because the efficiencies started to be good. I hope that this will kind of continue as it is. Second, with COVID gone, seasonality came back, and the second quarter was historically our slowest quarter. So we were pleased to start with the results. And I think as we are focusing on some new initiatives, we talk about them a little bit for focusing on the members with higher retention rather than just low cost, which is definitely helping overall growth due to the improved retention. Does that answer your question?

Mark Argento, Analyst

Yes, it sounds like the environment is hopefully improving. Just to switch topics quickly, it's great to see that you are cash flow positive this quarter. In your prepared remarks, did you mention that you expect to maintain positive cash flow going forward? Is that what I understood?

Ned Preston, CFO

Yes. Mark, it's Ned. Thanks for the question. That is correct. So Q2 was a big transition quarter for us in moving to that positive cash, and we do anticipate forecasting that continuing for the second half.

Jirka Rysavy, CEO

Yes. The improvement in the quarter between the first quarter was about $1.3 million in a positive direction. So we kind of hope that with all the staff reduction being gone, that obviously will improve.

Mark Argento, Analyst

It's good to hear. Just last one for me. In terms of the Marketplace, could you just refresh us on what should we look for there in terms of a rollout? Or how does that stage out over the next quarter or two?

Jirka Rysavy, CEO

Yes. So we are currently rolling it out to a small group of people. We are targeting about 10,000 to 20,000 active members and seeing their response. We kind of know how to market because there are several ways to display it mostly on a screen to those people we can target. As we're looking for experiences rather than products, our first product ties to our Ancient Civilizations series. We also have a conference related to the civilization. So we are going to market a tool for Egypt, which is probably about the $8,000 to $10,000 range. We're going to keep about 30% of that; that will be booked as a margin. We won't book the whole price, only the 30% we keep. However, our members will get a 10% discount that comes from our side. So that's roughly how it goes. We're going to slowly increase the number of people, and then we see it's running smoothly. We had other ideas for potential products, so it's something that I think as we approach the end of the year, it should really meaningfully improve our ARPU and hopefully also the revenue.

Operator, Operator

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

Thierry Wuilloud, Analyst

Mark covered quite a few questions there. But I was curious, you had some good momentum you told that on the foreign language subscribers earlier this year. Is that continuing? Can you give us some color there?

Jirka Rysavy, CEO

Yes. That's kind of started already like a couple of quarters and it's increasing. We invested in languages over the last 2 years as we were dealing with COVID. We didn't have, as this was a more challenging marketing environment, and we didn't want to fight it. We reserved the cash last year, so we did spend it on getting ready for a language offering, especially in French and German. Spanish was existing before. So obviously, those are the languages we are focusing on. Anytime you go to a new language, especially in some European countries, we're kind of ahead of the curve. There is not a really strong offering in those languages. So so far, we see both acquisition cost and retention being better than in the U.S. So we're probably spending more as a percentage of revenue in those countries than we spend in the U.S. right now. Our international membership currently is about 35% overall because our direct. Our third parties like almost on YouTube, Comcast, they're all in English. So if I take our percentage of our direct, it's probably in the high 40s. If you look at Netflix, they're about 2/3 international. I expect over the next few years, our international percentage will grow, providing the trend we feel right now sustains.

Thierry Wuilloud, Analyst

Great. Regarding all your subscribers, do you have any insights on whether there is increased consumption of your content or noticeable differences in behavior following the COVID situation?

Jirka Rysavy, CEO

Well, I mean, during COVID, especially when we're talking from mid-2021 to mid-2022, which is still compared to, we have more viewing and more subscribers there. But after the post-COVID wave when those subscribers, like everywhere, left, we kind of saw a decrease post-COVID. But I have to say that starting this year, in the first quarter, which is kind of going back to when people start to have free time, last year, I mean they could travel like they can now. We actually see increases this year. Again, we used to see it before COVID; COVID went quite high. Obviously, it came down, but now we see increases in viewing again.

Thierry Wuilloud, Analyst

Okay. Do you have any updates on the events scheduled for the rest of the year? Can you provide us with some information?

Jirka Rysavy, CEO

In about two weeks, we will have one of our main conferences, called Ancient Civilization, featuring around 10 or 11 speakers. This key event is scheduled for either the 12th or 13th of August, with another conference planned a few weeks later. You will notice our ongoing promotion for these events, and we are likely to ramp up our efforts, especially after experiencing some disruptions due to COVID. We have been refocusing our attention on this since the start of the year, and I believe the latter half of the year will concentrate on it. With the launch of Gaia Marketplace, we also have improved opportunities for promotion.

Operator, Operator

Our next question comes from Mark Argento with Lake Street.

Mark Argento, Analyst

Just a quick follow-up. So just going everything down, maybe just an update on that $5,000 to $10,000 fee kind of strategy for the company here. Now that we think you're able to cost-effectively acquire subscribers again, are you going to lean into growth a little more aggressively? Maybe just a little higher level, Jirka, how do you see the world right now and kind of where you guys are after the high and low given the COVID and then a post-COVID overhang? It seems like maybe we're kind of normalizing at all. Considering the environment we're in and what you're seeing, what's the higher-level strategy at this point?

Jirka Rysavy, CEO

Well, this is like from the B and C levels, I actually could see, from my point, that because now we have a new team with a couple of new additions, it's kind of started to click, and it's a really good chemistry-wise team. So I'm very pleased with that. With the growth and increasing ARPU, I feel pretty good about where we're heading. Expect the company to accelerate and produce, say, with positive cash flow. The question of cash flow versus growth, we really want to start to increase the growth while staying positive cash flow. We want to stay in positive cash flow and generate more dollars to reinvest back into growth, but we do not want to go negative on free cash flow. I think that's where it is; it's straightforward right now: grow as fast as we can without going negative in the cash flow. The cost per employee, which is the gross profit for employee, which is $610,000, is quite high. As long as we can keep it at these levels, cash flow and profitability will likely follow. But we want to focus on growth as quickly as possible while staying cash flow positive.

Ned Preston, CFO

Yes. And Mark, if I could, this is Ned. I'll just elaborate a little bit as the person that's just been here for a month. It's a big reason why I came to Gaia. It's just that leverage. I'm very impressed with the company that runs with around 110-120 full-time employees driving over $80 million of revenue. The efficiencies that I've seen and the ability to pull the levers when needed around increased marketing spend for the right reasons is impressive. So, as I said in my commentary earlier, the continued execution against the existing plan is very much what I look forward to here, but we just really look forward to the upside leverage of that model.

Jirka Rysavy, CEO

Also to mention, as Ned talked about leverage, our gross margin decreased by 90 basis points. This was primarily due to our ongoing growth and the introduction of new content. With the revenue slowdown last year, the ratio compared to revenue changed. However, when we examine what we refer to as cash contribution, which represents cash margin and indicates the cost of acquiring a new customer, that figure actually increased from 93% to 94% of revenue. Therefore, from a cash perspective, our margins are expanding as we discuss free cash flow.

Operator, Operator

There are no further questions at this time. I would now like to turn the floor back over to Jirka Rysavy for closing comments.

Jirka Rysavy, CEO

Well, thank you, everyone, for joining, and we look forward to speaking with you when we report our third quarter, which should be in early November. Thank you very much.

Operator, Operator

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.