Earnings Call Transcript - GAIA Q3 2024

Operator, Operator

Good afternoon. Welcome to Gaia's Third Quarter 2024 Earnings Conference. At this time, all participants are in 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 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 the 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, November 4, 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 Executive Chairman, Jirka Rysavy. Thank you, and over to you.

Jirka Rysavy, Executive Chairman

Good afternoon, everyone. During the third quarter, which is seasonally slow, we grew our revenue at a similar rate as the first part of the year at 10%. Gross profit increased 11%, with gross margin improving to 86% from 85.2% at the year-ago quarter. Member count grew during the same period by 7%. The third quarter was our sixth consecutive quarter of positive operating and free cash flow, which improved about $1.5 million during the quarter this year. Over the last few months, we raised, for the first time in our history, our subscription prices for all members by at least $2. While the initial losses from the price increase kept our member count for the quarter flat, we expect the price increase will push our revenue up from the current $22.2 million this quarter to almost $24 million during the fourth quarter. And James will now speak more about other advances in the business.

James Colquhoun, CEO

Hello, everyone, and thank you, Jirka. As mentioned, for the first time in Gaia's history, we began the implementation of a price adjustment for our legacy members, as we have typically grandfathered members on legacy or old pricing. Following a successful pilot in the UK in Q3, we expanded this initiative to include our third-party platforms at the end of this quarter. While the decision temporarily impacted our member count, it is set to create a strong uplift in revenue. We are optimistic that members will return to growth in Q4, and we will close out the year with over 850,000 subscribers. At the start of Q4, we began price increases for our direct members on legacy pricing, and early data suggests that this is already surpassing our expectations. This is a very encouraging indicator for revenue growth momentum as we move into 2025. Looking ahead to Q4, we expect our first full quarter of revenue contributions from Gaia Marketplace. As Marketplace scales alongside our new pricing strategy, we anticipate gross margins to rise above 86%, which would be a powerful improvement in our financial profile. Additionally, our marketing team's continued focus on attracting more annual members has resulted in a substantial improvement in retention over the past 12 months. This stabilized long-term member base sets us up for an even stronger strategic positioning as we roll out the new pricing for legacy members. Q3 also highlighted the impact of our live events and premium membership tier. We hosted two Gaia Sphere events, including our largest-ever ancient civilization conference and our sold-out Gene Keys event. We're thrilled to see even more enthusiasm in Q4 with the recent sold-out Channeling event. Coming up this weekend, we will have our first-ever HEAL conference. Finally, we're excited to announce our partnership with ElevenLabs as Gaia's official provider for AI-powered dubbing and translation services. This collaboration will allow us to streamline and accelerate the process of adapting our content for a global audience. By leveraging ElevenLabs' advanced technology, we'll be able to reach new viewers more efficiently in their native languages, enhancing the accessibility of Gaia's offerings. Looking forward to the end of the year and beyond, our focus remains on executing the price increases for existing members, broadening the reach of our Marketplace initiative, growing our premium membership tier, and driving improvements in annualized ARPU. Our CFO, Ned Preston, will now provide deeper insights into our financial performance.

Ned Preston, CFO

Thank you, James. Turning now to our financial results for the third quarter ending September 30, 2024. Revenues for the third quarter grew $2 million, or 10%, to $22.2 million, up from $20.2 million in the year-ago quarter. This also marked our fifth sequential period of year-over-year top-line growth. Member count increased on a year-over-year standpoint to $846,000 as of September 30, 2024, up from 790,500 or 7% from September 30, 2023. Gross profit in the third quarter increased 11% to $19.1 million, up from $17.2 million in the year-ago quarter. Net loss was negative $1.2 million, or negative $0.05 per share, compared to the year-ago quarter at negative $8 million, or negative $0.04 per share, driven primarily by the absence of the employee retention tax credit recognized in the third quarter of 2023. Adjusting for the $1.8 million ERTC recognized in Q3 of last year, the quarterly net loss improved by $1.4 million. Free cash flow for the third quarter was $100,000, representing the sixth consecutive quarter of positive cash flow. In the last nine months, both revenue and member growth were stable near 10%, with an improvement in free cash flow of $1.6 million on top of the $8.4 million improvement delivered during 2023. As of September 30, 2024, our cash balance was $4.4 million with an unused $10 million line of credit. That concludes my summary. I'd like to now turn the call back over to Jirka for his closing comments.

Jirka Rysavy, Executive Chairman

Yes. So, for the summary, we expect an increasing annual revenue growth rate, continuing growth of ARPU, which will be supplemented by the price increases as well. We obviously want to continue increasing gross profit per employee and continue generating positive free cash flow. This concludes our remarks. I would like to open the call for questions. Operator, please.

Operator, Operator

The first question comes from Mark Argento with Lake Street. Please go ahead.

Mark Argento, Analyst

Hi guys, good afternoon. Just wondering if we could dig down a little bit on when you took the price increase, kind of what did you see at the subscriber base? Did you get some initial churn and then it moderated? Or maybe you could just talk to kind of what the experience was there.

James Colquhoun, CEO

Mark, it's James here. So, with regards to the price increase, there are two elements to this. First of all, the price increase for new members as we increase it for acquisitions. And then, second of all, which I think is the meat of your question there in terms of impact on existing members. First and foremost, when we increase it for new members, we do see acquisition costs increase for a period of time, and then they settle down so that we're making the delta from the price increase, which we have seen happen, especially as we head into Q4. With regards to the churn event on the existing cohort. So, within Q3, we did a test cohort in the United Kingdom. In that region, we increased by over 30% due to some adjustments for currency fluctuations. We were very surprised by the results there. We made a significant margin on the delta of that price increase. This encouraged us to roll it out to third parties, which we did to our third-party platforms at the end of Q3. This had a slightly higher churn rate than direct. I would say, partially because we don't have a close connection with third parties in comparison to direct, which makes up a vast majority of our members. We've started in Q4 price increases for our legacy member base. We're a month into those notifications, and we're seeing results similar to those in the United Kingdom. We're very impressed and we're in a good spot to see our growth rate accelerate in Q4 and beyond.

Mark Argento, Analyst

That's helpful. When do you expect to have most of the subscriber base transitioned to the new price increase? Is that expected in the second quarter of next year? Clearly, there are still many annual subscribers that need to be addressed. What is the current percentage of the base, and where do you anticipate it will be in the next couple of quarters?

James Colquhoun, CEO

Sure. We should have around 60% of our member base fully migrated over to the new pricing before the end of the year. The remaining 30% to 40% will happen because of the annual membership percentage in our legacy cohort. So this will be fully accounted for a year from now, but the majority of the price increase will happen in this Q4, and so we will see the majority of that impact for the full year of 2025.

Jirka Rysavy, Executive Chairman

Yes, Mark. So basically, as James says, most of it is happening now because all the monthly members, and we have about half of the members who are annuals. So then the remaining 40% will be pretty much equally spread over the next three quarters.

Mark Argento, Analyst

That's helpful. And James, you mentioned Marketplace kind of launching or relaunching in Q4. It looks like you've got a busy calendar for some live events. What's your expectations for Marketplace and Gaia+, as you roll into Q4 but also next year? How aggressive are you going to be in terms of marketing to your fairly large 800,000-plus subscriber base?

James Colquhoun, CEO

Sure. With regards to Marketplace, we officially launched it in August. So, in Q3, we had a partial contribution there. For Q4, it will be our first full quarter of contribution. We don't typically share independent data based on these business units. What I will say, though, is that Marketplace will become P&L positive in terms of revenue per quarter and cost of headcount per quarter around the middle of next year. From that point onwards, we'll be scaling it out. With regards to Gaia+, the premium membership tier, we're seeing that it's outpacing our total membership growth at about three to four times. So, we're growing that at a faster rate in comparison to the total member count. This, along with the price increases, is really pivoting the organization, I would say, strategically to focus more on ARPU as well as total subscriber growth, but that ARPU and revenue growth is a key focus for Ned, myself, and Jirka.

Operator, Operator

The next question is from James Sidoti with Sidoti & Company. Please go ahead.

James Sidoti, Analyst

Hi, good afternoon. Thank you for taking the questions. I heard you mention two events this quarter. Will there be more Marketplace or more Gaia+ events in the fourth quarter?

James Colquhoun, CEO

Jim, it's James here. So, these two events will be our last events of the year, and we will kick off again next year with new events. This year, we'll have one of the most events that we've ever run in a single year. We're seeing great attendance. Like I mentioned to Mark, we're seeing the premium tier growing at a great rate, especially from member upgrades, which is a good sign for us. So yes, just one more event to go, and we had a sold-out event just recently.

James Sidoti, Analyst

And the price increases, do they impact the Gaia+ membership, or were they for the standard Gaia memberships alone?

James Colquhoun, CEO

Currently, it's just for the standard Gaia memberships alone. We have been leaning into the Gaia+ premium tier in terms of content production, as I mentioned, with the most events this year. As we look to 2025 and beyond, we will be revisiting the price point for the premium tier once we build out the on-demand library for those members.

James Sidoti, Analyst

And can you talk a little bit about what your expectations are for Marketplace? When do you expect it to be profitable by the second half of 2025? But when do you think it will really kick in and be a significant contributor to revenue?

Jirka Rysavy, Executive Chairman

This is Jirka. Marketplace is the first step of community. We want to introduce the community fully in the first quarter of 2026. We want to have marketing because it takes some programming to get it incorporated into our system with all the experiences, which is new. The goal is to make it profitable in the middle of this year. Next year, when we launch, the full community will be a full contributor to the community, and of course, also to the revenue of Gaia.

James Colquhoun, CEO

Okay. And that community launch would include the Igniton launch as well, I'm assuming?

Jirka Rysavy, Executive Chairman

Hopefully, the Igniton launch would be before that, somewhere later in the year, this year.

Ned Preston, CFO

Yes. Just to clarify. Jim, it's Ned. I just want to make sure that's clear around the timing of Igniton. That will be the middle of 2025. So we're probably shooting for June 2025.

James Sidoti, Analyst

Okay. And your free cash flow positive again, do you think this trend continues? Do you think that you'll need to go out and raise any capital in the near term? Or do you think you'll be able to sustain your growth with the existing capital you're generating from the businesses now?

Ned Preston, CFO

Yes. So Jim. This is Ned, and James can weigh in. I'm going to separate that into Gaia. I believe you're talking specifically about Gaia. So no immediate need to go out and raise cash at this time. With that being said, similar to what we did almost exactly 12 months ago, we always look for opportunities, but no immediate plans to do so.

James Colquhoun, CEO

Yes. We're planning to refile our S3, which expires this year, as we always do, but we don't have any immediate plans to do anything.

Operator, Operator

The next question comes from Thierry Wuilloud with Water Tower Research. Please go ahead.

Thierry Wuilloud, Analyst

Good afternoon. I have a question about the mechanics of the price increase. Could you explain how you communicated this to your members? Do they need to take any action, or if they do nothing, will it just not affect them? I'm interested in how you implemented this.

James Colquhoun, CEO

Thierry, it's James here. So around the world, different countries have different legislation when it comes to increasing prices. A vast majority of the world operates under non-consent, whereby you send an email notification to the member 30 days before the price increase. It increases unless they go and actively unsubscribe. There are very few territories that operate under consent mode, where the members need to actively approve the price increase. At this stage, for the increase, we're focusing on non-consent countries and will be adding the consent countries as we move into 2025. It's just a larger development lift for our engineering team. So far, we have been sending out notifications and comparing it to our test project in the United Kingdom, and the results are very encouraging. It gives us a sense that we have pricing flexibility in the market given the aggregate of niches that we serve. We're excited about its impact on revenue so that we can continue to expand the brand and reach more members as we grow.

Thierry Wuilloud, Analyst

Okay. And then maybe just a question on Events+. How do you translate that into the live event? How do you translate that into maybe an increase in Gaia+ membership or just an increase in overall new members? How do you integrate the event with your marketing program?

James Colquhoun, CEO

So Thierry, we typically use live events as a promotional opportunity for Gaia. Not only does it accentuate the community element of our mission by bringing people together at our GaiaSphere Event Center here in Colorado, but it also adds a tangibility to the experience of Gaia. This often encourages many members to upgrade and also new people to the brand to experience Gaia and then consider joining. With the accelerated events we've run this year, we're growing Gaia+ premium membership at an increasing rate, and it's healthy for the long-term economics of the business.

Thierry Wuilloud, Analyst

Right. Do you have any number you can share in terms of how many attendees online, or just any color around that?

James Colquhoun, CEO

With regards to the membership base, as I mentioned to Mark, we are growing that at three to four times the rate of our overall member growth. So that's a really encouraging sign. In terms of the live stream attendees, we open specific events wider for promotional activities like we did in March of this year with the Emersion conference. We had over 52,000 unique live stream attendees. We likely won't be offering the same level of open experience until Emersion again next year. I can report more once we've completed that event, which we're already selling tickets for.

Operator, Operator

I hear no questions. I would like to thank you for joining, and we look forward to speaking with you when we report our fourth-quarter results in March. Thank you. Thank you for joining us today for Gaia's Third Quarter 2024 Earnings Conference Call. You may now disconnect.