U.S. Markets closed

Edited Transcript of GAIA earnings conference call or presentation 29-Apr-19 8:30pm GMT

Q1 2019 Gaia Inc Earnings Call

LOUISVILLE Apr 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Gaia Inc earnings conference call or presentation Monday, April 29, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jirka Rysavy

Gaia, Inc. - Founder, Chairman & CEO

* Paul C. Tarell

Gaia, Inc. - CFO & Secretary

================================================================================

Conference Call Participants

================================================================================

* Darren Paul Aftahi

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Douglas Coburn

* Eric Christian Wold

B. Riley FBR, Inc., Research Division - Senior Equity Analyst

* Mark Nicholas Argento

Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst

* Cody Slach

Liolios Group, Inc. - Director of IR

================================================================================

Presentation

--------------------------------------------------------------------------------

Cody Slach, Liolios Group, Inc. - Director of IR [1]

--------------------------------------------------------------------------------

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaia, Inc.'s financial results for the first quarter ended March 31, 2019. Joining us today are Gaia CEO, Jirka Rysavy; and CFO, Paul Tarell. 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, general business conditions, historical losses, competition, changing consumer preferences, subscriber costs and retention rates, acquisitions 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, Gaia, Inc. - Founder, Chairman & CEO [2]

--------------------------------------------------------------------------------

Thank you, James, and good afternoon, everyone. Our revenue for first quarter increased 36% to $12.5 million from $9.1 million in the year ago quarter. Revenue before the effect of discontinuation of DVD operations increased to $12.9 million from $9.6 million. Gross margin increased to 87.2% from 87.1% in the year ago.

We finished the first quarter with 562,000 subscribers, which is a 34% increase from 418,200, which we had a year ago. We increased the targeted minimum ratio of between the subscribers' lifetime value and the cost to acquire subscriber from 2:1, which we targeted for the last 2 years to 3:1.

During the first quarter, our acquisition cost decreased to $80 per customer. And as a percentage of revenue, cost of acquisition declined to 68% from 109% in the year ago quarter. We are now focused on increasing our LTV-CPA ratio target to 3.5:1 by end of September and transitioning to positive EBITDA by the same time, maintaining revenue growth rate about 30% going forward with a steady gross margin.

In January, we increased our monthly subscription price for new members by 20% to $11.99 while grandfathering our existing members until their first renewal in 2020. Our renewal subscription price remain at $99.

Last week, we commenced marketing our new lifetime annual membership at $299 with the announcement of initial speaker lineup. The first live event will take place in June and second in August. This annual membership also includes our existing online offering.

And Paul will now speak to you more about the results. So Paul, please.

--------------------------------------------------------------------------------

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [3]

--------------------------------------------------------------------------------

Thanks, Jirka. As Jirka mentioned, we discontinued our legacy DVD business in the first quarter, and as such, the results discussed today and going forward are entirely from streaming. Our final month of operations for the DVD club is April, with the new owners taking control effective May 1. The earnings release that will be filed today provides the updated subscriber count and revenues on a historical basis reflecting the discontinuation.

Revenues in the first quarter increased 36% to $12.5 million compared to the year ago quarter due to subscriber growth over the same period of approximately 34%. We ended the quarter with 562,000 paying subscribers, which reflects the discontinuation of the DVD club as well as the exclusion of subscribers for whom we were unable to successfully charge on our last renewal due to their credit cards becoming invalid, which, as mentioned on our last call with our new billing system we implemented in the first quarter, we have refined the classification of active subscribers to exclude subscribers that are at a payment decline status. As previously noted, this was a onetime adjustment.

Gross profit in the first quarter increased to $10.9 million from $8 million in the year ago quarter, while gross margin increased 10 basis points to 87.2% from 87.1%. We expect to maintain gross margins at this level through 2019 as revenue growth and content amortization increases should offset throughout the year.

Operating expenses, excluding marketing and subscriber acquisition costs, were $7.2 million compared to $4.6 million in the year ago quarter, with roughly $1 million of the increase attributable to increased depreciation, amortization and stock-based compensation. The remaining increase is driven by increased payroll and overhead from our employee base growth.

Our gross profit per employee ticked up slightly to $313,000 for Q1 2019 compared to $311,000 for Q4 2018 and $242,000 for Q1 2018. The historical numbers have been adjusted to reflect the discontinued operations' impact on gross profit in the prior periods.

Total subscriber acquisition costs were $8.5 million or 68% of revenues. This is down significantly from 109% in the first quarter of 2018 and 120% in the fourth quarter. For the first quarter of 2019, the spend included $750,000 that we spent on marketing with our distribution sponsors, which we do not include in our CPA calculations as we do not receive gross subscriber counts from our partners. We have continued our focus on adding higher lifetime value subscribers, which represented over 80% of subscriber additions for the third quarter in a row. While the first quarter has historically been a period of strong Yoga growth, we maintained our spend discipline and did not increase our per-subscriber targets for acquisition costs for Yoga campaigns.

As Jirka mentioned, we increased our target LTV-to-CPA ratio in early December to 3:1 from 2:1, and the impact of this has brought our overall CPA average down to $80 compared to $91 in the fourth quarter of 2018. As Jirka mentioned, we are also now focused on further improving this ratio to 3.5:1 by the end of September.

As of March 31, we had $22.3 million in cash, with $12.5 million drawn down on our existing line of credit. We closed on refinancing of our campus on April 26, resulting in replacing the existing line, which was set to expire in 2020, with a new $17 million term loan that now matures in 2022 with 2 1-year extension options and no prepayment penalty after April 2021. The new loan is interest only for the duration with interest expense, including amortization of the financing costs of approximately $350,000 per quarter.

As Jirka mentioned in his remarks, our focus for 2019 is on continuing to increase our target LTV-CPA ratio to 3.5:1 and transitioning to positive EBITDA by the end of September 2019 while continuing to grow average gross profit per employee and maintaining revenue growth around 30%.

With that, I'd like to open up the call for questions. James?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll take our first question today from Mark Argento with Lake Street Capital Markets.

--------------------------------------------------------------------------------

Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [2]

--------------------------------------------------------------------------------

A couple of quick ones. Can you talk a little bit about the acquisition channel? Where you guys are acquiring subs from currently, if that's changed at all and given more of the focus on organic subscriber acquisition growth or acquisition using your own cash flow? And then just quickly on the live events, what are your thoughts on how big that business could get more events kind of frequency? Talk about that a little bit would be helpful.

--------------------------------------------------------------------------------

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [3]

--------------------------------------------------------------------------------

Sure. I'll take the first one, this is Paul, on the acquisition side of things. So as we've pulled back on our paid media spend, it's allowed us to optimize some of the lower-volume channels. So we've shifted more meaningfully to YouTube and some of the other channels that have been coming online, Pinterest and the like there, while we've been building out the organic side of things. We've talked historically about the ambassador and member referral programs, and those have been building nicely. We have a second version of our member referral program getting ready to launch here in about a week from a product delivery perspective. So I expect that to continue to shift in that direction as we go through 2019. But we've -- really, Q1 was about optimizing paid media on the existing channels while also driving the growth that we were looking for in Q1.

--------------------------------------------------------------------------------

Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [4]

--------------------------------------------------------------------------------

So on the second part, we have -- first event, basically, June last month, so Q2, we expect to have 2 of them in the third quarter. And so we expect basically this, like if you kind of look at it separately as a business, to kind of get breakeven in the fourth quarter and grow from there. There's a lot of reason why we're launching. It's not just to drive the revenue or ARPU, but there's a way to tie our talent to us more closely because they can make -- because the event is done kind of on split with the speakers, so there's opportunity to make quite more than they make in our means -- other means. And also, before they can -- before we do a live event, they would produce like a whole new season of the episodes for Gaia. So we will see how it goes over the next 6 months to really kind of try to size it. For right now, we don't have much in the plan -- in our kind of budgets to do because we kind of see where it's going. But it's more -- a lot of -- we'll be doing some events for our community, which we will start to talk next year. So it's real multifaceted event, like a feature for us. So I don't want to really kind of even guess how much it can go until we have some traction.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Next, we'll hear from Darren Aftahi with Roth Capital Partners.

--------------------------------------------------------------------------------

Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

--------------------------------------------------------------------------------

Just a couple, if I may. First on the CAC, can you talk about the mix of sort of paid versus organic? Secondly, with the paid spend, like how much of that was targeted towards your kind of higher LTV? I know you gave 80% as the active subscriber number. And then, Paul, maybe for you, on the cash burn, which looks like $7.6 million, how much of that was from operation? And was there anything sort of onetime in there that maybe obscures that number?

--------------------------------------------------------------------------------

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [7]

--------------------------------------------------------------------------------

Okay. I'm going to take those in reverse order. The cash from operations in Q1 of 2018 was $2.9 million used, and in 2019, it was $2.7 million used. And then in terms of...

--------------------------------------------------------------------------------

Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [8]

--------------------------------------------------------------------------------

We are obviously finishing our events space, so there was a burn in -- built into that for the building.

--------------------------------------------------------------------------------

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [9]

--------------------------------------------------------------------------------

Yes. So then in terms of focusing the spend on the higher lifetime value segments, the majority of the paid media dollars that we're spending are actually focusing on those segments of our business, the lower lifetime value segment, if you will, the Yoga practice people. We allow those to just primarily build the organic channels. We don't put much paid money behind them. But in Q1, you obviously get some uptick there. And then you rattled those off kind of quick, so can you repeat your first question just so I don't miss it?

--------------------------------------------------------------------------------

Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10]

--------------------------------------------------------------------------------

Yes. The -- so the first question was just -- I think you asked that, the spend. I just actually had a follow-up on that, when I think of it, based on what Jirka said. So the CapEx buildup in the first quarter, like how big was that?

--------------------------------------------------------------------------------

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [11]

--------------------------------------------------------------------------------

So the -- all in, including the media library, it was $4.9 million.

--------------------------------------------------------------------------------

Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12]

--------------------------------------------------------------------------------

Okay. Got it. And then specifically for the live event center?

--------------------------------------------------------------------------------

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [13]

--------------------------------------------------------------------------------

I don't have that number off the top of my head. I'll have to get that for you. But if you look at last year's same line, cash use was about $4.1 million. So comparatively, you could say that there's incremental difference there as attributed to the build-out of the live events space.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

We'll now hear from Eric Wold with B. Riley.

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [15]

--------------------------------------------------------------------------------

A few questions. I guess follow-up on the live events plan. I guess, one, you talked about expecting to see breakeven on a standalone kind of business in Q4. Is that just assuming the tickets sold for the events themselves? Or is that assuming also a ramp in kind of the premium subs paying the $299 that you're going to get access to that streaming? And then what is the planned capacity in terms of live event attendees in your new building kind of for each event?

--------------------------------------------------------------------------------

Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [16]

--------------------------------------------------------------------------------

So when you look at breakeven for us, we would take the seats minus if you do any commissions on that, obviously, plus the difference if existing subscriber upgrade their subscriptions. So we kind of look at the difference what they pay currently to what they would pay later, so that delta minus any obviously cost, what we have from running the event. The capacity -- the event space is -- is the fire code is 350 people. We probably would -- depends how comfortable and what -- who is there. We probably would run about 250 seats. That's our plan. We can do 250, 280. But for right now, we probably do first event at 250 to make sure people are comfortable, and we will decide based on that, but 350 is the fire code.

--------------------------------------------------------------------------------

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [17]

--------------------------------------------------------------------------------

Okay. And then 2 follow-up ones. Paul, I guess, one, the 562,000 paid subscribers at year -- sorry, at quarter end under the new payment classification, what would have been under the old system, i.e., kind of how many were lost in that onetime adjustment? And then last question, back in Q4, you spent $3 million kind of with partner matching. I guess have you seen any benefit so far in Q1 and Q2 from that spend? And then it seemed like you indicated you spent another $750,000 under that same program in Q1. Should we assume kind of an ongoing spend of that kind of $3 million-ish run rate going forward?

--------------------------------------------------------------------------------

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [18]

--------------------------------------------------------------------------------

Yes. So in terms of the onetime adjustment, it's in the neighborhood of about 20,000 subs that would have been counted under our historical method and are no longer counted. And then in terms of your second question, in terms of the impact of that spend, we really started spending that money in November, December of last year. So we did see some uptick, but what we've learned in working more closely with our partners is that it's actually beneficial to drip some money in on a regular basis with them. So a portion of our spend that we're targeting for this year will be allocated to those partners. A lot of it's dependent on inventory availability and pricing because we're running it through roughly the same matrix as we run ours -- direct spend decision-making, obviously, adjusted for the revenue split. So Q4 was about learning around that. And then Q1, we actually deployed that learning and kept the spend up. But I would say on a quarter-to-quarter basis, it should be roughly in that level, unless there's either, a, a new partner launching; or b, there's an inventory opportunity or a content launch opportunity that we might want to take advantage of.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

We'll now hear from Douglas Coburn with Ventuari Capital.

--------------------------------------------------------------------------------

Douglas Coburn, [20]

--------------------------------------------------------------------------------

I was just hoping if you could provide an update on your expectations for long-term growth. You mentioned the 7 million subscribers as a potential target in the past. Just wondering how you feel about that number now. And where do you see the growth coming from in the future?

--------------------------------------------------------------------------------

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [21]

--------------------------------------------------------------------------------

Well, I think as we've indicated on last call and then reemphasized on this call, we're really focusing on that 30% revenue growth rate number. In terms of the size of the market and the total potential addressable market that we could capture, there's been no meaningful changes in that. If anything, there's expansion as some of our topics become more and more mainstream. It's just it's going to take us longer to get there at 30% growth versus the higher growth rates that we've historically run at.

--------------------------------------------------------------------------------

Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [22]

--------------------------------------------------------------------------------

Yes. When we get to -- the goal is to get positive EBITDA by end of September. And obviously, next goal, we have a free cash flow, and then we kind of relook at that number.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [24]

--------------------------------------------------------------------------------

Thank you, James, and thank you, everyone, for joining. And we look forward to speaking with you, hopefully, and we'll report our second quarter in early August. Thank you very much.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

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