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Edited Transcript of GAIA earnings conference call or presentation 24-Feb-20 9:30pm GMT

Q4 2019 Gaia Inc Earnings Call

LOUISVILLE Mar 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Gaia Inc earnings conference call or presentation Monday, February 24, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jirka Rysavy

Gaia, Inc. - Founder, Chairman & CEO

* Paul C. Tarell

Gaia, Inc. - CFO & Secretary

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Conference Call Participants

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* Darren Aftahi

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

* Eric Christian Wold

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

* Mark Nicholas Argento

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities

* Steven Bruce Frankel

Dougherty & Company LLC, Research Division - Senior VP & Director of Research

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaia, Inc.'s Financial Results for the Fourth Quarter and Full Year ended December 31, 2019. Joining us today are Gaia's CEO, Jirka Rysavy; and CFO, Paul Tarell. (Operator Instructions)

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, competitions, changing consumer preferences, subscriber cost 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.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [2]

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Thank you, and good afternoon, everyone. So revenue increased 24% to $14.7 million for the fourth quarter and 29% to $54 million for the year. In fourth quarter, we eliminated the $0.99 trial from our pricing plans and replaced it with the free trial. We ended the quarter with 599,000 subscribers. This is with our own counting as we did historically -- a change from what we did historically. There are members, which were at $0.99 trial, which before we considered members, of which we had about 37,000 at December 31, 2018.

We build on positive EBITDA we reached in September and achieved positive EBITDA for full quarter is 24% revenue growth as planned. We did, however, significantly exceeded our cash flow plans by generating $3.3 million in positive cash flow from operation during the quarter, which was an $11.5 million improvement compared to the year ago quarter. While we do not expect to repeat the magnitude of the positive operating cash flow again in the first quarter, we do expect to operate this positive EBITDA and positive cash flow from operation on our prerevenue growth rate to reach positive earnings and free cash flow in July. We ended the year with $11.5 million in cash.

And Paul will speak to you right now more and more on the results.

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

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Thanks. Revenues for 2019 increased 29% to $54 million versus 2018. For the fourth quarter, revenues increased 24% to $14.7 million compared to the year ago quarter. As we discussed on the Q3 call, we eliminated the $0.99 introductory trial period in October and are now offering a 1-week free trial for potential new members who're selecting there the monthly or annual billing plans. We are, therefore, no longer including the trial members in the reported member count until they convert to paid members. We ended 2019 with 598,600 members compared to an adjusted 510,300 members, which reflects excluding roughly 37,500 members that were in the $0.99 introductory trial period at the end of 2018.

Gross profit for 2019 increased 28% to $46.9 million versus 2018. Gross profit in the fourth quarter increased to $12.8 million from $10.4 million in the year ago quarter, with a slight decrease in gross margins to 86.9% compared to 87.5% in the year ago quarter. So this has been sequentially improving over the last 3 quarters of 2019. We have adjusted our content investment over the past 12 months to reflect our current revenue growth trajectory, and therefore, expect margins to be around this level in 2020.

Selling and operating expenses, excluding marketing and member acquisition costs in the fourth quarter were $6.7 million, which was down $0.9 million from the third quarter of 2019. Corporate and G&A expenses came down to $1.3 million in the fourth quarter, representing a 24% improvement from the year ago quarter. Focus on continued operating efficiency and expense rationalization during 2019 has been successful. Our gross profit per employee has increased to $384,000 during the quarter, which is up from $311,000 in the year ago quarter.

Total member acquisition costs were $7.4 million or 50% of revenues, which improved close to 50% from year ago quarter when we spent $14.3 million or 120% of revenues. Our member-driven growth initiative we discussed on the last call has continued to gain traction during the past 3 months and has proven out our hypothesis that our most engaged members are eager to share Gaia content and help us grow. The contribution from this new growth driver helps contribute earnings to our average CPA for the quarter down to $61 from a comparable $91 in the year ago quarter and $67 in the third quarter of 2019. Please note, to maintain consistency, we are calculating the Q4 number based on trial additions.

I'm also happy to report that we achieved our goal for the fourth quarter of 2019, generating a positive adjusted EBITDA margin of 2.7% compared to a negative 75% in the fourth quarter of 2018. As expected, the combination of this and our negative working capital model allowed us to generate approximately $3.3 million in cash flows from operations, which, as Jirka mentioned, is an improvement of $11.5 million compared to the year ago quarter. We were also able to moderate our content and product investments to reduce our overall cash use during the quarter by approximately $5.7 million compared to the third quarter of 2018.

With our current cash balance of $11.5 million, continued improvements in retention as we mature our member base's average tenure, the early traction we're seeing in member-driven growth and Live Access premium memberships, we are comfortable with our ability to get to free cash flows in July of 2020 with our current liquidity.

With that, I would like to open up the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Mark Argento from Lake Street Capital Markets.

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

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Congrats on getting the EBITDA positive in the quarter. Just wanted to focus on ongoing subscriber acquisition and maybe you could talk a little bit about the different modalities, social media versus other avenues in terms of acquiring customers, where you're having success and any updates there.

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

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Sure, Mark. So from a subscriber acquisition perspective, we've really been focusing on optimizing all of our existing channels that we've utilized over the past few years. And with bringing down the target growth rate, it's allowed us to really start to get efficiency on each of those platforms and have been truly -- but it's also allowed us to create more time to focus on nurturing either new channels or channels that historically weren't -- we weren't able to get to perform. I'm happy to say that YouTube has actually turned into a pretty significant lead gen and acquisition source for us in the second half of the year. Whereas, if we looked in 2017 and 2018, we weren't really able to spend meaningful money on that platform to raise awareness. And what we're seeing on the other side of that is that those people that find us via YouTube are trying to be better fit for Gaia because they're seeking out content and finding Gaia versus the more traditional Facebook-style swiping and just scrolling through and trying to gain attention for a short period of time. So I'd say we're seeing a lot of improvements in YouTube as an acquisition channel, and that's combined with our member-driven growth strategy, where content is being shared out in the wild, and we're able to then do retargeting and more targeted conversion rate marketing as opposed to just awareness, top of the funnel marketing.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [4]

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And then in terms of the premium offerings, any new additions to the portfolio there? And what do you anticipate 2020 looking like in terms of the number of events or any other metrics for the premium?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [5]

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Yes. So we had a break in our event calendar in end of November, December and January. So it's been growing steadily. We're not intending to report those numbers separately going forward. But as we look to 2020, we have our first event coming up at the end of February, and from the premium to Gaia-supported events, we have a nice calendar, including Gregg Braden coming back, Bruce Lipton, Graham Hancock and a few others that are on the slate for there. But we're also looking at activating that -- the Gaia Sphere as its own event center and so there'll be other events that are happening there that we then can decide whether we want to make them available to our premium members or not, but the intent is to have that space pay for itself when we look at the rent and operating expenses. And then allow Gaia to decide which of the events we want to put out to our premium members. So I'd say it's gaining traction, but it's not significant enough for us to breakout on its own.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [6]

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All right. Then just one last one. On the content side, I know you announced a few new content personalities, I think on the Yoga side recently. Maybe just talk about any strategy changes in terms of content acquisition? How do you manage that and content cost here, given that you throttled back the subscriber growth? That's it for me.

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

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Yes. So I think from the Yoga side, we're actually looking at kind of revamping the way that we're building our Yoga marketing and really putting that teacher centric into that press release that went out this morning and it was a part of that strategy because we really feel that in order for Yoga to grow successfully, we need to have the teachers be attracting members to them. The Yoga space, as an online offering, is pretty competitive. And if you don't have a personality to draw people in, it's generally a money-losing proposition to try and spend paid-media dollars to bring in Yoga customers. So that's a relaunch as we've nurtured and curated our Yoga library holistically over the past 12 months, and now we're going to start focusing on bringing our new teachers into the platform and helping them grow. And I'll let Jirka talk to the rest of the content.

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

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Yes, we have still a very good lineup. We just announced last year but a very few are actually published yet as a series. So the coming hours like -- I'm not sure these numbers -- these names actually mean much to you, but Bruce Lipton, Matias De Stefano, Nassim Haramein. And then we have several new series or season of new series, which we have successfully tracked. So we will shift more to what we call produced content than graphics series. And so it's significant upgrade from last year of the content launch.

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Operator [9]

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And next we'll go to Darren Aftahi from Roth Capital Partners.

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

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A bunch of general questions on kind of the EBITDA. In the fourth quarter kind of if I may, so there may be a correction, kind of anniversarying the price increase. I'm just kind of curious what you're seeing with churn from existing members. I know as being a Gaia member, I don't know if my price has changed yet, I don't think it has, but I'm just kind of curious. Is it still at the end of Q1, are they going to kind of be rolled over and kind of like any insight into kind of like churn metrics from those that they're kind of grandfathered in?

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

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Yes, Darren, it's Paul. So 2 things to update here. One is we are still working through with our third-party partners then adjusting their price. They had verbally agreed to do that at the end of Q4, but have not actually updated their pricing yet. And so because of that, we have elected to defer our price increase off of our legacy members, which is why you haven't seen your price increase. What we have been doing is focusing on migrating as many of those $9.95 members as possible to our annual plans, and that's part of the reason why we're able to generate the upside and the cash flow from operations and the growth in deferred revenue. We were able to migrate a decent number of monthly people to annual. So we'll provide an update as it comes, but we are working with our third-party partners now to actually contractually agree to price increases. But it's taken a little bit longer than we originally expected.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [12]

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Yes, to get a perspective, about 60% of our members are on new price. So we have about 20% our direct members and about 20%, what's -- what we call third party. So those are not. So 60% are our new price and 40% not. And as we said, we're kind of waiting still word with third parties. So we don't competing with ourselves. So that's difficult for now until the big reorg on price since December 1 last year, but they didn't so we're still in the negotiation.

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Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

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Got it. So does that change any of the kind of 2020 guidance you talked about last time in Q1. You talked about I think it was 5 -- 20% revenue growth and then I want to say, maybe somewhere close to 30% for the full year, if I'm not mistaken with that. But I'm just kind of curious if that non-implementation on December 1 changed anything. And then I guess, embedded in that is, do you have a sense for when that switchover in the third-party actually will occur?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [14]

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So I'll answer that in reverse order. The pricing from a contract renewal perspective, all of it will be up for renewal in Q2. So we expect it to be rolled through in Q2. We're sticking by the guidance that we provided, our free cash flow in July of 2020. The revenue number is obviously going to be subject to when that pricing changes, but we purposely indicated that Q1 was going to be lower than the year because of the potential for the churn. So now we're offsetting that potential with the little -- the 20% of the direct base and the 20% of the indirect base that hasn't increased the price yet. So we don't get a step change up in Q1. But all of the new members that we're adding, as Jirka mentioned, they're at the $11.99 rate. So it shouldn't be a full adjustment. It will be just a time-shifted adjustment from -- as we look at revenue for 2020.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [15]

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Yes. Kind of -- you're actually -- this obviously will have an impact if the pricing doesn't change on the revenues, but we don't know when they will happen. We have some progress right now. We don't expect that it will happen in the second quarter -- I mean, first quarter. So you would have some impact from the first, but it would be in a single-digit if it does.

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Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [16]

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Okay. And then just maybe last one for me. You kind of stabilize the business with most balance between -- you're making some money on the way of free cash flow and growing at a more moderate rate. So I know you invested fairly heavily in translation in other languages in the past. Just an update, one, on that. And then, two, how aggressive are you going to be with kind of international growth in 2020? Or is that something that's more in the out-year?

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [17]

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Yes, we actually did shift the translation to producing originals in the country. So we kind of now produce -- we're producing whole series in Spanish. We produced series in German to kind of get more aggressive there, but from the content than we did over the last 2 years. However, from the marketing, I think, we will now really wait until the cash flow positive because -- I mean it's not that it will go to 0, but we're now going to refocus primarily for marketing international until we get cash flow positive because it's more predictable and probably since the numbers somewhat overall aren't big, we feel it's kind of better to just focus. Our main goal is to get cash flow -- operating cash flow or earnings positive. So it's -- on the other side, as I said, from the cash side, we did invest some -- the original series and we, right now, producing another one series in Spanish for the next couple of months. So I think it's like we want to bring international, it will be an important part of overall play, but we want it to kind of defer to second part of the year.

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

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Yes. So from a member driven growth initiative, one of our most successful member ambassador is actually based in Germany. So we're supporting our ambassadors that are in-country and in-language and actually providing them a little bit more support, because with the library differential in terms of the size, it's much better to spread via word of mouth. And so we're focusing on that now. And Jirka said, once we tip over to free cash flow, we'll make a decision on whether we want to continue to let it grow organically or we go back to investing a little bit more aggressively in growing the markets there. We are exploring some third-party opportunities to use the content library through third-party distribution in localized languages, but that's a long conversation to have and we're not banking on any of that happening. But it's another strategy that we're looking at with the international library.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [19]

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Yes, we don't really want to distract from the very positive momentum we have on the EBITDA, especially on the free operating cash flow, and we want to build on that because it's a great opportunity. So we will not distract from anything. It's kind of my general direction, just like, hey, it's going great, let's not focus on anything else.

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Operator [20]

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And next we'll go to Steven Frankel from Dougherty.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [21]

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For starters, could you update us on how much of your traffic today is coming organically versus from paid sources?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [22]

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Yes, it's a tough question to answer with any specificity because when you look at our acquisition, it's all based on last click attribution. And so based on where subscribers are signing up, it's about 50-50. In terms of the most traffic pages on the site that maybe don't lead to a conversion, our article content actually drives a pretty meaningful amount of views, but it's not translated into members yet. But when I look at it from a member perspective, it's about, as I said, 50-50 in terms of where our sign-ups are coming from.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [23]

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And as we saw like 6 months ago, it was like 40-60 now. So yes, we -- that 40 went to like 50, and to put it some kind of comparison for you.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [24]

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And maybe some insight into the lifetime value of subs across the different subject areas. We haven't heard you update that in a while.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [25]

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Yes. It's probably up about for -- well, $20 to $30 up, overall. And we actually have a pretty big project on this going, looking in the different -- the value of people who are less than 3 months, more than 3 months, 6 months, 1 year in the bucket. So we have a pretty good project going, but obviously, they're like, I'm increasing because we have more -- as we try to obviously build better content, so -- but also because we don't have so many new people as we used to have and also people who we’re hiring longer obviously would have a bigger value. So even a same number of subscribers, the lifetime value would increase because we add to the number of the longer-term subscribers.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [26]

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Okay. And what's your employee headcount today? And where was that at the beginning of the quarter?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [27]

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We've been pretty static as it relates to the overall number count. It obviously moves around depending on what month of the quarter you're looking at, but we're roughly around 140 right now.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [28]

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And what was CapEx or content spend in the fourth quarter?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [29]

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We don't break it out specifically by content and non-content, but the overall number is all in the press release and investing section, which for fourth quarter was about $3.8 million.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [30]

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Okay. And was there any material third-party marketing in the quarter?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [31]

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Not that we're going to call out and -- as a one-off event. We've been working with our partners to have a more consistent cadence of how we spend money. We used to break it out when it was new, but now it's just part of our overall mix of marketing spending.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [32]

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Also, obviously, because the third-party didn't raise the price, we really didn't give them much money because we didn't complete it ourselves, which also kind of reflects some -- you will see that in the first couple of quarters, until they change the price, we cannot really deploy much money there because we would complete it ourselves and our pricing.

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Operator [33]

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(Operator Instructions) Next we'll go to Eric Wold from B. Riley Financial.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [34]

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A couple of questions. I guess one follow-up on the last one, the $3.8 million you spent in Q4 on content and CapEx. What are your thoughts on the level of total spending in 2020 and how should we think about that slowing kind of throughout that quarter?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [35]

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I think as we look at closing the rest of the gap to get to free cash flow by July, it's a variable that's adjusting, but part of what we did in the second half of 2019 was really look at the slate of content and make sure that we could adjust it to where we are from a revenue perspective. So as revenue and cash flow starts to grow, we'll be able to invest more meaningfully. Q1 and Q2 have the new shows being shot, so it'll probably be a little bit up from Q4, but it's entirely within our control. We don't have any contractual commitments to rate of investment. So we're able to be pretty flexible based on how the cash flow dynamics are playing out.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [36]

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Generally, our content spend is up from last year. But as Paul said, we always do have positive free cash flow. So we would adjust it as we need to. But generally, we're spending more. And as long as we have a room, we will keep doing that.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [37]

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Okay. And then going back to the comments on the third-parties not raising prices. I guess is that -- I mean is there anything else you can say there? Is that -- they're refusing to not want to pursue a price increase? They don't think it makes sense? And I guess, what is the worth of these contract negotiations in Q2 if they still don't budge that contracts are not renewed?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [38]

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Well, I can't speak to that part of it. But what I do think is that they're up until Disney+'s introduction at $6.99, there was no question of whether we could, as a streaming industry, continue to push prices. That introduction in November and the traction that they've been able to get, I think, has created a little bit of apprehension on the third-party side. But I fully expect us to be able to come to some agreement on the 2 major contracts that we have in play. But this is part of the reason why we've strategically limited the exposure to individual third parties so that we don't have any real concentration risk. And one of them has already contractually agreed to the end of Q1. So it's really the other major player whose renewal's up in May coming along as part of their negotiation process.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [39]

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And now because their contract is expiring, we actually have some negotiating power during the year. During the existing contract, it's really hard to change the contract unless it's agreed, and any time the contract ends, obviously, we have more way to negotiate. But on the other side, it's not something what's that critical either direction because, as Paul said, we consciously kept it below 20% of revenue there. So it's more our ability to grow the channel and how you respond to existing people. But as you kind of said, it's actually -- for us, it's probably less than 20% of people on our direct side who are not converting to new price yet. So it's not that big deal. But it will impact the first and second Q revenue.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [40]

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Okay. And then just lastly, on the Yoga with -- just wondering around the 2 new -- especially, is the goal there just to kind of continue to drive library content? Or is that possibly morphing towards some sort of kind of a live streaming around Yoga on kind of the premium tier?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [41]

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Well, we've taken a pretty scientific approach to our Yoga content library over the past year and really focus on what the leadership of that is caught in weeding and watering. So pulling out content that doesn't fit. And then looking at from an overall content library offering, how do we fill it in? And two of the things that we were missing was some diversity both in terms of male, female, but also in terms of body type and look. And so that's part of what we've been focusing on is bringing more into the offering because then we can use their following to start to grow the member base there. I don't know, to be honest with you that live Yoga is really that interesting. We've tried it a couple of times and you get a little bit of engagement, but the whole point of digital Yoga is so that you can fit it into your schedule when you have time and desire not so that you have to schedule it, but it's not a no. It's just not part of the strategy that we're looking at right now.

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Operator [42]

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And 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.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [43]

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Well, thank you, everybody, and thank you for joining, and we look forward to speak with you when we report our first quarter, which will be in early May. Thank you very much.

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Operator [44]

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And that does conclude our call for today. Thank you for your participation. You may now disconnect.